On May 30, 2025, our major investee, Tomoe Corporation (hereinafter referred to as “Tomoe” or “the Company”), announced a revision to its “3rd Medium-Term Management Plan: TOMOE BUILD up 5” (hereinafter referred to as the “Revised Medium-Term Plan”, Japanese Only). The main updates are: (Point 1) an upward revision of the operating profit based on the completed-contract method (which we understand to be similar to the general operating profit), and (Point 2) a significant downward revision of the ROE target. The Company explains that the primary cause of these changes is the consolidation of a real estate subsidiary during FY3/25 (hereinafter referred to as the “Group Reorganization”). We find the downward revision of ROE is insane from the standpoint of the collective interests of shareholders. Accordingly, we would like to share this comments today to express our views on the matter.
First, regarding (Point 1), the operating profit target has been revised upward from 4.0 bn yen to 4.2 bn yen due to the increased profit of the real estate division, as shown in Figure 1. While the upward revision of the operating profit target may seem okay, it is not the key issue here. Downward revision in the ROE target (Point 2) based on huge increase in shareholders equity should be more important from a corporate value standpoint.
Figure 1: Reasons and Key Points for the Revision of the Medium-Term Management Plan（Japanese Only）
(Source: the Company’s medium-term management plan materials)
From this perspective, we note that the ROE target, as outlined in point ➁, has been significantly revised downward. In the original medium-term management plan (Japanese Only) announced in May 2023, the Company had set an ROE target of 10% (see Figure 2).
Figure 2: ROE Target at the Time of the Medium-Term Plan Announcement（Japanese Only）
(Source: the Company’s medium-term management plan materials)
However, in the revised medium-term plan, the ROE target was HALVED from the original 10% to 5%. In Figure 3, the Company attributes this revision to the recent reorganization, stating that “due to the recent reorganization, the increase in the denominator—total assets (we believe it to be a false statement and that it should be ‘net assets’)—was significantly larger than the increase in the numerator, i.e., net profit for the period.”
In essence, the Company is indicating that while the reorganization generated a extraordinary gain of 11.7 bn yen (see Figure 4), net profit increased by only 200 mn yen (see Figure 1). Based on a rough and simple calculation, the delta (incremental portion) of this group reorganization to capital profitability is estimated to be around ROE 1.7%1, and if we also take into account the 10.6 bn yen23 in non-controlling interests that likely arose from the consolidation of the real estate-holding subsidiary, the delta shrinks further to 0.9%. It is a complete irony that due to the reorganization company realized huge unrealized gain on real estate on its net assets but it worked to dramatically lower the ROE.
Figure 3: ROE target（Japanese Only）
(Source: the Company’s medium-term management plan materials)
Furthermore, in Figure 4, it is stated that “the 11.7 bn yen in special gains associated with the group reorganization is a “non-cash item” and therefore excluded from shareholder payout resource.” With that said. company, in addition to those real estate assets, holds approximately 35.8 bn yen in investment securities (primarily cross-shareholdings and 31% of total assets), which are more than enough resources for payouts.
We find it extremely regrettable that, despite the Company’s long-standing issue of trading below a PBR of 1.0x and holding excess net assets, no concrete measures have been taken to address this, and the Company has instead simply lowered its ROE target without any apology to shareholders.
Figure 4: Basic policy regarding shareholder returns（Japanese Only）
(Source: the Company’s medium-term management plan materials)
The extraordinary gain, which is the primary cause for the Company’s halving of the ROE target, arose from the group reorganization whereby the real estate held by subsidiaries was revalued at (so called) market prices, resulting in the realization of substantial unrealized gains. It should be noted that Tomoe Corporation itself also holds real estate with similarly large unrealized gains. According to FY3/24 report, those unrealized gains amount to approximately 40 bn yen (i.e. 28 bn yen after tax). As a result of reflecting this revaluation at fair value in net assets, in the same manner as applied in the current Group Reorganization, the portion highlighted in green in the segment-wise ROE in Figure 5 is obtained4. ROE for its core Steel Structure business is stellar at 15.7%, using only 12% of the Company’s total net assets. Of the remaining 88% of net assets, 55% is used for real estate with an ROE of just 2.1%, and 33% is allocated to other assets (mainly cross-share holdings) which you can see are both completely underutilized assets in terms of capital profitability. It should also be noted that the unrealized gains on real estate of approximately 40 bn yen (28 bn yen after tax) are based on appraisal values disclosed by the Company which, in Japan, is usually very conservative.
Figure 5: Segment ROE (Hibiki Estimate)
(Source: the Company’s securities report for FY3/24 and Revised financial results summary for FY3/25)
（Note:）
ROE: The numerator uses NOPAT (Net Operating Profit After Tax), calculated as Profit × (1 − tax rate 30%).
Profit: For Steel Structure Construction, the actual results for FY 3/25 are used; for Real Estate, the target figures from the revised medium-term plan are used.
Segmental Net Assets: Out of the total corporate net assets of 73 bn yen,➀ Non-controlling interests of 10.6 bn yen5 are allocated to Real Estate, and ➁ Valuation differences on securities of 12.9 bn yen are allocated to Others.
The remaining 49.5 bn yen is then proportionally allocated to each segment according to their asset ratios after deducting the above amounts.
Unrealized Gains: 28 bn yen (based on FY 3/24 securities report showing unrealized pre-tax gains on real estate of 40 bn yen, with 30% tax deducted).
Now we know the issue. Based solely on the level of shareholder payout planned by the Company (as shown in Figure 4), it appears difficult to achieve even a 5% ROE—let alone 8%—from a true ROE perspective, and so it is nearly impossible for Tomoe to achieve PBR of 1x. We hope fellow shareholders to understand why our shareholder proposal, calling for shareholder returns at a DOE (Dividend on Equity) level of 10% or more, which implies a total payout ratio exceeding 100%, is absolutely necessary in minimum.
By divesting real estate assets and cross shareholdings, thereby concentrating investments in the core business and allocating surplus funds to shareholders, ROE is expected to improve significantly, which should substantially enhance the Company’s valuation in the capital markets. We believe that for the Company to exceed a price-to-book ratio (PBR) of 1x (currently 0.6x based on the closing price of ¥1,394 as of June 5, 2025), it is essential to completely resolve its core challenges through bold business strategies and dynamic and decisive capital allocations.
In fact, Tomoe itself acknowledged similar issues in its November 2024 announcement, titled “Measures for Realizing Management Conscious of Capital Costs and Stock Prices (Japanese Only).” However, given the lack of progress in addressing these issues, we are submitting this shareholder proposal with the aim of protecting the common interests of shareholders.
As our end note, we would like to remind Tomoe that, in the materials released by the Tokyo Stock Exchange on August 30, 2024, it is stated that “…while an increase in various costs of being publicly listed may drive a rise in management decisions to go private, such decisions are deemed sensible.” In light of this, if Tomoe has no intention of making a fundamental effort to improve its ROE and PBR in the similar wavelength as our proposal, we believe it should simply consider alternative means of maximizing the shareholder values — such as taking the Company private including a management buyout (MBO) decision.
EOD
1The upward revision of operating profit was 200 mn yen, compared to a special gain of 11.7 bn yen related to the Group Reorganization.
2Since there were no non-controlling interests up until FY3/24, we judge that this primarily arose from the consolidation of a subsidiary holding real estate.
3Revised Summary of Financial Results for FY3/25
4Based on a simple calculation that includes only profits purely generated from the business (calculated by multiplying profits by (1 – tax rate of 30%)).
5Since there was no non-controlling interest until the fiscal year ending March 2024, it is judged that this mainly arises from the consolidation of subsidiaries holding real estate due to the group restructuring.
Please refer to the following for our shareholder proposal.
29/May/2025 ー Shareholder proposal for Tomoe Corporation
Please note that the publication of these materials is not intended to solicit the acquisition or sale of any specific securities, nor should it be construed as a recommendation or as advice on investment, legal, tax, accounting, or any other matters.