Finding Value In Japan Activism by Stock Pucker

As a follow up to the Japan Sohn Conference note, here’s a quick look at one of the companies that’s actually being targeted by an activist investor in Japan. Maybe it’s our fascination with airplanes, but Rolls-Royce is still rather interesting as well – see Andvari Advisors’ letter to Rolls Royce from April if you haven’t.

But back to Japan – things are certainly looking up there.

The airline business seems to double every couple decades or so making it a fairly predictable market – even with all the cyclicality. This comes as buyers are looking for the biggest and most fuel-efficient planes. But Japan and Asia has another tailwind, which is increased travel across emerging markets.

The rainmaker here is IHI Corp., which is the biggest aircraft engine maker in Japan. One of its partners is Rolls Royce. It makes engines that power the big planes like the 787 from Boeing. As with any airline parts company, the bread and butter is the replacement parts business. Think of the razor-razor blade model where you sell the razor for break even and make your money on high margin blades. Same with engine and replacement parts.

But it’s not just an airplane company, it also makes turbochargers for car engines. It’s tailwind here is the shift toward fuel efficiency.

The activist involved here is none other than Dan Loeb’s Third Point. Last year, Loeb sent a letter to the company with the thesis that shares are worth JPY 1,000 – well above the current trading price of JPY 600.

Now here’s the real thesis to unlock that value – IHI has a lot of owned real estate that needs to be spun off. Loeb thinks the company is grossly underestimating the value of this land. It has land in Tokyo in the Toyosu district and near the site of the 2020 Olympics. In any case, it could spinoff this non-core land owning and real estate developing business into another company and focus on engines.

Finding Value In Japan Activism