We believe Sun’s management has a history of bad investment judgment.
Selling shares of CLBT at a significant discount. In 2019, two years before the listing of CLBT, Israel Growth Partners ("IGP") invested $110 million into CLBT, acquiring a 25% stake in the company and valuing it at approximately $330 million. According to the company's document, CLBT reported annual sales of $172 million in FY2019. This suggests that IGP's investment in CLBT was made at a remarkably low multiple of 2x revenues. When CLBT went public just two years later in 2021, it was valued at $2.3 billion, indicating a revenue multiple of 9.3x. Presently, CLBT is trading at a revenue multiple of 6.3x revenues. IGP profited significantly from its investment in CLBT, buying at a 2x multiple, and selling shares at 9.3x two years later.
Core revenues have been on a decline. Sun’s management has struggled to deliver revenue growth to its shareholders through its core electronics entertainment and IT businesses. Excluding CLBT, revenues have declined at an average rate of 7.75% annually from 2014 to 2023, decreasing from ¥14.8 billion to ¥8.2 billion.
Poor capital allocation. As of December 2023, approximately 75% of Sun's balance sheet consisted of cash, cash deposits, and investment securities (this does not even include CLBT shares). Following the sale of shares as part of the listing of CLBT in 2021, Sun received an estimated $210 million in cash (pre-tax). The company returned only around 10% of these proceeds to investors through a buyback, repurchasing 6.25% of outstanding shares, while retaining the remainder as cash and investments. Sun’s core businesses are expected to turn around in FY 2023 according to the company guidance and there is no need for the company to hold such large amounts of idle capital. A prudent capital allocation strategy would involve distributing the majority of these funds to shareholders. Shareholders don’t need Sun's management in order to invest in deposits or investment securities.
Lack of Transparency. Sun’s management has not provided any update on its intentions regarding the holdings of CLBT’s shares. At the result presentation meeting held on November 28, 2023 at the time in 22:19, Mr Kimura, a representative director, answered a question about the ownership of CLBT’s shares. He stated that Sun does not have the intention of selling or acquiring shares of CLBT. He also mentioned that its technology needs to be secured and that Sun intends to expand the sale the CLBT’s products. We cannot understand why Sun would need to hold ¥169 Billion of CLBT shares for it to be able to re-sell CLBT’s products in Japan.
Sun’s share price provides all the evidence needed that Investors don’t believe in management’s intentions or ability to create shareholder value and therefore the shares of Sun are trading at a 54% discount to intrinsic value.
