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Elevator pitch

14 January 2021 By Jeffrey Goldfarb

Rebuilding trust at Toshiba is proving difficult. Just a few years on from an accounting scandal and the collapse of its U.S. nuclear business, the $13 billion Japanese conglomerate has invited fresh controversy. Doubts about leadership are also evident in a lacklustre valuation.

Outsider Nobuaki Kurumatani took over as chief executive in 2018 and initially won over investors with a chunky stock buyback and a promising restructuring plan that includes offloading businesses and selling more services that generate recurring revenue. Much of that goodwill is now gone.

Kurumatani narrowly survived re-election last year and questions loom over his victory. Postal votes representing a combined 1.3% stake went uncounted. More damning are reports by Reuters and others that Harvard University’s endowment fund was pressured into sitting out the ballot. Effissimo, which owns about 10% of Toshiba, has demanded an investigation and called for an extraordinary shareholder meeting on the matter.

How Toshiba intends to deploy capital raises additional concerns. It expects to generate some 1.3 trillion yen ($12.5 billion) in cumulative operating cash flow through fiscal year 2025. Additional borrowing and proceeds from selling its stake in memory-chip maker Kioxia will add to its coffers. The company had signalled it would earmark some for smaller deals and return most of it to shareholders. The tone changed in November, however, with acquisitions getting more attention. That triggered another request for a special shareholder gathering, this time from U.S. hedge fund Farallon.

A shaky investment track record may be reflected in the stock price. The Toshiba enterprise trades at 5.5 times EBITDA forecast for the next year, a discount to domestic peers such as Fujitsu and Mitsubishi Electric, which fetch more than 7 times. Overseas elevator outfits Otis Worldwide and Schindler command multiples of 15 times. Toshiba is in the same business, and its infrastructure and nuclear divisions rely similarly on long-term service contracts.

Any Toshiba turnaround will take time, and foreign shareholders who owned two-thirds of the company as of May, may be too itchy for quicker results. Kurumatani could nevertheless be doing more to move things along, even if it’s just staying out of the way of his own plan.


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