ValueAct takes a stake in Sanwa. How the activist can make a good company into a great one

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The stock price and financial metrics show that Sanwa is a solid company. ValueAct can help it close the gap between good and great.

is a Japan-based company mainly engaged in the manufacture and sale of building and commercial facility construction materials, as well as the provision of maintenance and renovation services. It operates in three geographic segments: Japan, North America and Europe. Its offerings include shutters, doors for buildings and housing, partitions, stainless products, front-desk products, windows and exterior products.ValueAct has been a premier corporate governance investor for over 20 years.

In Japan, there is also a margin opportunity. Currently, Sanwa's Japanese business has EBIT margins of about 11%, which can likely be improved a few hundred basis points in the next few years. Margins are much lower in Japan for a variety of reasons: An important one is that the company is vertically integrated in Japan, doing installation in addition to manufacturing, which is more labor intensive and expensive given recent wage inflation.

ValueAct has an earned reputation as a collaborative and amicable activist, and there is no reason why this situation should be any different, particularly since Sanwa has been doing a lot of the right things for a long time. For several years, and especially post-Covid, the company has consistently grown sales, profits, return on equity, return on assets, earnings per share and dividends with a target payout ratio of 40% of consolidated profits.

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