CFO Message

Maximizing both corporate
and shareholder's value
by improving shareholder returns
and capital efficiency.

Prioritizing capital allocation for "proactive growth investments" and "proactive shareholder returns" to improve corporate / shareholder's value.

Our Group is currently pursuing a proactive growth strategy under the framework of our medium-term management plan with an emphasis on "promoting sustainable management". It is my mission as the CFO to support these efforts from a financial perspective and drive sustained improvement in both corporate and shareholder value.

With this perspective in mind, our financial and capital strategy within the current medium-term management plan is based on two fundamental principles: "proactive growth investment" and "proactive shareholder returns" while prioritizing "Return on Equity (ROE)" and "Operating Profit Margin" as our targeted management metrics.

"Proactive growth investment" involving steady progress in both "innovation strategy" related investments and "M&A investments".

Regarding 'Proactive Growth Investment', we have set aside separate allocations beyond the ongoing capital expenditures (approximately 1.5 billion JPY annually) to facilitate organic growth over a three-year period within our current medium-term business plan called 'Innovation Strategy'. This involves allocating 1 billion JPY for 'DX(Digital Transformation) Investments' and 4.5 billion JPY for 'Research and Development Investments' while reserving a budget of 12 billion JPY for 'M&A Investments' in accordance with our inorganic growth strategy to actively pursue M&A opportunities.

In the terms of the 'Innovation Strategy' investments, by the end of December 2022 (the 2nd year of the medium-term plan), DX investments have already reached around 800 million JPY, while research and development investments have reached approximately 3.6 billion JPY. Both are around 80% of their respective allocated budgets, demonstrating that investments are progressing at a pace exceeding the original plan, which suggests that we may be able to reach the objectives ahead of schedule.

Moving on to 'M&A Investments', we have successfully completed two acquisitions within the current medium-term plan period. One is the acquisition of Geosmart International Pte. Ltd.(October 2022), a company with strengths in geotechnical surveys and monitoring of construction and structures in Singapore. The other is the acquisition of OX Inc.(January 2023), a startup in AI development. By acquiring Geosmart, we have established a one-stop service for surveyance, design, construction management, and monitoring in Singapore's public infrastructure market along with our two existing subsidiaries in Singapore (FC*1 and FCI*2). In acquiring OX, we are taking the initiative to utilize AI in our various solution services to drive DX and achieve differentiation.

Our current medium-term plan that includes 'Proactive Growth Investments' simultaneously focuses on 'Business Portfolio Reform' as part of our "Structural Reform" efforts. In the fiscal year 2022, we divested NCS Subsea Inc. (March 2022), a company engaged in offshore oil exploration, as part of our shift away from fossil fuels and towards decarbonization.

*1FC:Fong Consult Pte.Ltd.

*2FCI:FC Inspection Pte.Ltd.

Regarding the return of profits to the shareholders, we will maintain a high dividend payout ratio and implement flexible share buyback initiatives

Regarding our 'Proactive Shareholder Returns' approach, we have undertaken measures to increase the base for profit distribution, firstly by reviewing the targeted range for the 'Consolidated Payout Ratio', raising it from the previous 30-50% to 40-60% starting from 2022. For the dividends of the fiscal year ending December 2022, due to the impact of global supply chain issues causing profits to fall short, especially in overseas Group companies, we increased dividends by 2JPY without changing the initial plan. As a result of this, the payout ratio was 63.7%, exceeding the targeted range of 40-60%.

Furthermore, we are dedicated to improving the total return ratio through flexible share buyback initiatives. Over the two-year period of 2021 to 2022, our proactive share buyback endeavors have resulted in a remarkably high 'Total Return Ratio' of 97.4% in 2021 and 183.0% in 2022 (which can be seen in the graph below)."

For the targeted management indicators we prioritize 'ROE' and 'Operating Profit Margin' for improvement in the medium-term.

Targeted key performance indicators are "ROE 5%", "Operating Profit Margin on Net Sales 8%", and "ROE 5%" (both consolidated) for the final year of the current mid-term management plan (December fiscal year 2023).

The "Operating Profit Margin on Net Sales" came close to achieving the goal of 7.1% for the fiscal year ending December 2021 / December 2022. Still, as mentioned earlier, due mainly to the decrease in profit margins caused by supply chain issues, it dropped from 7.1% (December fiscal year 2021) to 4.3% for the fiscal year ending December 2022 / December 2023. Consequently, the "ROE" also decreased from 4.2% (December fiscal year 2021) to 2.7% (December fiscal year 2022). Pursuing to achieve the mid-term management goals for the current period, the fiscal year ending December 2023, we will focus on the following four initiatives-

  1. Regarding government and local authority projects, we will strive to increase the order closing rate of higher-margin proposal-based contracts in comparison to the regular competitive bidding projects.
  2. We will focus on expanding sales of new high-margin services and solutions, such as subsurface visualization services and hazard mapping sensor solutions.
  3. We aim to become more cost competitive for offshore wind power, which is experiencing rapid growth in sales, to further improve profit margins.
  4. We will pursue the M&A of companies with high-profit margins while reviewing low-profit businesses.

From here onwards in the medium term, we recognize the need to consistently secure a ROE of around 6-7% when considering the shareholder capital costs and other factors. In the upcoming mid-term management plan, we will be mindful of the "Action to Implement Management that is Conscious of Cost of Capital and Stock Price" issued by the Tokyo Stock Exchange in March 2023 and will actively engage in setting the appropriate financial and non-financial Key Performance Indicators and initiatives to achieve this aim.

Encouraging management centered on sustainability to strive for further enhancement of corporate value.

Our Group's businesses are directly aligned with the SDGs, and we are positioned to make a meaningful impact on sustainable development by addressing our tasks head-on to accelerate its growth. With a foreign ownership ratio of 24% (end of December 2022), I feel our high level of foreign investment indicates the level of international recognition for our unique growth potential.

Moving forward, we will continue to prioritize sustainability as a core element of our management approach in order to meet the expectations of its stakeholders, including both domestic and international investors.

Changes in dividend payout ratio and total return ratio

Changes in dividend payout ratio and total return ratio

Representative Director & Deputy President

Yuichi Hirashima

This message has been taken from the CFO's message originally published in the Integrated report.