CFO Message

While the previous medium-term business plan produced outcomes that will positively impact the future as a result of effectively executing financial and capital strategies, there are still some issues to be addressed

In the financial and capital strategies of the previous three-year medium-term business plan (fiscal 2021 to fiscal 2023), the OYO Group set out the basic policy of proactive growth investment and proactive shareholder returns, and focused and pursued the target management indicators (targets for the final year) of an ROE of 5% and operating margin of 8% (both on a consolidated basis).

Regarding growth investment, first of all, we had planned to invest a total of 5.5 billion yen (in total over the three years) in innovation strategy for organic growth, consisting of 4.5 billion yen for R&D and 1.0 billion yen for digital transformation (DX). In reality, however, we invested a total of approximately 7.2 billion yen, around 30% more than planned, including approximately 5.8 billion yen for R&D and approximately 1.4 billion yen for DX. Next, under the policy of aggressively promoting M&A as an inorganic growth strategy, we planned for an M&A investment quota of 12.0 billion yen, but the actual figure totaled approximately 4.0 billion yen for three companies. Although it fell short of the investment quota, we acquired three companies that are expected to generate significant synergies with our business: Geosmart International Pte. Ltd., a Singapore-based company with strengths in infrastructure monitoring; OX Inc., an AI start-up; and NihonZitan Co., Ltd., a magnetic exploration and oceanographic survey company. In December 2023, we achieved a big result by reaching a basic agreement on the acquisition of Sanyo Techno Marine Co., Ltd., an oceanographic survey company (the deal was closed in February 2024, so it is not included in the 4.0 billion yen mentioned earlier).

As for shareholder returns, we revised the target range of the consolidated dividends payout ratio (from 30~50% to 40~60%) starting in 2021, and also conducted flexible share buybacks. As a result, during the three years of the previous medium-term business plan, the average consolidated payout ratio was 47.0% and the average total return ratio, including share buybacks, was 110.0%, maintaining a high level. The consolidated dividends payout ratio in fiscal 2023 was 34.7%, below the target range. However, net income includes a onetime factor of approximately 1.0 billion yen in deferred tax assets recorded at a US subsidiary. Excluding this impact, the consolidated payout ratio would be 46.6%.

On the other hand, the management indicators targeted in the previous medium-term business plan left challenges for the future. The ROE was 5.6% in the final year, exceeding the target of 5%. However, again, if the one-time deferred tax assets are excluded from the net income, the numerator making up ROE, the figure would be in the 4% range. We are aware that it effectively fell short of the target. The operating margin was 4.3% in the final year, far below the target of 8%.

Recognizing Key Issues of Improving Business Profitability and Capital Efficiency, and in the New Medium-term Business Plan, to Promote Optimizing the Balance Sheet

Having completed the previous medium-term business plan, two important issues have become evident: improving business profitability and capital efficiency. Also, in the process of preparing the new medium-term business plan, we examined the causes of our PBR standing at 0.7x to 0.8x, under the 1x mark, and considered the measures to address this. According to the formula of PBR = PER x ROE, our PER is 21x to 22x, higher than the average of 16x to 17x for Prime-listed companies. While investors have highly valued our business growth potential, our analysis revealed that our PBR fell below 1x mainly because our ROE is lower than that of peers.

Based on the understanding of these issues and the analytical findings on PBR being below 1x, in the formula of ROE = net income/equity x 100, we concluded that improving capital efficiency (ROE) requires the following: improve profitability by promoting segment strategy for the numerator and optimize the balance sheet for the denominator.

As a Key Initiative to Optimize the Balance Sheet, We Will Further Enhance Shareholder Returns and Deploy Financial Strategies to Have Higher Leverage

For balance sheet optimization, to restrain the increase in equity, we have decided to revise the dividend policy and promote flexible share buybacks as measures to further enhance shareholder returns. On revising the dividend policy, we advanced the review conducted in 2021 and changed the policy to pay out stable dividends setting a consolidated dividend payout ratio of 50% or more and a consolidated dividend on equity (DOE) ratio of 2% or more, in principle. By doing so, we have committed to paying even more stable dividends than before, with 2% of shareholders’ equity as the minimum dividend amount, regardless of the level of net income for a single fiscal year. We will continue to promote flexible share buybacks following the previous medium-term business plan period.

The new medium-term business plan also explicitly states the use of cash on hand, a theme on which we received many inquiries from investors, by clarifying our cash allocation. We plan to use operating cash flow, sales of non-core assets, and cash on hand as a source of funds to appropriately allocate to proactive growth investment, increased working capital driven by sales growth, and shareholder returns. In this strategy, we will use interest-bearing debt in principle to fund new M&A during the new medium-term business plan period, raising financial leverage and improving the ROE.

More Innovation Development Investment and Proactive Human Capital Investment Planned in the New Medium-term Business Plan

We will invest more aggressively for growth in the new medium-term business plan. Under the previous medium-term business plan, we allocated 5.5 billion yen to innovation investment. In reality, we used 7.2 billion yen for this growth investment. When compared over the same three-year cumulative period, the new medium-term business plan commits 8 billion yen for innovation development investment for growth investment.

In addition to this, to actively promote human capital management in the future, we have newly planned human capital investment of 1 billion yen (the threeyear cumulative total), separate from raising wages. This has two objectives: to expand our talent portfolio and to foster work environment and job satisfaction. For the former, we will invest in acquiring talent and expanding education/training, as well as supporting the acquisition of qualifications. We also plan for international personnel exchange programs with overseas subsidiaries with an eye on further globalization of business. For the latter, we plan to promote health management measures and expand benefit programs. We will continue to support the proactive growth strategy of the OYO Group from a financial perspective and contribute to the sustainable enhancement of corporate value/shareholder value.