The medium-term management plan and growth strategy of Kyokuto Trading <8093>

As part of efforts to contribute to medium- to long-term development, the company formulated the medium-term management plan 'KBK Plus One 2025' (fiscal year 2022 to fiscal year 2026) in May 2021. This plan aims to optimize the business portfolio, select focus areas for strengthening profitability, execute business expansion and investment in new fields to achieve a sustainable society, and create new sources of revenue.

Overview of the medium-term management plan 'KBK Plus One 2025'

- Environmental, Social, and Governance (ESG)

To realize a sustainable society, the company will develop a diverse ESG business utilizing the technologies and customer assets it has cultivated to enhance corporate value.

- Business Strategy (Business Portfolio Strategy)

To create new businesses, project teams spanning three business divisions have been established. Additionally, a total investment budget of 5 billion yen (M&A) has been set for five years. Sowing the seeds for the next 5 to 10 years, nurturing multiple pillars of new businesses concurrently.

- Financial and Capital Strategy

Aiming for a ROE level of 5.4% or higher to improve capital efficiency. Without increasing self-capital for 3 years, actively working on shareholder returns (dividend payout ratio of 100% in the first half of the year) while considering capital efficiency.

- Improvement of shareholder value / corporate value

Ensuring returns that exceed the cost of capital and meeting the listing conditions of the Tokyo Stock Exchange Prime Market (market capitalization of 10 billion yen or more in circulating shares).

2. Review of medium-term management plan (numerical targets)

The company has been optimizing its business portfolio, allocating resources to new business areas, and implementing measures to enhance shareholder value during the first 3 years of the mid-term management plan (from the fiscal year ending March 2022 to the fiscal year ending March 2024). Although there was a recovery and improvement in earnings by the fiscal year ending March 2024 from the impact of the COVID-19 pandemic, differences have arisen from initial targets due to the slowdown in the situation in Ukraine, the low growth of the Chinese economy, and delays in growth investments. Therefore, the numerical targets for the fiscal year ending March 2026 have been reset, with consolidated ordinary profit revised from the initial target of 2.5 billion yen to 1.9 billion yen, and ROE from the initial target of 8.0% to 5.4%.

The setting of the investment framework for 'M&A and other investment rounds' (total of 5 billion yen over a planned period of 5 years), which is one of the numerical targets, will continue as it is, and will continue to focus on growth investments.

The biggest feature of the medium-term management plan is the development and nurturing of new businesses

3. Progress of the 3rd period of the medium-term management plan

(1) Business development and investment execution in new fields to achieve a sustainable society.

1) Integration of the sales organization.

The company integrated its sales organization on April 1, 2022. It consolidated five sales departments related to core industrial sectors and electronic control system sectors into the "Industrial Infrastructure Solutions Group," and three sales departments related to industrial material sectors into the "Material Solutions Group," creating two integrated sales groups.

There are three objectives for integrating the sales organization. Firstly, it is a reorganization of the business strategy and its execution organization tailored to business and sales characteristics. The two sales groups (Industrial Infrastructure Solutions, Material Solutions) are defined as facility engineering-based business and material supplier-based business, with different selling and business practices. Moving forward, each sales organization will formulate and execute business strategies. Secondly, to create a flexible sales structure that can work in project teams in response to future customer needs. Thirdly, to enhance the development of sales talent through sharing customer information, expertise, and know-how within the organization. It is worth noting that this sales organization reform is not a defensive reorganization involving rationalization or layoffs, but an offensive reorganization with strategic significance.

2) Reorganization and strengthening of the business portfolio.

In conjunction with the sales organization reform, the company also restructured its business segments. Starting from the fiscal year of March 2023, it newly established the "Industrial Equipment Division" by integrating the "core industrial sector department" and the "electronics and control system-related department," transitioning to a three-business segment structure alongside the existing "industrial material-related department" and "machinery component-related department."

Against the backdrop of anticipating the trend towards carbon neutrality, the company decided to withdraw from its power plant-related businesses and exit the main business of the electronic control system-related department, specifically the "instrumentation system (control system for power plants)." This significantly reduced the business scale, eliminating the need for separate business segments. As a result, the core industrial sector department essentially absorbed the electronic control system-related department.

Due to the accounting standard changes from the fiscal year ending in March 2022, the top spot for revenue and gross profit shifted from the core industrial sector department segment to the machinery component-related department segment. The company plans to reassess the business portfolio for each business sector in the medium to long term and reallocate resources accordingly.

(Written by: Fisco guest analyst Keiji Shimizu)