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Kobe's Top Bull Says Scandal-Ridden Firm Should Dump Steel

Updated on
  • Steelmaker’s new chief opens door to deals at business units
  • Jefferies hasn’t wavered from its buy call at height of crisis

Mitsugu Yamaguchi

Photographer: Kiyoshi Ota/Bloomberg

Kobe Steel Ltd.’s new president, Mitsugu Yamaguchi, used his first public appearance last week to signal the possibility of a strategic shift at the scandal-ridden manufacturer that could involve hiving off parts of its sprawling operations via alliances or mergers.

It’s a departure from his predecessor, who had insisted the firm remain wholly independent. Now, here’s the advice from one of the company’s most bullish observers: sell its core steel-making business, Japan’s third biggest, which accounts for the biggest chunk of revenue.

Yamaguchi, the 60 year-old company veteran who formally takes the reins next month, said at a briefing in Tokyo he won’t rule out the possibility of deals at Kobe’s units, although nothing concrete is being considered. For Jefferies Japan Ltd. analyst Thanh Ha Pham, that opens the door to a structural shift at the 112 year-old firm that should include offloading steel and allocating funds to growth areas like aluminum, industrial compressors and power supply.

Too Many?

Kobe Steel makes everything from steel and aluminum to diggers

Source: Kobe Steel

Note: Revenue data for financial year ended March 2017; others includes welding, wholesale power supply and real estate

“The key is how far he can slim down a bloated company and whether he can implement reform” while facing opposition from current and retired executives, Pham said by phone from Tokyo this week. He has Kobe at a buy, the only analyst to hold that rating of 12 recommendations compiled by Bloomberg. “This company has many good assets. It’s just that they aren’t being utilized,” he said.

Yamaguchi has pledged to improve governance after his predecessor Hiroya Kawasaki resigned following a scandal that involved employees misrepresenting the strength and durability of parts from a variety of units that were shipped to hundreds of customers, from Toyota Motor Corp. to Boeing Co. He’s also the first president from the company’s non-core machinery division, one of eight business lines. Kawasaki, 63, will remain at the firm as an adviser.

Ranged against Kobe’s steel unit are two much bigger local rivals formed by past mergers, Nippon Steel & Sumitomo Metal Corp. and JFE Holdings Inc. As an independent firm, Kobe is a holdout and Kawasaki ’s strategy, which survived the data scandal that erupted in October, was to focus the business on three pillars -- materials, machinery and power.

While it may be a wrench for Yamaguchi to sell the division, especially after a recovery in both the steel market and company earnings, Pham said the business is “too small to be competitive,” leaving it at a disadvantage to rivals at home and abroad when negotiating on raw materials and product prices.

Yamaguchi said at the Tokyo briefing that in principal the steel business “shouldn’t be excluded when considering deals,” but that the company isn’t considering such a course and is unlikely to do so.

Pham’s buy call on Kobe in the immediate aftermath of the data scandal, a contrarian bet that the impact would be much smaller than the market had priced in, has paid dividends since. The stock, which tumbled more than 40 percent in the week following the revelations, had reclaimed much of those losses by the end of February, before a fresh retreat after the company disclosed additional cases of misconduct.

Kobe’s shares fell 0.4 percent in Tokyo on Friday, while the benchmark index rose.

(Updates with Kawasaki’s new post of adviser in fifth graph.)
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