[KCGF Opinion] Doosan Bobcat’s value-up plan gets B rating; significant area for improvement remains

19 Dec 2024



Doosan Bobcat’s value-up plan gets B rating; 

significant area for improvement remains


“A thorough review of the executive compensation plan and a restructuring of the board are recommended”

“A US listing is essential if Doosan Bobcat pursue M&A-driven growth”


 

 

Doosan Bobcat's value-up plan, released on December 16th, is given a B rating, based on our analysis. Although the plan demonstrated some efforts to enhance shareholder value, it fell short in several key areas.


It is encouraging to note that the board has held five meetings and discussions regarding the value-up plan since late October. The company has recognized a capital cost of approximately 12% and acknowledged that the equity spread (ROE - COE), a measure of capital efficiency, has turned negative in 2024, a significant decline from the positive 4-5% in 2023. The combination of deteriorating profitability and a structurally lower valuation is a serious issue. It is urgent for management and the board to make efforts to normalize this situation. The shares, that traded at 13-20x P/E in 2016-2017 following a local listing, have experienced a significant de-rating to 5-7x in 2023-2024 due to issues such as low shareholder returns and governance problems. EV/EBITDA multiple has also declined from 8-10x in 2016-2017 to 3-4x recently.


Over the past three years, the company has faced criticism for its low dividend payout ratio, which averaged a mere 23% despite substantial free cash flow generation. The value-up plan seeks to address this by committing to a shareholder return ratio of 40% of net income between 2025~2027, a minimum cash dividend of Won1,600 pa (equivalent to a 4% dividend yield), and a share buyback and cancellation of Won200 billion by year-end. While the company has emphasized the its 40% shareholder return ratio stands favorably with the domestic manufacturing sector, we believe a comparison to global peers suggests that there is still scope for further improvement, given the industry average of 60-70%.



We propose that the Doosan Bobcat board address following three key issues:


1.  Given poor share price performance, the company's executive compensation practices, particularly those related to CEO and Vice Chairman Scott Sungchull Park, have raised concerns among shareholders. Park's total compensation of W3.9 billion in 2023 is significantly higher than other senior executives and is not aligned with its shareholders who have lost money. The 12% decline in the company's share price over the past year, its relatively flat performance for 3 years and a mere 2% annual appreciation since its IPO eight years ago highlight the disconnect between executive compensation and shareholder value. Compared to other executives, such as CFO Duk Je Jo who received W1.1 billion, and the average of W0.5 billion for the next three highest-paid executives, Park’s total compensation appears disproportionate Furthermore, Park's short-term incentive cash payment of W2.1 billion, primarily linked to revenue and operating income, is misaligned with shareholder value, in our opinion. To meet global best practices, the company should adopt an executive compensation system that is principally based on equity rewards (RSUs) with long-term incentive accounting for over 50% of total compensation. Key performance indicators (KPIs) should include: 1) total shareholder return (TSR), 2) EPS growth excluding foreign exchange effects, and 3) organic revenue growth excluding M&A effects. It is also necessary to disclose the compensation of the six foreign executives, who are listed as ‘executives’ on the company's website but are absent from the semi-annual report's ‘executive overview’ under the local disclosure.


2.  The company should provide the detailed capital allocation principles. As its value-up plan proposes pursuing long-term growth centered around M&A, a US listing for Doosan Bobcat is the optimal solution, in our view. The company has stated that of the additional $6billion revenue to be created by 2030, a half will come from organic growth and the other half from inorganic growth (M&As). It is questionable whether the current board has the ability to objectively evaluate M&A deals from the perspective of all shareholders. If Bobcat is listed in the US and its valuation gets re-rated to a fair level, the company could leverage its high share price to drive M&A activities.


3.  The board should be upgraded with more independent directors and the chairman of the board role should be separated from the CEO. We also recommend adopting a cumulative voting system as the company highlighted in the value-up plan. The series of capital transactions attempted by the Doosan Group since July have been completely contrary to shareholder protection. It is questionable whether the current board, composed of 2 inside directors and 4 outside directors, has faithfully fulfilled its fiduciary duties to shareholders when making decisions. As the company has stated in its policy on "protecting shareholder rights," implementing a cumulative voting system will help the company elect independent directors who will contribute to long-term growth and enhance shareholder value.






December 18, 2024

Korean Corporate Governance Forum Chairman,

Namuh Rhee