Ascender Capital Calls for Improved Capital Allocation Policy at Argo Graphics Inc (7595)

• Argo Graphics operates a superior, stable business but remains severely undervalued
• Ascender calls for the cancellation of treasury shares from the SCSK TOB announced on 9 May 2025 and the sale of its cross-shareholding in SCSK
• Ascender opposes re-election of CEO and Chairman
• Ascender has filed Shareholder Proposals for the June 2025 AGM

Ascender Capital Limited (“Ascender Capital”), a Hong Kong-based investment firm focused on high-quality businesses across Asia, is a long-term investor in Japan’s software and system integration sector, where it has allocated over half of its assets in recent years. The firm actively monitors more than 100 publicly listed companies in the space and has met with the management teams of over 50 since 2015.

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Ascender Capital has a strong track record of constructive engagement with companies to enhance long-term corporate value. In line with the objectives of the Japan Stewardship Code and global best practices, we have been engaging with Argo Graphics Inc. (“Argo Graphics” or “the Company”) (ticker 7595) since December 2023, urging the Chairman and the Board to improve capital allocation and corporate governance.

Ascender Capital is a long-term shareholder of Argo Graphics, currently holding approximately 2% of the Company’s shares.

Strong Operations Undermined by Poor Capital Allocation

Since 2015, Argo Graphics has increased its operating margin from 7.3% to 14.7%, leading to 16% annual growth in operating income. Over the same period, cumulative free cash flow of ¥40 billion has largely accumulated on the balance sheet, unused.

FY3/2025 was another strong year: revenue rose by 16.9%, operating income increased 11.2%, and FY3/2026 guidance targets a further 5.4% increase in operating profit.

We commend management for these solid operational results, which reflect deep relationships with its large corporate clients and the pricing power of its core partners, Dassault Systèmes and IBM — whose software solutions command high switching costs and deliver strong value.

Unfortunately, shareholders have seen limited benefit. The ¥45 billion in operating cash flow generated over the last decade has mostly remained idle. Excluding excess capital (defined as more than three months of SG&A) and new business capex, we estimate the Company’s true ROE could exceed 100% — largely above the current 14% — and a testament to the company’s business quality.

The increase in the dividend payout from 32% to 40% — applicable only from next year — and the lack of any commitment to cancel the 20% of shares being repurchased in the Tender Offer Bid (“TOB”) announced on 9 May 2025 are both disappointing. The market’s negative reaction to these announcements reflects growing shareholder dissatisfaction — a clear rejection of the Chairman and Board’s out-of-touch decisions and their failure to constructively engage with our proposals.

Valuation Disconnect

Despite its strong fundamentals, Argo Graphics trades at only 14x P/E — a 26% discount to the System Integrators (SI) sector average of 19x. After cancellation of the TOB shares, the P/E would drop to 11x, and the discount widen to 41%.

This double discount is clearly not a reflection of business quality. It stems from ineffective capital allocation, persistent overcapitalization, and a governance structure in urgent need of reform.

Shareholder Proposals

Ahead of the upcoming June 2025 AGM , Ascender Capital submitted the following proposals in the interest of all shareholders:

1. Dividends:
   
   a. Declare a special dividend of ¥218 per share to normalize the cash balance relative to operational needs
   
   
   
   b. Distribute a year-end dividend of ¥182 per share for the year ending 31 March 2025, resulting in a 75% payout ratio for FY3/2025 - a sustainable level reflecting Argo Graphics’ asset-light model
   
   
   
   
2. Expand buybacks by up to an additional 4.5 million shares (20% of shares outstanding), and immediately cancel all treasury shares, in line with best practices from Sumitomo Corp

Even after implementing these measures and completing the SCSK TOB, the Company would still retain over ¥5 billion in cash and investments— well in excess of any reasonable operational requirements. Moreover, annual operating cash flow before dividends of more than ¥5 billion will continue to replenish reserves and fully support future investments, including the planned Hokkaido data center.

Supporting Analysis

No financial justification for maintaining such an overcapitalized balance sheet.

As of March 2025, Argo Graphics’ net cash and long-term investments were equivalent to 7.8 years of SG&A — an excessive buffer for a company with a 15-year record of uninterrupted positive cash flow, including during the Global Financial Crisis, the Tōhoku Earthquake, and the COVID-19 pandemic.

Past M&A success was achieved with just ¥1.5 billion over ten years. Future deals of similar scale can be comfortably funded through operating cash flow or modest debt. The ¥10–15 billion cited by management as necessary in its mid-term plan is not justified.

Cross-Shareholding with SCSK

Argo Graphics continues to hold a ¥13 billion stake in SCSK. Now that SCSK has unwound its investment in Argo Graphics, a reciprocal sale should follow. SCSK trades at a P/E of 30x, with strong liquidity (¥2.6 billion daily), and a sale would align with Japan’s governance code and regulatory guidance on reducing cross-shareholdings.

We call on the Company to immediately sell this stake and redeploy the proceeds toward shareholder returns.

Misuse of Treasury Shares and Cross-Shareholding Must End

Following the TOB, the Company’s treasury shareholding — which already stands at 4.7% — will rise to 25%. Yet management refuses to commit to cancelling these shares, in direct contradiction to best practice - as demonstrated by companies such as Sumitomo Corp.

This mirrors its historical pattern: despite past buybacks, the number of shares outstanding has barely declined. The Company also facilitated the sale of the same TOB stake from founding shareholders to SCSK in 2008, entrenching cross-shareholding and management complacency.

Governance Breakdown and Shareholder Disregard

The CEO and Chairman’s lack of constructive engagement over the past two years, and the Board’s superficial dismissal of our shareholder proposals — as stated in its 19 May 2025 response — reflect a fundamental misunderstanding of capital allocation and a troubling disregard for fiduciary responsibility.

Now that SCSK has exited, Argo Graphics no longer has a controlling shareholder and should be even more fully accountable to its public shareholders.

We are also concerned by the absence of a credible succession plan. Chairman and CEO Yoshimaro Fujisawa is now 82 years old — nearly 20 years older than the average age of CEOs in the sector — and has chaired the Board since 2007.

In light of these concerns, we oppose his reappointment , and call for a strengthened Board that aligns with the governance standards expected of a modern Japanese company in 2025.

Further Information

More details are available in the News section of our website or through these direct links:

- Shareholder proposals in English Shareholder Proposals - ENG

- Shareholder proposals in Japanese Shareholder Proposals - JPN

- Improvement Plan for Argo Graphics Presentation and benchmarking - ENG

DISCLAIMER

Ascender Capital is the investment manager of private funds (the “Ascender Capitals Funds”) that own shares in Argo Graphics. Ascender Capital has created this communication to enable fellow shareholders to carefully monitor how sincerely the board of directors and management of Argo Graphics address our concerns, listen to shareholders’ views and endeavor to increase the value of Argo Graphics shares in the best interest of all shareholders.

Ascender Capital is not and should not be regarded or deemed in any way whatsoever to be (i) soliciting or requesting other shareholders of Argo Graphics to exercise their shareholders’ rights (including, but not limited to, voting rights) jointly or together with Ascender Capital, (ii) making an offer, a solicitation of an offer, or any advice, invitation or inducement to enter into or conclude any transaction or (iii) any advice, invitation or inducement to take or refrain from taking any other course of action (whether on the terms shown therein or otherwise).

Further, this communication and information to be found on its Website do not purport to recommend the purchase or sale of any security nor do they contain an offer to sell or a solicitation of an offer to buy any security. Nothing in this communication or on the Website is intended to be, nor should it be construed or used as, investment, tax or legal advice.

This communication and the Website exclusively represent the opinions, interpretations, and estimates of Ascender Capital in relation to Argo Graphics’ business and governance structure. Ascender Capital is expressing such opinions solely in its capacity as an investment adviser of the Ascender Capital Funds.

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Improving capital allocation at Japanese software companies