Ascender Capital Calls for Improved Capital Allocation Policy at Cresco Ltd (4674)

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

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 Cresco Ltd. (“Cresco” or “the Company”) management and Board since November 2023, urging improvements in capital allocation and corporate governance.

Ascender Capital is a long-term shareholder of Cresco, currently holding approximately 2.2% of the shares.

Strong Operations Undermined by Poor Capital Allocation

Since 2015, Cresco’s operating margin has increased from 8.0% to 10.2%, driving annual growth in operating income of 12%. Cumulative operating cash flow of ¥28 billion has largely accumulated on the balance sheet.

FY3/2025 was another strong year: revenue rose by 11%, operating income increased by 17%, and FY3/2026 guidance targets a further 17% gain in operating profit.

We commend management for these strong results, reflecting stable client relationships and operational excellence. However, shareholders have seen limited benefit. The ¥26 billion in cash flow generated over the last decade remains idle. Excluding excess capital (defined as anything beyond three months of SG&A), we estimate the Company’s ROE could reach 50% — more than triple the current 15%.

The announced increase in the dividend payout from 40% to 50% and the 2.5% share buyback disclosed on 9 May 2025 are welcome, but only partially address the issue.

Valuation Disconnect

Despite these strong fundamentals, Cresco trades at only 14x P/E — a 26% discount to the System Integrators (SI) sector average of 19x. On an ex-cash/LTI basis, the P/E drops to below 9x.

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

Shareholder Proposals

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

1. Transfer authority to set dividends to the General Meeting of Shareholders — consistent with best practices across 90% of listed companies in Japan
   
   
2. Increase dividends:
   
   a. Declare a special dividend of ¥46 per share to normalize the cash balance relative to operational needs
   
   b. Distribute a year-end dividend of ¥54 per share for FY3/2025 — resulting in a 75% payout ratio, a sustainable level for Cresco’s asset-light model
   
   
3. Expand share buybacks to 8.8 million shares (21% of shares outstanding), and immediately cancel all treasury shares

Even after implementing these measures, Cresco would still hold over ¥6 billion in cash — well above operational requirements. Moreover, annual operating cash flows exceeding ¥5 billion will continue to replenish reserves and support strategic initiatives.

Supporting Analysis

Overcapitalization of the Balance Sheet

As of March 2025, Cresco’s net cash and long-term investments amount to over 4 years’ worth of SG&A — far in excess of what is needed to run the business efficiently.

This level of capital is excessive for a company with a 15-year track record of uninterrupted positive cash flow, including through the 2008 Global Financial Crisis, the 2011 Tōhoku Earthquake, and the COVID-19 pandemic.

Cresco has executed a highly successful M&A program over the last decade with just ¥3 billion. Future transactions of similar scale can be easily financed through operating cash flow or modest leverage.

There is no financial justification for maintaining such an overcapitalized balance sheet.

Risky Investment Management

Cresco incurred derivative losses in FY3/2020 and FY3/2023 through active management of a ¥8 billion financial investment portfolio. This speculative activity is inappropriate for a system integrator and detracts from the Company’s core focus in a rapidly consolidating IT services market.

We call on the Company to immediately liquidate these investments and redeploy the capital toward shareholder returns.

Improving Shareholder Engagement

Cresco has no controlling shareholder and should therefore be fully accountable to its public investors. While management has been hospitable and courteous, engagement has lacked depth and substance.

The Board’s superficial rejection of our shareholder proposals — in its 9 May 2025 response — reflects either a fundamental misunderstanding of capital allocation or a disregard for fiduciary responsibility.

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 Cresco – ENG

This press release does not constitute an offer to purchase or sell shares in Cresco Ltd.

About Ascender Capital

Founded in December 2012, Ascender Capital is a Hong Kong-based value orientated investment firm concentrated on opportunities in Asia including Japan. The fund focuses on high-quality companies with a track record of profitability and earnings growth.

DISCLAIMER

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