London-based activist investment fund Palliser Capital has sent a letter to Japanese factory automation firm SMC Corp, stating it has made a "significant" investment in the company and proposed a $38 billion share buyback.

The letter indicates that Palliser believes SMC Corp, a manufacturer of chip-making equipment, has demonstrated foresight in capacity investment, but also points out that the company is undervalued and should focus on improving capacity utilization and profit margins.

The fund stated in the letter that SMC Corp has the ability to complete a 600 billion yen (approximately $38 billion) share repurchase over the next two years while maintaining a stable dividend payout ratio of at least 40%.

As artificial intelligence investment drives growth in the semiconductor manufacturing industry, Japanese companies with advantages in specific segments of the supply chain have become key targets for investor attention.

Palliser stated in the letter: "With strengthening semiconductor demand and a recovery in non-semiconductor industries, SMC Corp is well-positioned to optimize its capacity utilization."

The letter noted that SMC Corp, founded in 1959, produces products including valves, actuators, and chillers, but its stock performance has lagged behind peers over the past five years.

The letter also stated, "There is a significant disconnect between SMC Corp's current market valuation and its fundamentals."

Two informed sources revealed that Palliser is among the top 25 shareholders of SMC Corp. The fund did not provide further details regarding its stake in the letter.

In Japan, rising activist activity continues to pressure companies as governance reforms encourage firms to unwind cross-shareholdings, sell non-core assets, and repurchase shares. Revisions to corporate governance codes have emphasized the need to ensure effective use of cash, raising expectations that more companies may utilize their cash reserves.

The letter stated, "SMC Corp can demonstrate leadership in the sensible deployment of excess cash as Japan's corporate governance code is expected to be revised later this year."

Palliser previously invested in monosodium glutamate producer Ajinomoto, which manufactures films used in chip packaging substrates, and bathroom fixture maker Toto, which produces electrostatic chucks used to secure wafers during chip manufacturing.

Other Japanese investments by Palliser include Keisei Electric Railway and Japan Post Holdings.