June 11, 2014 2:29 am JST

Hurdles remain in Japan Post's homestretch toward IPO

TOKYO -- With Japan Post shares set to hit the market as early as next fiscal year, the group's business prospects and the handling of its two financial units will come into greater focus in attracting retail and institutional investors.

     The government-owned behemoth runs the nation's sole postal services company, along with its largest bank and insurer.

     "We seek to replace power utilities as a stable stock and capture individual investors," a Japan Post executive says.

     Electricity providers have long been deemed typical income stocks, with the regional monopolies generating solid earnings and high dividend yields. But in a time of idled nuclear power plants and eroding regional dominance, the label no longer fits them. Japan Post hopes to find its value in their stead by taking advantage of this tidal change.

     Even after the initial public offering, the government will still hold more than one-third of the shares in Japan Post, which will retain its postal services monopoly. "A certain level of demand among retail investors is expected (for Japan Post) as a special stock with continuing governmental ties," says Yoshinobu Yamada, senior analyst at Deutsche Securities.

     But whether the postal giant will dole out generous dividends is unclear. It paid 38.5 billion yen ($372.1 million) to the government in fiscal 2013. Assuming a price-to-book ratio of 1, the dividend yield would come to a paltry annualized 0.3%.

     "A yield of 3% is a must for Japan Post to be called a dividend stock," Yamada says. Based on a P/B ratio of 1, the company would need to pay out some 400 billion yen to achieve a 3% return. Group net profit is projected at 330 billion yen for fiscal 2014, and even if all were used for dividends it would still fall short. So unless individuals simply ignore the dividend side of shares with stable earnings, it will be difficult to call Japan Post a successor to utility stocks.

     "The reaction of many institutional investors was that they didn't want to buy," a brokerage insider says. Japan Post unveiled an outlook of a 350 billion yen group net profit in fiscal 2016, down 27% from the fiscal 2013 level, in a medium-term business plan released this February. Even though this is due partly to investing 1.3 trillion yen in systems and other facilities and equipment over three years, the company cannot deliver the growth that institutional investors want to see when buying stocks.

     The banking unit generates more than 70% of Japan Post's profit. Despite exceeding the three megabanks in terms of assets, it is more like a regional financial institution. The unit's branches are mostly outside metropolitan areas, and it has substantial holdings of low-yield Japanese government bonds. Japan Post's return on equity stood at just 3.7% for fiscal 2013, a far cry from the megabank trio's average of 10.7%. Withdrawals of savings are expected to accelerate in regional areas, where populations are graying rapidly. The government has yet to give the unit the green light to launch mortgage loans and other new businesses, and the outlook is not promising.

     Japan Post had some 13 trillion yen in net assets as of the end of March. Using this as a gauge and assuming a P/B ratio of 1, the government would receive 8.6 trillion yen by selling a two-thirds interest through the offering. But even for the high-profit megabanks, the P/B ratio stands at just 0.77. "The ratio cannot possibly come to 1 for Japan Post, which does not have hopes of growth," an official at a foreign brokerage says.

     A calculation using a P/B ratio of 0.5 would reduce the proceeds to 4.3 trillion yen. The government wants to sell Japan Post shares for the highest possible price to generate funds for rebuilding disaster-hit regions and lift the P/B ratio to nearly 1. But it does not have much time to change investors' minds on the postal group.

     Another issue is when stakes in Japan Post's banking and insurance units will be sold. The two companies account for about 90% of group sales and hold almost all group assets. Given this, investors would be hesitant to purchase Japan Post shares without knowing how interests in the two will be handled.

     Under the postal privatization law that took effect in 2005, the two units would have been free of government control by the end of September 2017. But the amended law enacted in 2012 drops the concrete deadline, instead stating that government-held shares are to be disposed of as early as possible.

     Without these two cash cows, the Japan Post group would be left with the low-margin postal services company, so it is unclear whether investors would support the sales. With megabanks, for instance, the parent holding companies are listed but the banking units themselves remain private.

     Under the IPO plan hammered out by a government then led by the Democratic Party of Japan, holding company Japan Post would first go public and the handling of the two financial services units would be "determined by the time half of Japan Post shares are sold." This way, investors would be assured of the two units staying under Japan Post's umbrella for a while.

     But Taizo Nishimuro, the former Toshiba boss tapped by the current Liberal Democratic Party-led government to lead Japan Post, wants to "take the two units public soon after (the parent's) IPO." Nishimuro apparently seeks to ease the limits on the operations of the two subsidiaries -- measures put in place amid concerns that the private sector would be squeezed.

     The bank and the life insurer must undergo rigorous screening by the government when entering new lines of business. Per-customer savings and insurance policies are capped as well. These rules are to be relaxed as Japan Post sells off more and more of the two units.

     The sale of the units also presents the question of whether the proceeds will be used efficiently. While proceeds from the sale of Japan Post shares must be spent on reconstructing disaster-affected areas, proceeds from the sale of the two units are expected to go to Japan Post itself. Some with government connections worry that the money will not be put to efficient use and instead just be parked in the form of an internal reserve.


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