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Pushing the envelope

20 October 2015 By Quentin Webb

A big brand and big payouts are helping Japan Post’s 1.4 trillion yen ($12 billion) privatisation. The group’s banking and insurance subsidiaries have priced their initial public offerings at the top of earlier ranges, boding well for the parent group’s own IPO pricing on Oct. 26. Still, the success of this retail-heavy deal says little about the group’s fundamental prospects – and even less about Japan’s wider attitude to stock-market investing.

At 1,450 yen a share, Japan Post Bank will be worth about 5.4 trillion yen, or 0.47 times book value. It will yield about 3.4 percent, based on expected dividends for the second half of this financial year. That undercuts Japan’s megabanks, Mitsubishi UFJ, Mizuho, and Sumitomo Mitsui, which trade on an average of 0.69 times book value and a 3.1 percent forward yield, Starmine shows. Japan Post Insurance’s 2,200 yen pricing gives it a market capitalisation of 1.32 trillion yen, equating to a slender 0.38 times embedded value.

Yet there was a good argument for pricing these deals even more cheaply. Growth prospects are limited, at least while the government remains the majority owner. The bank barely lends, instead holding a huge portfolio of low-yielding securities. There is also a sizeable overhang of future share sales to come.

That this wasn’t necessary shows the power of name recognition. Japan Post has the biggest network of any business in Japan, and dozens of banks have been pushing this deal to retail investors. High payouts are also a prized commodity: the dividend yield on the Nikkei 225 index is just 1.6 percent.

At the margin this is also a fillip for the government’s plans to lure individuals back into shares. Households are certainly risk-averse: 52 percent of assets are held as deposits, versus 13 percent in the United States, and the proportion of the stock market owned by individuals has been sliding for decades. But this potential shouldn’t be overplayed. Few other companies will be as well-known as Japan Post – or as generous in funneling cash to their owners.


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