Following his re-election as President of the Liberal Democrat Party last week, Japanese Prime Minister Shinzo Abe has unleashed his country’s largest initial public offering in almost two decades with the launch of three-way stake sales in Japan Post Holdings and its two subsidiaries, Japan Post Bank and Japan Post Insurance.
Together the three companies could raise a combined ¥1.4 trillion ($11.6 billion) in what is also shaping up to be the world’s largest IPO of the year.
The flotation, which has been a decade in the making, is a multi-headed hydra that will provide a key marker of domestic and international sentiment towards Japan as it continues to try and haul itself out of deflation. For Japan Post Bank and Japan Post Insurance are not only the country’s largest operators in their respective sectors, but also (in the case of Japan Post Bank) the largest creditor to the government as well.
All three deals have been structured with a heavy emphasis on domestic participation, particularly retail investors who will be looking for a decent yield pick up.
As such, the troika are set to offer a dividend yield in the range of 3% based on a 50% payout ratio, although Japan Post Insurance has said its ratio will range between 30% and 50%. This represents a very attractive pick-up relative to the country’s risk free rate given that 10-year Japanese Government Bonds (JGB’s) yield just 0.34% and have tightened 5bp over the past month.
It is also very attractive relative to the roughly 1.4% to 1.5% average dividend of companies listed on the first section of the Tokyo Stock Exchange, which includes nearly all of Japan's top names.
Buy-side sources said the three deals should consequently be well received by the country's legion of retail investors (the famous Mrs Watanabes) who will view them as defensive investments. “Japanese retail investors are eager to find alternative investments that are safe, but offer higher returns than bank deposits and government bonds,” one hedge fund manager said.
This is probably just as well since institutional investors, with wider international purchasing options, are far more likely to focus on some of companies’ operational challenges. These include falling profitability at two of the three entities, allied with concerns about their overall efficiency and ability to weather the winds of private sector competition.
Over the longer-term, the government has said it hopes to reduce its stake in the holding company to about one third and 50% where the bank and insurance subsidiaries are concerned.
Year-to-date, the Nikkei 225 has been one of Asia’s better performing markets up 5.63% to close Friday at 18,264.22. For most of the year, it seemed to sail through Grexit and China slowdown fears, only finally succumbing on August 17 when the Shanghai Composite Index’s “Black Monday” sent global markets into a tailspin.
Since then it has fallen 8.8%, although it has shown signs of stability over the past week following Abe’s re-election.
Valuation
His government plans to sell an 11% stake in each of the three companies. The largest should be the parent Japan Post Holdings, which should raise ¥668.3 billion based on the sale of 495 million shares at an indicative price of ¥1,350 per share.
In terms of valuation, this equates to a p/e ratio of 12.5 times earnings on a trailing 12-month basis and 16.3 times on a forward basis. The company has said that net income may fall about 23% to ¥370 billion in the year through to March 2016.
Japan Post Bank should raise ¥577.4 billion from the sale of 412.4 million shares at an indicative price of ¥1,400 per share.
Based on its indicative pricing, the stock has been valued on a trailing p/e of 14.21 times and 16.35 times on a forward basis. The bank has said that net income may fall 13% to ¥321.4 billion in the year through to March 2016.
Finally Japan Post Insurance (known as Kampo domestically) is flagged at ¥141.9 billion from the sale of 66 million shares at ¥2,150 each.
This values the stock at 15.6 times on a trailing 12-month basis and 15.4 times on a forward basis. The group has said that profit may grow 3% to ¥84 billion in the year to March 2016.
All three should result in a combined market capitalization around the ¥12.6 trillion mark.
Bookbuilding is slated to open on October 7 and will close on October 16 for Japan Post Bank and Kampo, followed by Japan Post Holdings on October 23. Pricing will take place on the October 19 for the two subsidiaries and on October 26 for the parent.
Foreign institutional investors will be allocated 20% of each deal, with domestic investors getting 80% of which 95% has been set aside for retail and 5% for institutions.
Listing is scheduled for November 4.
Post and logistics
As the country’s sole postal service provider, Japan Post Holdings runs the nation’s 24,000 post offices as well as logistics centres. It is also one of the nation’s largest employers with over 220,000 full-time employees.
Like all traditional mail businesses, it has faced heavy competition from the internet. Total mail volumes have been falling for ten consecutive years - from 25.6 billion items in 2003 to 22.3 billion in 2013, before managing to stay flat in 2014.
In response, Japan Post has designed new products such as domestic delivery service “Yu-Pack”, which allows parcels to be shipped at lower fees, and “Yu-Mail” for sending books and publications.
Japan Post Holdings is also linking technology to traditional mailing services including notification services for smartphones and tablets.
The state-run postal service provider is also trying to enhance its corporate value through acquisitions. In May this year, it expanded its business overseas with an A$6.5 billion ($5.1 billion) buyout of Australian transport and logistics provider Toll Holdings.
At the time it ranked as the largest Asia-Pacific M&A transaction of the year.
Banking and insurance
Japan Post Bank handles the banking business of the post offices, where as many as 120 million ordinary postal saving account holders put their savings, according to a research report by one of the IPO bookrunners.
The bank has about 1.5 times more deposits than Mitsubishi UFJ Financial Group, Japan’s largest listed financial institution and second largest listed company by market capitalization, according to the report.
Japan Post Bank is one of the world’s largest institutional investors, but has always maintained a very conservative asset allocation policy. Until very recently it held more than two thirds of its portfolio in JGB’s. That ratio has now fallen to about half as the company seeks to boost returns over a three-year period.
For its most recent annual results it recorded a net interest margin of just 0.77% while its deposit balance stood at ¥177.7 trillion as of March 2015.
So far its diversification has mainly been into foreign bonds, but should it follow the Government Pension Investment Fund’s (GPIF) lead into domestic equities there could be profound implications for the Japanese stock market.
One source close to the deal argued that Kampo has the best growth potential among the three IPO candidates, as insurance coverage will increase in tandem with the country’s ageing population. Over the past five years, the number of new policies has increased from 205 billion to 238 billion.
As of March 2015, it had ¥84.9 trillion in assets, equating to a 23.1% domestic market share.
Syndicate
Joint global co-ordinators across all three tranches are: Nomura, Goldman Sachs, JP Morgan, Mitsubishi UFJ and Morgan Stanley.
For the international tranche bookrunners are: Nomura, Goldman Sachs, JP Morgan and Morgan Stanley. Each have a 23.6% allocation weighting.
Citi and UBS are also bookrunners, but with a 2% weighting and are only allowed to take orders from accounts, which have no relationship with any of the JGC’s.
Senior co-lead manager is Bank of America Merrill Lynch, while co-leads are Barclays, Credit Suisse, Daiwa, Deutsche Bank, Mizuho and SMBC Nikko.
For the domestic tranche bookrunners are: Nomura, Mitsubishi UFJ, Goldman Sachs, JP Morgan, Daiwa, Mizuho, SMBC Nikko, Okasan Securities and Tokai Tokyo.
