Japan Post Pricing Seen Drawing Investors More Than Strategy

  • Questions linger over business prospects for postal giant
  • Price ranges Wednesday show relatively cheap valuations

Japan Post Group, preparing a $12 billion initial public offering, is a bank that can barely lend, a postal service in an era of electronic mail, and an insurer in a nation with a shrinking and aging population. So how can it attract investors?

The answer depends on how quickly the state-owned postal giant, whose origins date back to 1871, can unlock the potential from its 296 trillion yen ($2.5 trillion) in assets, 24,000 branches and 200,000 employees. With much of that strategy still in doubt due to regulatory restrictions, Japan Post is offering its shares relatively cheaply, according to price ranges released Wednesday for the sale of its three companies.

“Investors are keen on the future potential of Japan Post, but their patience may wear thin if they see the pace of its reform slow," said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo. “The group needs to develop a sense of urgency to make better use of the deposits, post offices, brand and customer trust that it has built over the past centuries in Japan."

The banking unit, which has so far been unable to convince regulators to relax rules that prevent it from giving out mortgages and other loans, is seeking to do more with the country’s largest stockpile of deposits than put it in government bonds. It has already begun rebalancing its portfolio and hiring bankers from firms including Goldman Sachs Group Inc. to manage its assets.

Expanding Abroad

For the postal service, which contributes the least to the group’s profit, its success may hinge on how quickly it expands overseas and focuses on freight transport after its A$6.5 billion ($4.6 billion) deal to buy Australian logistics company Toll Holdings Ltd. this year. The insurance arm is also looking to venture abroad.

The sale of Japan Post Holdings Co., Japan Post Bank Co., and Japan Post Insurance Co. is set to raise as much as 1.44 trillion yen, according to the top of the price ranges, making it the country’s largest privatization since Nippon Telegraph & Telephone Corp. in 1987. Junichiro Koizumi led the initiative when he was prime minister 10 years ago. Some of the proceeds will be used for reconstruction efforts following the 2011 earthquake and tsunami in northeastern Japan.

The holding company is being priced at a range of 1,100 yen to 1,400 yen a share, according to a regulatory filing. At the upper end, it would be worth 0.41 times book value, according to Bloomberg calculations based on the prospectus. That is a third of the 1.2 times book currently at Royal Mail Plc, the U.K. postal service whose surging shares after its October 2013 listing generated criticism that it was offered too low.

Japan Post Bank, with a price range of 1,250 yen to 1,450 yen a share, would be valued at as much as 0.47 times book, less than the 0.7 times at the nation’s three so-called megabanks Mitsubishi UFJ Financial Group Inc., Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. Japan Post Insurance is being priced at 1,900 yen to 2,200 yen, giving it a value of 0.67 times book.

Past Privatizations

Final prices will probably be close to the upper end of the ranges, said Hirozumi Kobayashi, an analyst who covers IPOs at Fisco Ltd., a Tokyo-based financial research and investment service company. He described the bank in particular as “cheap.” Prices for the bank and insurer will be decided on Oct. 19 and for the parent company on Oct. 26.

With more than 70 percent of the offering aimed at individuals, Prime Minister Shinzo Abe risks angering retail investors if the shares drop when they are listed on Nov. 4. And with further stake sales planned in the future, the government has an additional incentive to err on the cheap side.

“They have to make it attractive, really for political purposes,” Peter Tasker, founding partner of hedge fund Arcus Investment Ltd., said before the price ranges were released. “If it’s a disaster it would be very, very embarrassing for the government," said Tasker, a former equity strategist who has worked in Tokyo since the 1980s.

Past privatization deals in Japan have tended to bring immediate rewards to investors. Only one of the country’s six major government flotations since 1987 -- Japan Tobacco Inc. -- opened at less than the offering price on the first day, according to data compiled by Bloomberg.

Led by President Taizo Nishimuro, 79, Japan Post Holdings targets net income of 450 billion yen in the year ending March 2018, excluding earnings by Toll, according to its business plan. It forecasts profit will decline 23 percent to 370 billion yen in the year ending March, in part because lower interest rates will curb returns on government bonds.

The banking unit, which reaps most of its income from returns on its asset portfolio, contributed 51 percent of the group’s 1.12 trillion yen in pretax profit last fiscal year. The insurance unit delivered 44 percent of earnings, while the postal service made up just 2 percent.

Fund Managers

Japan Post Bank, led by Citigroup Inc.’s former Japan chief Masatsugu Nagato, is trying to get higher returns on its 178 trillion yen in deposits by diversifying from Japanese government bonds into equities and foreign debt. It hired Katsunori Sago, former vice chairman of Goldman Sachs’s Japan unit, this year as head of asset management.

“Japan Post can’t compete without hiring a slew of top skilled fund managers, and this won’t happen overnight,” said Kyoto University economics professor Hideki Fujii, who has studied the privatization.

The postal service is also hamstrung by regulations. Under the privatization law, it’s required to maintain “universal” services, restricting its ability to close branches even as the shrinking population and rise of digital messaging crimp demand for mail services.

Fewer Letters

Japanese sent about 3 billion fewer letters and postcards in the year ended March 2015 than they did seven years earlier, the postal group’s data show. That slashed revenue from mail and postcard deliveries by 185 billion yen over the period.

“To maintain its low-profitable universal postal service, going abroad is the right path,” Fujii said. “But it will need better management to oversee the post-merger integration of Toll and the global operation."

Japan Post’s insurance arm is also considering its prospects overseas, much like its peers, which have announced $24 billion in cross-border acquisitions in the past year.

Heizo Takenaka, who helped shape the privatization plans as a cabinet minister under Koizumi, is optimistic about the group’s prospects.

“If private-sector governance comes in, Japan Post will be strong,” Takenaka said in an interview. “Postal services themselves, if they are managed correctly, have enormous potential.”

Before it's here, it's on the Bloomberg Terminal.