Rare Brokerage Reports Show Analyst Faith in Japan Post Profits

Investors piling into the world’s biggest initial public offering this year have another reason to be optimistic: analysts are much less bearish than Japan Post Group itself.

QuickTake Japan Post

That’s according to six reports on the companies produced by brokerages before they started to sell the three-pronged privatization to their clients. Ordinary profit at Japan Post Holdings Co. will decline 11 percent this fiscal year, according to the average analyst estimate from the notes. That’s about half the drop forecast by Japan Post, and there’s a similar divergence between strategist and company projections for the banking and insurance units too.

Japan’s government raised 1.44 trillion yen ($11.9 billion) from the nation’s biggest state asset sale since the 1980s, with shares debuting on Tokyo’s exchange next week. The brokerages published their research on the postal giant in August, after guidance from the financial regulator that firms can issue reports as long as they do that at least a month before the listing company registers to offer shares. When it comes to Japan Post, it doesn’t seem to matter what anyone says about the companies’ earnings prospects, investors just want in.

“They have really tried to appeal to investors by providing a stable income, and that’s what’s important," said Takashi Aoki, a Tokyo-based fund manager at the asset-management arm of Mizuho Financial Group Inc., which oversees the equivalent of about $42 billion. “It was the first time I’d seen reports like this, and they contained a lot of thorough information about the business structure, so I read those parts. I didn’t really care about their earnings outlook."

Popular IPO

Buyers placed orders for all the shares by the end of the second day of book-building, and the three companies each priced at the top end of marketed ranges. Individuals, who were allocated more than 70 percent of the stock, are buying on expectations for high dividend yields, say Amundi Japan Ltd.’s Masaru Hamasaki and Chiba-Gin Asset Management Co.’s Yoshihiro Okumura.

It’s lucky they’re not buying on the potential for near-term earnings growth, because everyone agrees it’s limited. Only one of the brokerages is forecasting an ordinary profit increase this fiscal year -- Nomura Holdings Inc., which sees the insurer making 0.4 percent more than it did in the previous 12 months. Still, they’re much more optimistic than the Japan Post entities themselves. All brokerage estimates for the insurer are non-consolidated figures.

Nomura, a global coordinator for the listing, said Japan Post Insurance Co. will probably earn 494.4 billion yen in ordinary profit in the 12 months through March 31. That’s the highest projection among the group. Mizuho expects the insurer to post a 2.2 percent decline, while the average of the six estimates calls for a 13 percent drop, and the company itself is forecasting a 29 percent slump.

Lower Estimate

JPMorgan Chase & Co. was the only brokerage to produce a lower earnings estimate than the companies’ own figures. That was on Japan Post Bank Co., where JPMorgan’s expecting a 29 percent decline in ordinary profit this year as the lender’s shift from domestic bonds to foreign debt starts to slow. Japan Post Bank is forecasting a 19 percent drop, while the average analyst projection is for a 11 percent decrease.

Japan Post “is forecasting conservatively,” said Okumura, a general manager at Chiba-Gin. “Still, there remains a question mark over its profit-growth potential.”

Pre-IPO Reports

The six reports obtained by Bloomberg were all published Aug. 6-7, in accordance with the financial regulator’s guidelines, and have been circulating since then among investors being targeted by the IPO’s more than five dozen underwriters. The brokerages that produced them -- Nomura, JPMorgan, Goldman Sachs Group Inc., Mizuho, UBS Group AG and Daiwa Securities Group Inc. -- declined to comment. The companies’ earnings forecasts haven’t changed from what has been announced, a Japan Post spokesman said.

About 11 percent of the three companies will be sold in the IPO, which is the country’s largest privatization since Nippon Telegraph & Telephone Corp. in 1987, with proceeds being used to rebuild areas in the northeast that were damaged by the 2011 earthquake and tsunami.

Fee Frenzy

There are 61 brokerages managing the offering, and they’ll receive about 24.5 billion yen in fees, according to Bloomberg calculations based on a Finance Ministry statement. Nomura, Mitsubishi UFJ Morgan Stanley Securities Co., Goldman Sachs and JPMorgan were global coordinators of the sale.

Japan Post Holdings’ fortunes are in the hands of its two financial units, which the government plans to eventually divest entirely. About 91 percent of the holding company’s profit last fiscal year came as dividend payments from the bank and the insurer, according to Nomura’s report. The lender has said it will seek higher returns by diversifying away from low-yielding domestic government bonds, and Japan Post Insurance is considering expanding overseas.

Any changes in the postal business will only impact profits at the holding company by a few percentage points as the subsidiaries’ contributions are much more important, the Goldman Sachs report says.

“There’s very little growth potential,” said Hamasaki, head of the investment information department at Amundi Japan, which oversees about 4.23 trillion yen. “Investors will likely make judgments based on dividend yields. If they think that the business is stable, they may want to hold it as an income asset.”

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