State-owned Japan Post Holdings got an approval to place an initial public offering on November 4th, privatizing its postal service. For the moment it will be the biggest IPO in the world this year, and certainly the biggest since Alibaba (N:BABA) which went public in September 2014. The offering is expected raise ¥1.4 trillion ($11.6 billion)
The Japan Post IPO is a remarkable turning point in the country’s long effort to implement changes and start economic reforms. And of course, it is a promising investment opportunity.
This offering will combine three deals. Japan’s Ministry of Finance will sell an 11% piece of Japan Post Holdings, a holding company that encompasses the actual mail delivery business. This company will also sell an 11% slice of Japan Post Bank and Japan Post Insurance.
The pricing of shares appears to be available and cheap, at the midpoint of its indicative price range. Japan Post Holdings shares will go for just 0.37 times book value, based on its end of June net asset value. Japan Post Bank is priced at 0.44 times book value, compared with an average 0.74 times book for Japan’s three biggest commercial banks. The insurance company will go for 0.35 times embedded value.
Such a move could be explained as strategical underpricing by the government. A major quantity of share sales is targeted at individuals: domestic, retail investors. It's in line with Prime Minister Shinzo Abe's attempting to motivate people to invest more of their savings. He's hoping the listing will be a success that will drive investor interest in further offerings in the upcoming 3 years. The government also hopes this IPO will show good results in order to encourage stock ownership in general.
Half of Japan Post Holdings stake is earmarked to be sold, which will dramatically sell down the company's entire ownership of its bank and insurance units. If investors can profit on the first tranche, clearly, they'll then be more eager for future participation.
There are, in fact, a number of reasons for the trio to sell at discounts. Core postal operations are extremely challenged—delivering printed materials in a country where the population is decreasing can hardly be considered a promising business model. This is a strong reason to avoid the core business in favour of the financial subsidiaries.
As well, floating all three together makes it hard to charge top prices. The state is motivated to complete the deal and to patch the holes that were caused by debt in order to repay damages created by the earthquake and tsunami of 2011.
It’s also essential that these two units—the bank and insurance company—are restricted by rules, so they are limited from competing with private firms. For instance, the bank is barred from making most kinds of loans or acquiring other banks, making it in effect a glorified government bond fund, with a return on equity of just 3.2%. Similarly, the insurance company is limited in the kinds of policies it can offer.
But these rules will start to be loosened as soon as the government’s stake falls below 50%, laying the groundwork for an eventual valuation change.
In this regard, some investors also raised questions about Japan Post Holdings’ future business, as profits have come overwhelmingly from the banking and insurance units, which will go public at the same time.
But it is worth noting that pressed by tough competition and slow growth in the domestic market, the postal services unit, Japan Post Co., purchased Australia's leading logistics company, Toll Holdings, last May for about $6 billion. It's the Post's attempt to generate profits as a way to reassure prospective investors about its business strategy going forward.
Investors are being promised impressive dividends. That includes, at the midpoint of the price range, a 3.6% yield for Japan Post Bank. This compares with an average yield of 2.8% for Japan’s three largest banks. The yield is especially attractive for Japan’s income-starved savers, given that 10-Year government bonds yield just 0.32%.
Altogether, tomorrow's IPO appears to be a good deal for investors. They should get their applications in the mail.