Is corporate governance in Japan improving?
It appears that after two decades of pressure, companies finally are beginning to wake up.
The developer Mitsubishi Estate MITEY T:8802 and the railway operator Keisei Electric Railway T:9009 both just pledged to discuss at the board level "poison pill" plans that they have on their books.
These are hardly revolutionary companies. Japanese property companies such as Mitsubishi Estate have a hidebound way of doing things and typically sell large developments that homebuyers are used to seeing built the exact same way based on the brand.
Keisei makes its bread and butter running rail passengers from downtown Tokyo out to Narita International Airport, which takes more than an hour to reach by car. It bolsters its portfolio with bus and taxi services.
Keisei is in luck. Japan is experiencing a boom in intra-Asian tourism, primarily from China but also from the expanding middle classes of Southeast and South Asia. It also will experience the one-off boons from the Rugby World Cup in late September and the Tokyo Olympics next summer.
Keisei management "is aware that these [poison-pill defenses] are not popular among equity market participants," the brokerage Nomura notes with deadpan delivery. "From the perspective of corporate governance, we think the company has made progress, though what happens next is uncertain."
Keisei President Toshiya Kobayashi has promised that the company's directors will discuss its defense measures at the next board meeting. To Nomura, it would be "welcome" if the company were to discontinue takeover defense measures. That would likely lead to improved engagement with shareholders, particularly on its interest-bearing debt.
The other issue shareholders would want to take up is Keisei's large stake in Oriental Land, the company that owns and operates the Tokyo Disney Resort. "We think the company is willing to listen to the various views of shareholders," Nomura says, leading the brokerage to raise its target price for the stock to ¥4,500, up from ¥4,100.
It's trading at ¥3,910 now. So that suggests an easy 15% upside, nothing to sniff at. It suggests a price-to-earnings ratio of 19, which is par for other private rail operators.
Management's forward guidance seems conservative, given that Keisei will be boosting airport train service, and therefore passengers. Should the company work to curb its debt load, at around ¥320 billion, the upside could be higher.
Mitsubishi Estate already has announced plans to discontinue its takeover defenses. It will scrap them as of the end of June.
The company also will buy back ¥100 billion (US$910 million) in shares. Overseas shareholders in particular chafe at the large amounts of cash that many Japanese companies hold on their books. While it has made sense to stockpile cash during Japan's two decades of deflation, it also leaves them with a low return on equity. Shareholders favor buybacks, or even one-off dividends to return cash directly to investors.
Mitsubishi Estate is only valued at 0.57 x its net asset value of ¥3,241. This exposes the company to takeover risk, Nomura notes. The company appears to be addressing this by raising the share price through buybacks as well as improving the efficiency of its use of capital.
Nomura has upped its target price to ¥2,650 from ¥2,530. That's a hefty 30% upside.
Mitsubishi Estate can generate profit by selling property holdings, drawing on that large NAV. These potential gains "have not been appreciated much in the equity market," Nomura notes. If it can sell low-occupancy, low-yield properties, it also could improve its asset efficiency while returning profits to shareholders at a rate higher than in the past.
Japanese companies long have been run with the interests, in order, of customers, partners, lenders, employees, and then finally shareholders in mind. Stockholders were inconvenient pests, at best.
More often than not, the stockholders have been the lenders, customers and partners, too, through the complex series of cross-holdings that became commonplace in Japan. It did not make sense for a Japanese bank to pressure a defaulting borrower if it also owned a good stake in that borrower.
Japanese pension funds historically have shown little interest in rocking any boats. They'd sit at the back of the craft, heading wherever the current took the company.
With Mitsubishi Estate and Keisei Electric Railway, it appears management of Japanese companies -- even well-established ones in old-fashioned industries -- finally may be starting to steer the boat more actively. It should be in the right direction for shareholders and equity price gains.