Palliser's Japan Post play walks a tightrope
HONG KONG, Dec 10 (Reuters Breakingviews) - It is one thing to tell the market it is wrong and another to change its mind. Therein lies the challenge for Palliser Capital, whose stake in Japan Post Holdings (6178.T), opens new tab is predicated on unlocking what the activist firm's founder James Smith reckons is a massive undervaluation of the firm’s real estate unit, coupled with the conviction that Japan’s post office operator will follow his recommendations for monetising it. His plan looks feasible but only with all major stakeholders, which include the finance ministry and ordinary customers, on board.
Palliser's investment as supportive of management’s drive to boost returns, is correct that Japan Post Holdings has a valuation problem: the stock trades at less than half forward book value, per LSEG, or about half the target Tokyo’s bourse has recommended for publicly traded companies.
By the activist firm's reckoning the target's current market capitalisation of 4.7 trillion yen ($30 billion) ignores some $25 billion in value, with the biggest wodge accounted for by a real estate business Palliser argues is worth about 2.9 trillion yen. That’s roughly double the holding company’s own estimate of 1.5 trillion yen, though the latter excludes current and planned developments.
Smith laid out his plan to rectify this discount at last month's Annual Sohn London Investment Conference. Besides pushing for improved transparency and capital efficiency, he proposed consolidating real estate operations at the holding company and subsidiary Japan Post into a separate unit and then initiating a “strategic review of value unlock options”. The top option mooted is spinning off the property business while maintaining an ownership stake.
Smith has stopped short of calling for that spinoff. But it's probably necessary because internal reorganisation alone would still let management meddle at will. He does have precedent on his side: Japan Post Bank (7182.T), opens new tab and Japan Post Insurance (7181.T), opens new tab, which both listed alongside Japan Post Holdings in 2015, pay dividends to the parent and sport decent valuations themselves.
Running this playbook again could free up the property unit’s management to operate more like other developers and prompt the market to recognise its value. That would also benefit the finance ministry, which by law must hold at least a third of shares in Japan Post Holdings.
The unanswered question is how willing the holding company is to spin off the business, and at what speed. To ensure a clear path, Smith would do well to get out ahead of potential objections from stakeholders: ensure the exchange views the listing as aligned with its value push; flag to the public and politicians that it doesn’t require slashing post office staff or services; and make clear to the government that improved returns can lessen Tokyo’s burden in subsidising universal service nationwide.
This may not guarantee an unreserved endorsement from his quarry. But it should help minimise the political risk if Smith deems it necessary to strengthen his nudge into a more forceful push.
