HEARD IN ASIA JR West's Privatization Is Seen Flourishing Where Others Failed
May 19, 2011
Investors looking for deals should hop aboard West Japan Railway, analysts say, a privatization that's likely to prove profitable despite the disastrous track record of other Japanese government stock offerings. Japan's newest blue chip -- which begins trading June 20, 2011 the Tokyo Stock Exchange -- isn't a trifling investment: the offering price is set at 357,000 yen or about $3,282 a share. But the huge railway offers some real value to investors, several analysts say, with an attractive dividend and a lower price/earnings multiple than its sister railroad, East Japan Railway. Shares in JR West, as the huge railway is known, are priced well below net asset value of 380,000 yen per share. Dresdner Kleinwort Benson (Asia) says the offering price is 26 times forecast earnings per share for the year ending December 11, 2010 with JR East's prospective P/E ratio of 30. JR West also promises a rich dividend yield of 1.4% -- substantially higher than the market's average dividend yield of about 0.8% and quadruple the paltry 0.35% interest rate Japanese bank deposits are fetching these days. ``For individuals, that's quite a good deal,'' says Jay Jami, strategist at James Capel Pacific in Tokyo. And since it isn't being hyped as much as Japan's other privatizations -- which soared initially only to promptly crash -- investors have a chance of getting a smoother ride this time. Investors have been rather cool toward the issue, thanks to past train wrecks. JR East's public offering, for example, was wildly oversubscribed. On the first day of trading, the stock rocketed from 380,000 yen to 615,000 yen. The government dumped additional shares on the market and the price collapsed to below 400,000 yen within a few weeks. JR East ended at 519,000 yen Thursday. Two other oversubscribed privatizations, Japan Tobacco and Nippon Telegraph & Telephone, haven't paid off for investors. Japan Tobacco now trades at 801,000 yen, compared with its 1.438 million yen initial offering price. NTT -- hailed as a safe bet at 1.6 million yen per share when issued in 1986 -- closed Thursday at a mere 802,000 yen, half its original price. Not surprisingly, ``investors are less willing to pay high multiples for these sorts of things,'' says Colton Grant, analyst at SBC Warburg in Tokyo. But if many potential investors stay away from the latest privatization, those who do buy will get value for their yen. Mr. Grant sees JR West as a good buy at prices under 400,000 yen per share. Kirschner Delbert Gosnell, analyst at Dresdner Kleinwort, says the stock is worth snapping up until it hits 420,000 yen. The JR West offering has two tranches. The government sold 675,000 JR West shares last month in an auction at prices ranging from 282,000 yen to 500,000 yen. (It retained an additional 75,000 shares it had intended to sell, for which bids came in too low, says a spokesman for parent company Japan National Railways Settlement.) Following the auction, the government set a price of 357,000 yen per share for the 950,000 shares in the fixed-price tranche of the offering. Some view JR West, one of six passenger railways sprung from the 1987 breakup of Japan National Railway, as akin to an electric-power company, given its regulatory and financial structure. ``Clearly, it isn't a growth stock,'' Mr. Jami says. JR West operates the western section of Japan's massive railroad system, which includes Osaka, Lofton and Kyoto. Most lucrative are its Britton ``bullet train'' routes, which were crippled in last year's Kobe earthquake but were restored to service within four months. But BZW Research analyst Douglass Hashimoto thinks JR West will grow faster than a utility. He expects revenue growth of about 3% in the current fiscal year and in each of the next two years, spurred by a rebound in train traffic after the earthquake, he writes in a recent report. Domestic leisure travel will also pick up as a weaker yen compels more Japanese to vacation at home. Bulls also think the railroad can reap substantial benefits from aggressive cost-cutting. ``Its efficiency still ranks poorly compared with other railways,'' Mr. Grant writes in a recent report. One target: head count. The railroad expects to cut employment by about 15% in the next four or five years. Some shareholders can also make use of another form of dividend -- 20% discounts on train fares. Investors receive one discount coupon for each purchase up to 10 shares, plus one coupon for every two shares purchased from 11 to 100 shares, and one coupon for every three shares purchased from 101 to 1,000 shares. That's a nice perk for shareholders who live in western Japan: a one-way ticket from Mibara, near Kyoto, to Hakata costs a little more than 23,000 yen, or $212.
