Investors who took part in the flotation of Royal Mail (LSE: RMG) in 2013 were able to snap up a slice of the UK postal service at a bargain price.
At today’s price of 475p, Royal Mail shares trade nearly 45% above their IPO price of 330p.
Investors will now be wondering whether the Japanese government will make the same mistakes as our government when it floats Japan Post in November.
This mega-IPO is expected to raise around $11.65 billion, and will be the biggest privatisation in Japan for 30 years.
Get the price right!
The Japanese government is hoping to sell around 75% of Japan Post shares to domestic savers, with the remainder going to institutional buyers.
Clearly the shares need to be attractively priced, but not too cheap.
The initial pricing for Japan Post Holdings shares has been set at between Y1,100 and Y1,400. That’s a discount of more than 50% to the shares’ book value, which seems very cheap.
However, Japan Post does have a big problem: growth.
Postal volumes are declining steadily, while earnings at the group’s insurance and banking operations — which generated 95% of pre-tax profits last year — are stagnant.
Most of Japan’s largest banks also trade at a big discount to book value.
On this basis, the Japan Post pricing looks attractive, but not outrageously cheap, in my view.
Don’t undervalue the assets
Investors who read the Royal Mail share prospectus before the IPO soon realised that the value of £200m of surplus London property was not reflected in the proposed IPO price. This made the shares a clear bargain.
The City also used concerns about the need for Royal Mail to modernise and reform its operations to help justify a lower valuation.
Similar factors may help to suppress the valuation for Japan Post. In addition to a 24,000-strong branch network, Japan Post’s bank division has Y206tn (£1.1tn) of financial assets, mostly Japanese government bonds.
These generate the majority of the bank’s profits, but returns could be much higher if the bank diversified out of sovereign bonds and into shares and other riskier assets. Lending is also restricted by competition rules.
Potential investors may be persuaded to pay more in the IPO if they believe the bank will be allowed to reform its lending and investment policies to increase returns.
To maximise returns, I believe the Japanese government needs to clarify these issues ahead of the IPO.
Take a long view
Even more than Royal Mail, Japan Post is part of the fabric of Japanese society.
There’s no doubt at all in my view that whatever happens, the flotation will trigger some criticism. I suspect that short-term volatility in the shares of the newly-floated companies is also likely.
Those in charge of the IPO need to be as transparent as possible about future plans before the sale. Afterwards, they need to develop a very thick skin and focus on the long term.
The success of a privatisation this large will be measured over years or even decades, not months.
Should you invest in mail?
I suspect the Japan Post IPO will be good value for shareholders who are able to buy in at the offer price.
