Three big brokers upgrade outlook on Toshiba
Analysts recognise risk but expect shares to rise and hedge funds bet on miracle escape
§Three brokers have upgraded their ratings of Toshiba for the first time since its finances were plunged into crisis last year, and a growing number of event-driven hedge funds are placing their bets on a miracle escape.
Though the new analyst notes acknowledge the high risk of the wager, all three suggest that a critical corner may have been turned. Toshiba’s negative shareholder equity, the heavy criticisms of its corporate governance and its risk of delisting from the Tokyo Stock Exchange all remain in place, but the existential threat has been slightly lifted, they say.
The notes from JPMorgan, CLSA and Citigroup partly reflect investors’ experience with Olympus, the Japanese manufacturer that was plunged into scandal in 2011 and narrowly avoided delisting. From their low that year to their peak in 2015, Olympus shares rose almost 1,000 per cent.
The analysts suggest that Toshiba’s prized chip business, which it is trying to sell to fill a $5bn hole in shareholder equity, could be worth 50 per cent more than the ¥2tn ($18.1bn) offered by a consortium of bidders led by a Japanese government-backed fund.
That is a bold view on the conglomerate whose future as a listed stock depends not just on selling all or part of the memory chip business but on convincing the TSE that its internal management controls are of a standard befitting a large, listed company.
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CLSA was first to lift its rating to “outperform” in June. Citi and JPMorgan slapped on “buy” recommendations following the release of Toshiba’s results on August 10, when the flash memory business recorded a better than expected performance and the company revised operating profit guidance upwardly for the current financial year.
A growing number of event-driven hedge funds now sit on Toshiba’s share register. Effissimo Capital Management, a fund in Singapore run by the former colleagues of Yoshiaki Murakami, Japan’s best known activist investor, became the top institutional holder when it declared a 9.4 per cent stake at the end of March.
David Einhorn’s Greenlight Capital took a new long position in Toshiba during the June quarter at an average price of ¥234.79 per share, and King Street Capital, an event-driven hedge fund in New York, reported a 7.1 per cent stake in the company this month.
Greenlight wrote in a note to investors that Toshiba is “worth closer to ¥400 per share”, one-third higher than where shares closed on August 16. “Investors will refocus on the significant margin and valuation upside at Toshiba once it has resolved current uncertainties,” it added.
Citi’s Kota Ezawa said in a note to clients the NAND memory business is generating “remarkably high profits” and is probably worth ¥3tn, or ¥1tn more than its current price tag. That could mean a “100 per cent sale may no longer be on the cards”, he noted. The broker puts the possibility of the company being delisted at less than 30 per cent.
Toshiba recorded negative shareholder equity for the financial year ended March 2017 because of a $6.3bn writedown related to cost overruns and delays at its Westinghouse US nuclear unit. The stock was demoted to the second section of the Tokyo Stock Exchange effective August 1. Listed companies that report two consecutive years of liabilities exceeding assets can be forcibly delisted, although the TSE retains discretion on such matters.
PwC Aarata, Toshiba’s auditor, last week signed off on the company’s accounts, but it also issued an “adverse opinion” on internal management controls.
Toshiba shares have gained 22 per cent since their demotion to the second section of the TSE at the start of the month, leaving them 6 per cent higher for 2017.
Brokers including Goldman Sachs, Morgan Stanley, Mitsubishi UFJ Morgan Stanley and Nomura have either restricted or suspended their coverage of the stock, according to Bloomberg.
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