Tokyo Metro IPO is a big deal with big caveats
07/10/2024 12:00
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own. Refiles to remove broken link in fifth
paragraph.)
By Hudson Lockett
HONG KONG, Oct 7 (Reuters Breakingviews) - There's
plenty for investors to get on board with in Japan's biggest
listing in half a decade. The government is selling 320 billion
yen ($2.2 billion) of shares in subway operator Tokyo Metro, and
trends are broadly on its side.
Cost-cutting measures launched during the pandemic, plus the
return of rail-reliant Tokyo commuters to the office, helped
boost the company's EBITDA more than 50% in the fiscal year to
March, to 150 billion yen. More impressively, at 39%, the EBITDA
margin was nearly 10 percentage points higher than the previous
year and well above the average 23% for listed rivals. Tokyo
Metro is also experimenting with credit card payments to cater
to foreign tourists and plans to reduce headcount by about a
tenth by 2031, partly through increased automation.
All that bodes well for the upcoming initial public
offering. The deal’s indicative price of 1,100 yen per share
will give Tokyo Metro a valuation of 1.7 trillion yen including
debt. Assume revenue increases 14% this fiscal year - the
average forecast growth for listed peers - and that margins hold
steady, then the forecast 171 billion yen of EBITDA implies a
valuation multiple of just less than 10 times its enterprise, a
slight discount to double-digit ratios enjoyed by rivals with
less impressive margins, including Tokyu 9005.T and Odakyu
Electric Railway 9007.T .
Rising indebtedness is one factor. As of March, net debt
stood at 6.9 times EBITDA, up from less than 4 times pre-Covid,
due to rail extension and other projects. The company, which is
not raising any funds in the listing, warns in its prospectus
that it does not expect its long-term debt to fall significantly
in the medium term.
Then there's the fact that, unlike the last big railway
privatisation in 2016, Tokyo Metro’s government owners are not
fully divesting.
The Ministry of Finance and Tokyo Metropolitan Government
will together still hold 50% of shares outstanding after the
IPO, which is required by law to be conducted before March 2028
to repay debt sold after the Tohoku earthquake and tsunami of
2011. Japan’s Ministry of Land, Infrastructure, Transport and
Tourism has indicated that future divestment should take a
backseat in light of the ongoing expansion projects, which are
expected to finish in the 2030s.
That creates a massive stock overhang for investors. It also
limits Tokyo Metro’s ability to carry out share buybacks on top
of regulations that limit its ability to raise fare prices.
That may be why Tokyo Metro has proposed an initial dividend
that implies a yield of 3.6% using the IPO price - double the
sector average. Investors will have to weigh whether that and a
solid earnings outlook are enough to offset the deal's caveats.
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CONTEXT NEWS
Subway operator Tokyo Metro plans to raise about 320 billion
yen ($2.2 billion) from its upcoming initial public offering in
Tokyo, with shares set to price on Oct. 15. The company has
provided an indicative price of 1,100 yen per share, suggesting
a market capitalization of 639 billion yen.
The privatisation will reduce the combined holdings of
Japan’s Ministry of Finance and the Tokyo Metropolitan
Government to 50% of outstanding shares in the company.
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Graphic: Tokyo Metro: high margins, high dividend https://reut.rs/47Xw3Iz
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(Editing by Robyn Mak and Ujjaini Dutta)
((For previous columns by the author, Reuters customers can
click on LOCKETT/
hudson.lockett@thomsonreuters.com))