Commentary: Japanese Markets and Nippon TV

It has been reported in The Independent today that Tokyo stocks briefly reached a 34-year high – by Sean Peche

Similarly, other publications reported yesterday that the 225-issue Nikkei Stock Average logged the most significant daily rise in nearly three months, ending up with 743.36 points, or 2.06 percent, from Wednesday at 36,863.28. At the same time, the broader Topix index finished 12.68 points, or 0.50 percent, higher at 2,562.63.

Sean and the Ranmore team are value investors, and one of their biggest holdings is Nippon TV, the Japanese commercial broadcast television network. Given the recent jumps in Japanese financial markets, Sean would like to offer you the below insights on Nippon TV, which recently surged after it announced a share buyback and proposed changing its dividend plan to make it more favourable for foreign shareholders.

Sean commented: “Nippon TV is one of the largest television broadcasters in Japan, and despite the challenges with terrestrial television and advertising, the company has reported fairly stable earnings over many years. However, our investment rationale lay in unlocking the value on their balance sheet, not the potential growth prospects for terrestrial television in Japan.

For many years, Nippon TV paid out less than 1/3 of earnings as dividends, reinvesting the balance in listed Japanese companies like Recruit Holdings (owner of Indeed.com and Glassdoor), Mitsubishi UFJ Financial Group and Nomura. When we started acquiring a position in March 2022, tangible book value had almost doubled over the prior 10 years, but the share price was 8% lower.

So why was any shareholder willing to sell us their shares at ¥1300 with tangible book value of ¥3200. Possibly because they didn’t believe management would ever return this value to shareholders or that it was a $2.5bn company and so monitoring any holding wasn’t “worth the hassle” for large asset managers.

In contrast, we felt that we had limited downside from buying a stable business at 10x normal earnings with 150% return potential if the share price traded at tangible net assets. Of course, there was a risk that management could destroy value in the interim, but they’d done some sensible media deals in the past and corporate remuneration in Japan is modest so we didn’t think they would destroy value that way either.

We figured we could afford to wait 5 years and still be assured of a positive real return with a low risk of capital loss.  As the momentum gathered behind Japanese corporates returning cash to shareholders and industry peers joined the move, we became ever more hopeful that we wouldn’t need to wait 5 years and continued building our position.

On Feb 1st, management announced that they would initiate their first buyback = 2% of their shares over the next four months. Equally importantly, their intention to amend their articles to approve dividend payments to foreign shareholders who have been refused registration because the foreign ownership level (20%) has been exceeded.

They also announced a reduction in their cross-holdings and reported a substantial increase in cash and short-term securities, so we’re hopeful this paves the way for special dividends and further buyback announcements at their AGM in June. Management’s recent announcement was very positive, so the 22% share price response was not surprising. However, there is still a 60% upside to NAV from here.

We’d love to promise investors regular returns consistent with calendar months, but unfortunately, that’s not how Value investing works. Hopefully, this example illustrates the ‘prize for patience’ and why it can be ‘expensive’ waiting for a ‘catalyst’.”

Sean Peche is Portfolio Manager at Ranmore Fund Management