Japan Markets ViewA Keyword “P/B Ratio” Stay Hold? Trading Companies’ Stock Price Surge Stands Out

 

[Nikkei QUICK News] Three months ago, on March 31, the Tokyo Stock Exchange (TSE) requested that listed companies with P/B ratios of less than one improve their management with an awareness of capital costs and stock prices. Since then, companies have launched a series of measures to improve their low P/B ratios. Over the past three months, a certain degree of success has been seen, with many companies having succeeded in enhancing their P/B ratios to one or above. However, stocks with low P/B ratios are still attracting investors. The stock market is likely to continue to focus on “P/B ratios” as a keyword for speculative buying.

 

According to the QUICK FactSet Workstation, of the Nikkei 225 constituents, 97 companies had P/B ratios, which indicate a corporate liquidation value, below one on June 29, down from 126 at the end of March. In response to the TSE’s request, many companies, especially those with low P/B ratios, conducted share buybacks, and management made statements with an eye to improving return on equity (ROE), which indicates capital efficiency.

 

Mitsubishi Corporation (8058) is one of the best-known companies that have recovered the P/B ratio to one or above. The rise in the company’s stock price was triggered by the statement by Warren Buffett, a prominent U.S. investor, in April that he would buy more trading company shares. A share buyback of up to JPY300 bn announced by the company on May 9 also attracted market interest. In addition, a larger buyback size compared to the previous one of up to JPY100 bn was favorably received. As a result, Mitsubishi Corporation’s P/B ratio rose from 0.84 at the end of March to 1.23 as of June 29.

 

During the same period, the P/B ratio of Canon (7751) rose to 1.24 from 0.96. On June 15, the company announced a share buyback of up to JPY50 bn. Canon also announced a share buyback in May, and its stock price has been in a range of year’s high due to buying in favor of the company’s continuous share buybacks. As for aggressive shareholder returns, Citizen Watch (7762) announced on May 12 that it expects consolidated net income for the fiscal year ending March 2024 to decline by 8% from the previous year. However, the company increased its planned annual dividend to a record 40 yen per share, and its P/B ratio rose to 0.99 in early June, just short of the mark of one.

 

The Nikkei 225 has made historic gains since late April and is currently at its highest level in about 33 years. The TSE’s request for P/B ratio improvement has undoubtedly contributed greatly to foreign investors’ increased buying interest in Japanese stocks. Having said that, some companies have “automatically resolved” their P/B ratios below one even though they have not taken any measures such as share buybacks or dividend increases. Such improvement is attributed to an overall surge in stock prices, which are the numerator of P/B ratio, calculated as “stock price divided by net assets per share.”

 

Some investors are focusing on stocks that are still holding low P/B ratios. As of June 29, 97 stocks among the Nikkei 225 constituents had P/B ratios below one, with the marine transportation and banking sectors standing out. The Nikkei 225 has somewhat entered a consolidation phase since reaching a 33-year high on June 16. In the meantime, the average fluctuation rate of these 97 stocks with P/B ratios below one from June 16 to June 29 was plus 0.55%, which is noticeably higher than that of stocks with P/B ratios above one (minus 0.36%). Masahiro Ichikawa of Sumitomo Mitsui DS Asset Management said, “Investors may continue to favor stocks that have not yet resolved their P/B ratios below one, firmly believing that such stocks will provide additional returns to shareholders.”

 

Even for stocks with P/B ratios above one, Kenichi Hori, President & CEO of Mitsui & Co. (8031), emphasized at the financial results briefing in May that a “P/B ratio of one is not a magic number.” Yuki Kusumi, President & Group CEO of Panasonic Holdings (6752), said at the annual shareholders meeting in June, “We would like to increase the P/B ratio to the range between 2 and 3.” However, it is highly likely that the stock prices of companies that fail to take action amid the speculative stock market rally will eventually be forced to face a correction. There is no doubt that continuous growth is expected in awareness of “P/B ratios” in the stock market and corporate management.

 

(Reported on June 30)

 

 

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