Investments in low PBR stocks that played a part in the Japanese stock market are real

The US stock market entered this year, and while showing full-scale reversal movements, it was none other than Japanese stocks that continued an upward trend that was not inferior to US stocks. Looking at the gain/fall rate of the world's major indices in the first half of this year, the NASDAQ Composite Index led by about +32%, and the Nikkei Average followed immediately after about +27%. Regarding the drastic level correction of Japanese stocks, in addition to the Buffett effect represented by Mr. Buffett's additional purchases of major trading company stocks, various positive factors were taken up, such as good settlement of corporate performance, retreat of financial instability, continuation of quantitative easing by the Bank of Japan, and share buybacks. Above all, it seems that the PBR 1 times split improvement request launched by the Tokyo Stock Exchange contributed greatly to improving the value of listed stocks in both name and reality.

In the case of Japanese stocks, there are many companies where the investment index called PBR (stock price net asset ratio), which represents how many times the stock price is compared to net assets per share, falls below 1 times, and it has come to light as a main issue in the Tokyo stock market, which has been struggling with a sluggish market for a long time. In January this year, the Tokyo Stock Exchange clarified a policy requesting improvements for companies listed with low PBR, and on March 31, a notification called “Requests regarding responses, etc. for the realization of management that is conscious of capital costs and stock prices” was issued for approximately 3300 companies listed on the Prime Market and Standard Market. It was a request that did not see an example of requesting management that was conscious of rising stock prices or efficient management (ROE of 8% or more) from enterprise managers.

In the Ito Report published in 2014/8, recommendations were shown that companies should conduct management with an emphasis on ROE (return on equity), and there is consensus among Japanese listed companies that the target level of ROE was set at 8%. Meanwhile, in order to aim for stock price increases, simply raising ROE is insufficient, and corporate value cannot be raised unless capital costs, which are required returns from shareholders, are exceeded. This is why the Tokyo Stock Exchange has requested management that is conscious of capital costs, based on the fact that capital cost management has not been fostered as a consensus among listed companies.

PBR is a value obtained by multiplying PER (price-earnings ratio) and ROE (return on equity). When PER is constant, PBR rises by increasing ROE. In contrast to the fact that PER tends to be determined by the subjective consensus of investors or the market as a whole, ROE is not an external evaluation, but can be enhanced through corporate management efforts. ROE is broken down by 3 factors: net profit margin on sales, total asset turnover ratio, and financial leverage. In other words, raising profits, reducing assets, and increasing debt are ways to raise PBR. On the other hand, profit generation does not happen overnight, and since it is not realistic to increase debt, reducing the cash balance of private business corporations rising to 320 trillion yen (as of 2021/3) will lead to an increase in PBR. The fact that the Tokyo Stock Exchange requested management that was conscious of stock prices from listed companies, in other words, it looked like they were imposing a request to buy the company's stock.

INPEX (1605), known as the largest mining company, is involved in the development and production of crude oil and gas both domestically and internationally. The company's PBR and ROE were 0.57 times 13.7% (7/19)), respectively. Following the implementation of a 70 billion yen share buyback in 2022, the company, which has a typical low PBR stock purchase, set a treasury stock acquisition quota of 119.99 billion yen this year, an increase of 49.99.95 million from the previous year. In response to aggressive capital cost efficiency management (ROE of 8% or more), major level revisions were made to the company's stock price. At the beginning of this year (1337 yen), the company's stock price, which had been moving in the 52-week low range, is currently 1704 yen (7/19), breaking the 52-week high every day.

There is an active movement of stock buybacks by listed companies. While the amount of stock buybacks carried out in 2022 was 9.546.7 billion yen, +2 trillion 4201 billion yen compared to the previous fiscal year, a 34% increase from the same period, the number of companies that carried out share buybacks and the amount of money per company increased. Also, according to the summary of SMBC Nikko Securities, it became clear that the set amount of share repurchases announced by listed companies from January to 5/16 this year reached a scale of 4.6 trillion yen, and the 2023 share repurchase amount is expected to be at a high level along with 2022, which was a record high.

Evaluations of stock buybacks by listed companies are also reflected in stock price movements. According to the summary of Daiwa Securities, out of TOPIX 500 stocks during the period from April to 5/19, 91 companies announced share buybacks, and half of them were companies that split PBR by 1 times. The share price increase rate of 66 companies, which is 70% of the total, in the same period surpassed TOPIX.

According to simple PBR as of the end of 2022/12 compiled by the Japan Exchange Group and simple PBR data as of the end of 2023/6, simple PBR for the Tokyo Stock Exchange market as a whole only rose 1.1 times to 1.2 times. By market, the prime market rose 1.5 times to 1.7 times, the standard market rose 0.8 times to 0.9 times, and the growth market rose 4.3 times to 5.0 times. Meanwhile, according to paid membership data for the Nikkei Shimbun as of 7/19, out of 1611 companies in 36 industries in the prime market, 841 companies split PBR by 1, accounting for 52% of the total. Of these, in the five industries of pulp and paper, petroleum, steel, shipping, and gas, company-wide PBR remains below 1 times. Incidentally, in the US stock market as of the end of May 2023, it can be said that there is plenty of room for Japanese listed companies to raise PBR, based on the fact that the ratio of listed companies that are less than 1 times PBR is about 19%. It is thought that the investment interest of PBR 1 times split stocks that actively engage in stock buybacks and capital efficiency management will increase more and more.