2023-07-20 17:38:51 ET
Summary
- In our last article, we focused on TV Asahi's ridiculous valuation, considering stakes like Toei and ABEMA, where ABEMA is nearing profitability.
- They also have massive cash balances, that are being put to use now since the TSE is targeting companies like them officially to lower their P/B values.
- While some of that is being invested into IP-creation initiatives, important to bolster their original programming and differentiate ABEMA, it is very likely to mean dividends and buybacks lowering P/B.
- With One Piece: Red being a record-breaking blockbuster, and with the fact that Toei has made virtually every One Piece movie in the last decade, there will likely come another equity-accounted windfall from the next film.
- Overall, TVA comes at an absurd discount with actual catalysts that come from a TSE and other activism premiums. Finally, the broadcasting business has shown Japan's relative economic resilience.
TV Asahi Holdings (THDDY) has been one of our best performing investments this year, and it was a rare case of capital appreciation in the face of modest operating profit declines due to a tough 2022 comp. The reason is that while there are several ideas on the Japanese markets where enterprise values (EVs) are very low or negative, TV Asahi Holdings has features that makes it optimally positioned to actually make the ignored non-operating assets deliverable to shareholders. In addition to the TSE being an activist partner in all prime market companies with low P/B, we think that the importance and size of TVA, as well as the obvious opportunities for carve-outs, makes it a prime activist target, where an activist investor could double their money with the stroke of a pen on a dividend decision and some non-strategic disposals. Since Elliott showed how lucrative it can be to get involved in Japan with Dai Nippon Printing (DNPLY) and activism at companies like Toppan (TOPPY), it's only a matter of time before private activism starts repricing low P/B Japanese stocks, which we think are going to be some of the best performing developed market equities over the next three years. We think that conservatively there is 50% upside left in TVA, or as much as 223% upside if you compare to western broadcasting comps, that could be achieved in very short order for superb IRRs, and come with irrefutable long-term downside protection. It is an exceptional buying opportunity.
Starting with Latent Earnings Growth
We mentioned that earnings have been under a little pressure. It is being mitigated by TVA's equity affiliated holding in Toei Animation (TOEAF), both directly and through their ownership of Toei Company the distributor, which has had a strong early 2023 relative to early 2022 due to the December release of the One Piece: Film Red movie, which was a massive blockbuster and is the fourth or fifth One Piece movie that Toei was trusted to make to further the juggernaut IP. While the release was in December 2022, sales of DVDs and late goers to the movies bolstered early 2023 results where nothing special was going on for Toei in early 2022. In all, shares of profit from equity affiliates is up meaningfully bolstering the ordinary income.
The problem has been the performance of the general broadcasting business relative to last year. The issue isn't weak performance so much as it is very tough comps. Last year the broadcasting business managed a YoY increase, where a COVID recovery drove results from 2021 to 2022. Inflation was also low, so COGS didn't rise as much as sales did. There was a meaningful lift in gross profit as a consequence. While the broadcasting business is actually performing resiliently, only declining 2.5% despite pressures on the Japanese economy from the weaker Yen, the inflation caught up from last year on the COGS line and it did a number on gross profits. They are still well ahead of 2021 levels.
But things are settling down, and on the demand-side things have been looking decent in Japan. While a weaker Yen continues to weigh on the economy, signs of a softer landing in the US than previously expected, as well as other major wallets for Japanese export, does indicate that the broadcasting business could keep chugging along.
Moreover, on the Toei side, another One Piece movie is going to be in the works, and Toei would be at the helm. The franchise continues to get better and better, having won the Guinness World Record last year for being the most popular manga ever, and despite running for more than a decade it continues to get traction with new fans. This is another latent boost to earnings as broadcasting manages to hold the fort. Moreover, TELASA and ABEMA both continue to grow, with TELASA already profitable and ABEMA planning on taking on larger projects and continuing to scale . Our calculations tell us that ABEMA is probably emerging from zero-profitability as of the latest FY disclosures.
TSE and Activism: Low Hanging Fruit
The perennial issue with Japanese low P/B and low EV stocks has been the lack of catalysts. Indeed, this is why these obvious opportunities have been ignored. Years of too low payout ratios have just accumulated useless cash balances under caretaker managers. It's a problem for many Japanese low P/B and EV opportunities, but not TVA, and markets have begun to recognise that.
Firstly, taking a western approach, it is obvious that TVA would be a perfect activist target thanks to very low hanging fruit and growing precedents:
- One precedent is Dai Nippon Printing, which has some EV exposure . This is quite high profile and somewhat of a watershed moment because the vaunted Elliott got involved to encourage sweeping buybacks, disposals of lots of real estate and other non-strategic investments, in order to take advantage of the pretty large balance of non-operating assets that cover around 30% of market cap. The other is Toppan Printing, which is similar to Dai Nippon, and got a similar boost of activism speculation also because they had a CEO change to someone more active and strategic. Toppan started selling assets to PE and public holding like Recruit Holdings (RCRRF) which is often a no-brain Japanese corporate holding. It has bought back a good deal of shares in the last year, around 7%, while also paying a 1.45% dividend yield. Both are pretty low EV companies and have or had a large balance of non-operating assets that are finally coming back to shareholders where they can do more good. TVA has a lot of non-strategic non-operating assets. While Toei is somewhat strategic, even though TVA doesn't get credit for its 25% ownership of that animation powerhouse, their own holding of Recruit isn't strategic, and neither are their substantial cash balances unless they put it to use. This is already starting to happen, but more on that later.
- TVA is ripe for activist picking also because of its strategic assets. Hidden within it are properties like TELASA and more importantly ABEMA. It also has a massive cash balance that it needs to allocate. They have plans to build a theme park with about half of the cash, which could be quite profitable given their access to IPs like One Piece, and is a great initial sign, but they should also be doing buybacks and dividends. Management, to their credit, has acknowledged this, but activism involvement would speed things up.
- ABEMA is massive . It has about the same penetration as Netflix (NFLX) in Japan. If you value ABEMA proportionate to Netflix based on Netflix's Japan revenue share, TVA may have a stake in the company worth around $2.7 billion which is going clearly unrecognised, because that's 2x of TVA's overall market capitalisation. While there are strategic reasons to stay private, like not having to disclose too much to competitors who are all aggressively vying for the same subscribers, an activist would probably see a carve-out opportunity here.
The other critical thing is that the TSE has already announced itself an activist stakeholder in all Prime Market low P/B opportunities due to its issued mandates and requirements around continued Prime Market listings. Deadlines are TBA, but they will be concrete and light a fire under management teams. You don't even need private activists. Look at what TVA management had to say about it.
This is the major and current real catalyst for TVA as well as for other highly undervalued Prime Market stocks in Japan. The parameters for which companies will be under pressure is a little unclear, but what we do know is the following:
- The TSE reorganised its 'sections' of the exchange so that Prime Market is the top section where storied and the more respected companies benefit from the most visibility, prestige and liquidity. It is important for shareholders and management teams to maintain their position in the Prime Market if they have a listing there.
- Many Prime Market companies have extremely low ROEs on a consistent basis, and trade well below 1x P/B. The P/B and ROE metrics are both signs of a company that has not served shareholders sufficiently, because appropriate reinvestment, buybacks and dividends would all serve to either reduce book values through payouts or raise prices with earnings growth. The TSE has announced that listing on the Prime Market will start to depend on management plans and outcomes in maintaining higher P/Bs, the minimum limit seems to be 1x, and higher ROEs. The deadline for performance is unclear, but it could be around the beginning of 2024 or 2025. Management plans, including that of TVA , have announced investment plans, with TVA for example budgeting half of its 40 billion Yen in cash for a theme park, as well as doing other investments in things around the manga/anime/content industry like the BookLive investment. Even if the ROIs on these projects are low, TVA has so much cash that goes completely ignored by markets that they'll still manage to move the needle and drive earnings. If it really doesn't work out, their last resort will be the instant P/B and ROE benefits from becoming less overcapitalised by paying out dividends or doing buybacks, and they have referenced that as part of their overall plan.
The takeaway is that the TSE understands that there is too much untapped value in its exchanges, and Japan benefits from its stock markets being more efficient. After the exchange reorganisation was too covert of a measure, they have stepped up with further requirements, coming now to P/B and ROE which directly addresses shareholder payouts. They will take actions until the ridiculous, low P/B opportunities that we've been focusing on this last year become fully mined for their worth. It helps that there are record inflows into Japanese markets, TOPIX performance nearing bubble-era highs, and a lot of media attention to allow them to strike with mandated corporate governance reforms while the iron is hot.
200%+ Upside
Having established that influential stakeholders like the TSE have a vested interest in these equity bridges becoming recognised by markets, let's present the valuation case for TVA, which is one of the most endowed assets on the market.
The EV is negative, so it's no wonder that the upside is so high. Note that ABEMA is not included in this valuation, so it could be a lot higher than the 223%.
223% is a theoretical figure of course. We have an approach that is a little more realistic. The non-strategic disposals are Recruit and cash balance, which can be quickly put to better use with buybacks, dividends or the theme park reinvestment plan. Toei Animation is not likely to be sold, there is a real business relationship between the two that goes back in time from when TVA's programming and Toei's animation expertise made for an important strategic partnership. With TVA promising to invest more in IPs and content, this could kick in again. At any rate, the 25% comprehensive ownership in Toei Animation is a great net income contributor that doesn't go unnoticed. If you treat it as part of the business, and note the 10% exposure to Toei's affiliate income, you can do a weighted average of the PE of a typical broadcasting business and Toei with the weights of 90% and 10%. You get around 10x. Then if you add on the value of the bloated cash balance and the Recruit shares which are almost 50% of market cap, a fair value on a PE basis would be around 15x. Current PEs are around 10x, which is why we think a reasonable target price is 50% above current levels at a minimum. We do think that the cash balance can be reinvested well by TVA in the content industry in Japan, which with the growth of Otaku culture and TVA's positioning near the center of traditional content and programming puts TVA in an advantaged position as an allocator. Considering that an even higher PE could be justified. And nothing changes the SoTP truth of the matter.
Bottom Line
If there were more activist sharks in the water, TVA would make a perfect opportunity. ABEMA, the non-strategic assets and easy disposals, as well as massive scope for buybacks and dividends could mean major shareholder value creation just by showing up and making some noise with management. There would be a lot of different things and activist could do to create value.
What makes many of these low P/B and EV opportunities especially interesting right now is that as long as they are in the Prime Market, which TVA is, the TSE is putting in place sweeping mandates and requirements that highly incentivise shareholder payouts and buybacks. You don't need a private activist, you have the whole exchange hoping for the same thing which you'd be hoping for as a shareholder: lower P/Bs, higher payouts, and depletion of massive, unrecognised non-operating asset balances. We think that from current prices TVA has a relatively high likelihood and short horizon 50% upside ahead as TSE mandates become more definite and strict. Considering the full SoTP picture gets you to a 200%+ upside, and with ABEMA you get even more if that were to trade separately one day. With the added little fact that Japan's IPO markets have even been strong because of the excellent credit conditions, that final boost is something that could actually come to pass. TVA remains a phenomenal buy on imminent, exchange supported shareholder payout and governance catalysts, with general net profit growth prospects being good too as another vector for intermediate shareholder returns.
For further details see:
TV Asahi's Negative EV Is Ridiculous With TV Resilience, Toei Growth, And Exchange Reform