This multinational is facing several challenges, but our contributor believes the shares offer potential as its turnaround ensues.
Toshiba Corporation (TOSYY)
From The Turnaround Letter
Toshiba Corporation (TOSYY) is an industrial multinational based in Tokyo, Japan. As a conglomerate, its products range from NAND memory chips to large scale power generation equipment, railway systems, point-of-sale computers and artificial intelligence systems. With predecessors dating back to 1873, the company was created in 1939 with the merger of Tokyo Electric Company and Shibaura Engineering Works to form Tokyo Shibaura Denki, later shortened to Toshiba.
The company’s current predicament started in 2015 with its disclosure that it had inflated profits by over $1.2 billion. With investor confidence shaken, the CEO and half of the board of directors were forced out—a rare and dramatic move in generally change-averse Japan. Then in March 2017, following steep losses from its nuclear reactor construction projects, its Westinghouse Electric business, acquired in 2006, filed for bankruptcy. With the accompanying write-offs, Toshiba’s book value turned negative. While many American companies have negative accounting equity, if this occurs for two consecutive years in Japan, it will result in the stock being delisted from the Tokyo Stock Exchange. Toshiba must post positive book value at its March 2018 fiscal year-end.
To prevent delisting, and to help provide liquidity, Toshiba recently signed an agreement to sell its memory chip business (the world’s second largest) for $17.7 billion to a group led by private equity firm Bain Capital. This pending sale is being vigorously contested by Toshiba’s partner in a chip joint venture, California-based Western Digital. As Toshiba is in limbo, investors have stayed away, creating what we believe is a highly attractive opportunity, albeit with risks.
What makes Toshiba shares attractive is the valuation discount of about 50% compared to a pre-crisis Toshiba. The primary catalyst to closing this discount is the completion of the memory business sale by March 2018 at the agreed-upon price.
We believe the dispute with Western Digital will be favorably resolved in advance of the deadline. The business is too valuable to all parties, with needs for timely capital requirements and sound management, for it to become embroiled in a protracted control battle. Providing another potential catalyst is Toshiba’s December 6 filing date for Westinghouse’s bankruptcy plans. From this plan might come more clarity on what the components of Westinghouse are worth, prompting potential bidders to emerge. A group of investors including Blackstone and Cerberus indicated preliminary interest in a $4 billion bid.
There is not likely to be much more downside coming out of the Westinghouse bankruptcy because Toshiba has already taken substantial reserves to cover its bankruptcy liabilities. Other positives: Shareholders recently approved the sale of the memory business, and the Tokyo Stock Exchange cancelled its designations of Toshiba as “Securities on Alert” and “Securities under Supervision.” As an iconic Japanese company, the regulators and financial institutions will likely grant it sizeable leeway to right its problems.
We value a post-crisis Toshiba at about ¥6001 common share, or about $32/TOSYY ADR, about 84% higher than the current price. Our valuation is based on a sum-of-the-parts analysis for the memory business sale, net proceeds from the sale of Westinghouse assets and the value of the remaining Toshiba operations. Also factored in is Toshiba’s debt, cash and various bankruptcy obligations.
An investment in Toshiba carries risks that are higher than many turnarounds. Notable risks include the following: if the catalysts we anticipate don’t occur, or if for some other reason the company is delisted, its ability to finance its operations and growth could be severely limited. Also, like many Japanese companies, its murky disclosures and governance prevent rigorous analysis of its operations. Nevertheless, we believe that the gain potential in the stock more than offsets these risks.
U.S.-based investors can buy Toshiba shares indirectly through the ADRs, which trade under the symbol TOSYY on the OTC Markets. Ordinary shares can also be purchased on the OTC Markets under the symbol TOSBF. They also trade in Yen on the Tokyo Stock Exchange.
We recommend the PURCHASE of shares of Toshiba (ADR - TOSYY) up to 28.
Note: We assume a ¥113 to $1.00 exchange rate.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550