One year has passed since the TSE requested a P/B increase at the end of March 2023 (“Request for action to achieve cost of capital and stock price conscious management”). Valuations are expected to increase as stock prices rise. In this analysis, I examined what trends were observed in the companies that increased their Tobin’s Q in the Metrical universe during the period from March 2023 to March 2024.
In the comparable Metrical universe of 1,750 companies from March 2023 to March 2024, the analysis is divided into 5 groups (>50% increase, >25% to <50% increase, >0% to <25% increase, no change, and decrease) for each item in terms of the percentage change in Tobin’s Q. The median percent change in Tobin’s Q during this period was 2.06%.
The table below profiles the 1,750 companies in the Metrical universe, dividing them into five groups (>50% increase, >25% to <50% increase, >0% to <25% increase, no change, and decrease) by the percentage change in Tobin’s Q over the one-year period from March 2023 to March 2024. We can see that companies whose Tobin’s Q increased by more than 50% include those with high Tobin’s Q, average ROE and ROA over the past three years, and foreign shareholding ratios. Although companies whose Tobin’s Q rose by more than 50% in terms of market capitalization gave up the top spot to companies whose Tobin’s Q rose by more than 25% but less than 50%, the relatively large market capitalization of these companies caused their Tobin’s Q to rise. The companies whose Tobin’s Q increased by more than 50% and by more than 25% but less than 50% continued to increase their ROE and ROA.
Conversely, companies with unchanged Tobin’s Q have traditionally had lower Tobin’s Q, lower foreign shareholdings, smaller market capitalization, and lower ROE and ROA. The case of companies experiencing lower Tobin’s Q is somewhat more complicated: Like the companies whose Tobin’s Q did not change, they tend to have lower foreign shareholdings and smaller market capitalizations. However, the ROE and ROA of firms whose Tobin’s Q declined are higher than those of firms whose Tobin’s Q did not change and firms whose Tobin’s Q increased by more than 0% but less than 25%. This suggests that the companies whose Tobin’s Q did not change include those whose valuations were adjusted for excessive valuations.
The table below shows the characteristics of board practices in five groups based on the percentage change in Tobin’s Q. Companies with the largest median market capitalization, with Tobin’s Q increasing by more than 25% but less than 50%, have superior Board Practices and Metrical CG Score. Companies with Tobin’s Q up over 50%, the second highest median market capitalization, and the second largest market capitalization (many of the companies are listed on the prime market, inferring a positive impact from overseas investor engagement), also have superior values. . Companies with relatively small market capitalization and low foreign shareholdings, whose Tobin’s Q did not change and whose Tobin’s Q declined, have relatively poor values for Board Practices and Metrical CG Score.
The table below shows the characteristics of key actions, divided into five groups based on the percentage change in Tobin’s Q.
As for the Key Actions, it is striking that the Growth Policy Score and Treasury Stocks Retirement are superior for companies whose Tobin’s Q increased by more than 50% and companies whose Tobin’s Q increased by more than 25% but less than 50%, while there is room for improvement in Cash Holding Score and Policyshare Holding Score. This means that there is room for further improvement in return on capital by returning cash on hand accumulated on the back of high profitability and reducing policyshare holdings.
In summary, I have considered the characteristics and trends of the five groups of companies based on the percentage change in Tobin’s Q.
The 1,750 companies in the Metrical universe that were comparable between March 2023 and March 2024 were analyzed by percentage change in Tobin’s Q into five groups (>50% increase, >25% to <50% increase, >0% to <25% increase, no change, and decrease).
Companies that increased their Tobin’s Q in the period from March 2023 to March 2024 tended to be those with traditionally high Tobin’s Q. As mentioned in my previous article, companies with higher foreign shareholdings have higher Tobin’s Q, confirming the tendency of overseas investors to invest in companies with larger market capitalization and higher profitability. Companies with higher Tobin’s Q are considered to have further increased their Tobin’s Q as a result of continuous ROE and ROA growth. Since these companies have high foreign shareholdings, it can be inferred that they have worked to improve board practices through engagement of overseas investors. As for key actions, further shareholder returns are expected to further positively impact ROE and ROA, as these companies tend to accumulate cash on hand due to their high profitability.
On the other hand, companies with small market capitalization and low foreign ownership have not been able to increase Tobin’s Q as expected. This may be due to the fact that they are not included in the investment targets of overseas investors. However, since some of the companies that lowered Tobin’s Q had relatively high ROE and ROA, it is possible that valuations may have adjusted to make the stock more undervalued if the outlook for profitability is not in question. Companies with smaller market capitalizations but not covered by overseas investors may contain small-cap stocks with future growth potential.
It can be said that valuations could not be raised simply based on the expectation of a higher P/B without an improvement in profitability. The median IR Disclosures Score, one of the key action items, did not differ among the five groupings of companies based on the percentage change in Tobin’s Q. This suggests that superficial IR Disclosures have a limited effect on boosting Tobin’s Q. The most important thing for a company is to have the profitability and growth potential to attract overseas investors, and the management strategy that forms the basis of that growth potential. Simply raising P/B expectations and strengthening IR activities will have only a limited effect.
Aki Matsumoto, CFA
Please see detail research the following links.
http://www.metrical.co.jp/
Please feel free to contact the below email address if any interest or query.
Aki Matsumoto, CFA
Executive Director
Metrical Inc.
akimatsumoto@metrical.co.jp
http://www.metrical.co.jp/jp-home/