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Toshiba: split-up not enough to narrow conglomerate discount   

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Toshiba offers a textbook example of the conglomerate discounts that plague many Japanese companies. Attempting to correct this, the Japanese group will split into three companies by the second half of 2023.

Despite several competitive units and sales of more than ¥3tn ($26bn) in the year to March, shares trade at less than 0.7 times forward sales. However, this move does not guarantee a valuation boost.

The plan provides for an asset management group, including its equity holding in memory chip business Kioxia, plus new ones focusing on infrastructure services and technology devices. Toshiba’s businesses span from railways to printers, often in unrelated industries that bring few group-wide benefits.

Shareholders have long moaned that Toshiba’s shares trade below its sum-of-the-parts value and are cheap compared with local peers such as Fujitsu. Valued at an industry multiple of 12 times forward ebitda, its digital storage business could fetch about ¥400bn. Toshiba’s high-margin infrastructure systems unit, assuming ¥50bn of operating profit in the year to next March, is worth almost ¥850bn. Kioxia, which has benefited from the global chip shortage, has an estimated value of more than $20bn. This implies Toshiba’s 40 per cent stake is worth $8bn.

The sum of these three businesses surpasses Toshiba’s ¥2.1tn market value, even before totting up its other units that include energy systems, printing, industrial products and building solutions.

Historically, break-ups have had mixed success. DowDuPont’s 2019 dismantling in the US has not added market value to the whole. Shares of News Corp declined over the seven years following its split-up. Often the successful splits benefit from heavy job cost cuts and exits from lossmaking businesses, possible prior to any break-up. For Toshiba, such a drastic restructuring might be easier as a private concern, particularly given past high-profile accounting scandals.

Even so, as the first major Japanese conglomerate to make such a radical decision, this may well encourage activists. Expect other underperforming local industrial groups to receive more attention in the year ahead.

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