June 1, 2018 / 6:57 AM / 6 months ago

Breakingviews - Toshiba has reasons to cling to its cash pile

Toshiba Corp's CEO Nobuaki Kurumatani attends a news conference at the company's headquarters in Tokyo, Japan May 15, 2018. REUTERS/Issei Kato

HONG KONG (Reuters Breakingviews) - Toshiba faces an unfamiliar problem: overabundance. The scandal-hit Japanese electronics group is finally poised to close the tortuous, 2 trillion yen ($18 billion) sale of its memory-chip business, meaning it will be flush with cash after years of crisis. Yet large investor payouts – either dividends or buybacks - seem a distant prospect.

Desperate to avoid being thrown off the stock market, Toshiba also raised 600 billion yen in December from hedge funds. As a result, it now expects to finish this financial year with 1.1 trillion yen of net cash, or about $10 billion - a whopping sum for a group with a market value roughly twice as large. Most industrial outfits, both in Japan and in the West, work their balance sheets at least slightly harder: debt and cash are roughly in balance at bigger rival Hitachi, for example.

That has naturally stoked hopes of cash flowing back to shareholders – perhaps even an amount matching that raised from hedge funds. Citigroup analyst Kota Ezawa reckons Toshiba could return some 300 to 600 billion yen, for example. And this would fit with a wider push for Japanese bosses to hoard less capital and lift returns on equity. 

That would be quite an exercise. Travis Lundy, an analyst publishing through Smartkarma, estimates a 200 billion yen buyback could require stock purchases accounting for a massive 15 percent of all trading in Toshiba shares for a year. There are technical hurdles, too.

Toshiba’s past accounting woes mean it will not have any “distributable reserves” until year-end, under Japanese accounting rules, unless it takes special steps to fix this.

What’s more, no firm decisions on capital are likely until new boss Nobuaki Kurumatani has worked out the details of his five-year “Next Plan” to revitalise Toshiba. This could be unveiled alongside results for the first six months of the fiscal year, which are due to be reported in November. 

Nor will the slimmed-down Toshiba be very profitable: it foresees making just 70 billion yen of operating income this year. A cash war chest would come in handy for funding all kinds of things – from layoffs, and growth investments, to perhaps even buyouts of minority stakes in listed units to simplify its structure. After years of nothing, merely reinstating normal dividends might be enough to cheer up the hundreds of thousands of small investors still backing the company. 

Breakingviews

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