published Nov 30, 2017 2:00:00 PM, by Keiko Ujikane and Nobuyuki Akama
(Bloomberg) —

Shares of SG Holdings, the operator of Japan’s second-largest parcel delivery company by volume Sagawa Express, could rise as much as 27 percent by a year after its debut this month as investors bet on solid earnings helped by logistics services home and abroad.

With the indicative price range set at 1,540 yen to 1,620 yen, book-building is under way for what could be Japan’s biggest initial public offering this year as SG debuts its shares on Tokyo’s exchange on Dec. 13. The IPO comes as optimism over global growth and Japanese corporate earnings helped boost the Topix index to levels unseen in a quarter century early last month.

The shares of its biggest rival Yamato Holdings Co., which gets its revenue mostly from domestic operations, have declined 4.3 percent this year and the company booked an operating loss in the April-September period on higher labor costs needed to secure workers. In contrast, Nippon Express Co., which gets more than 20 percent of its revenue from overseas, has gained 13 percent this year, while the Topix has risen 18 percent. SG has said it will develop a global logistics network through the strengthening and integration of domestic and overseas businesses. The company doesn’t disclose the geographic breakdown of its revenue.

“SG Holdings shares look attractive,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo who oversees more than 30 billion yen ($268 million) in Japanese equity funds. “Both the international and domestic logistics services have the potential to grow further, given expansion in e-commerce. There will be more room for business-to-business services to expand as the company may continue labor-saving investments.”

The stock could reach about 1,900 yen from the median indicative price of 1,580 yen by the end of the next year if the company maintains its growth trend in profits through the next fiscal year, according to Fujiwara. It could rise to about 2,000 yen by the end of 2018 as investors may look at SG’s logistics services for corporate customers and its development into services overseas as a strong point compared with Yamato, said Mitsuo Shimizu, deputy general manager at Japan Asia Securities Co.

SG in October maintained its guidance that operating profit for the year ending March 2018 will rise 17 percent from a year earlier to 58 billion yen.

In October last year, SG, which holds a 29 percent stake in Hitachi Transport System Ltd., started a delivery service in cooperation with Hitachi that delivers clothing made in Chinese factories to Japanese retailers. The company also bought Vietnamese delivery and logistics company, Phat Loc Express, in December last year.

Room to Rise

“SG Holdings has put some effort into its overseas businesses, so its shares will tend to outperform when the global economy expands,” said Mitsushige Akino, an executive officer with Ichiyoshi Asset Management Co. in Tokyo. “I’m interested in the shares as there may be plenty of room for them to rise in the short term.”

The stock could climb by about 30 percent from the indicative price in about a month from its debut, according to Akino. That would be around 2,050 yen. Shares may reach about 1,800 yen within six months of the listing, Makoto Kikuchi, chief executive officer of Myojo Asset Management Co. in Tokyo, said.

Shinkin’s Fujiwara said the shares don’t look overvalued relative to their peers. The estimated price-earnings ratio for the fiscal year ending March 2018 may be about 15 times for SG based on the indicative price, Fujiwara said. That compares with 15.9 times for Nippon Express and 49.8 times for Yamato, according to data compiled by Bloomberg. The estimated dividend yield may be around 2 percent for SG, Fujiwara said. That’s higher than 1.7 percent for Nippon Express and 1.2 percent for Yamato.

Industry Headwinds

Wage pressures and the prospect of higher fuel costs mean not everyone is bullish on the logistics industry. Yamato announced its first price increases for retail customers in 27 years in April amid fierce competition and announced plans to hire 9,200 new full- and part-time workers this year.

“The labor shortage is putting a great strain on the sector,” said  Masakuni Fujiwara, chief executive officer at VistaMax Fund Advisors Ltd. in Tokyo. “Even if online trades expand and it gives more work to logistics companies, they haven’t fully solved a problem of higher costs due to the labor shortage. Also, gasoline prices will likely rise in the coming months, leading to higher costs.”

Based on the highest indicative price, SG’s IPO could raise as much as 127.6 billion yen, making it the biggest in Japan this year, according to Bloomberg calculations. The offer price will be finalized on Dec. 4. That would beat the share offering of conveyor-belt sushi restaurant operator Sushiro Global Holdings Ltd. in March that raised 69.5 billion yen.

To contact the reporters on this story: Keiko Ujikane in Tokyo at kujikane@bloomberg.net ;Nobuyuki Akama in Tokyo at akam@bloomberg.net To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net Jonathan Annells, Naoto Hosoda

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