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Sony’s revival puts a smile on activist shareholders’ faces

TOKYO
On the back of the rapid recovery of Sony’s earnings, foreign activist funds are changing their attitudes toward the once-struggling Japanese electronics company.
Sony on Friday said that its group operating profit for the financial year through March this year would rise 150% from a year earlier to a record 720 billion yen ($6.55 billion), an increase of 90 billion yen from the company’s previous forecast, and its first record operating profit in 20 years.
The announcement on the same day of the promotion to president of Kenichiro Yoshida — currently executive deputy president and chief financial officer, and a man who has spearheaded the company’s turnaround efforts — has also impressed activist shareholders.
Seth Fischer, chief investment officer of Oasis Management in Hong Kong, has praised Sony’s performance. “[I am] happy to be a shareholder,” Fischer, a renowned activist investor, told Nikkei in a telephone interview. He pointed to the management’s effort to focus on producing high returns on invested capital, high returns on equity and getting out of loss-making businesses.
Sony was once confronted by demands from Third Point, a U.S. activist fund, to spin off its entertainment business, but Fischer said there was no need for activists to demand what management should do.
Brisk sales of smartphone games and high-definition 4K television sets have shored up the sharp recovery in Sony’s earnings. Looking back to a year ago, the company announced a substantial write-down on its movie business, providing another negative surprise to the market. In stark contrast, Sony today appears capable of earning profit in a stable manner.
The revival of Sony can largely be credited to the caliber of Yoshida, whom investors have long regarded as a de facto president. He has cautioned against free and easy investment by spreading a concept known as the “hurdle rate,” or mimimum acceptable rate of return, which shows the cost-effectiveness of investment across the company, and has resulted in the improved earnings capability of TVs, digital cameras and semiconductor sensors, among other products.
Urging the heads of spin-off companies to be committed to achieving profit goals, he has kept a close eye on the subsidiaries’ balance sheets and maintained the parent’s grip over them. His efforts have made the market sit up and take notice of Sony, with the company’s stock price hitting a 10-year high of more than 5,700 yen in late January.
However, the level of the stock price is still far below its all-time high of 16,950 yen (after taking into account stock splits) in March 2000, though it is inappropriate to simply compare the current stock price with levels in the days the market was high flying amid the first dotcom bubble. A cause for concern at present is the low price-earnings ratio of around 18 times, significantly lower than 149 times for U.S.-based content provider Netflix, according to analytics service Quick FactSet.
Yoshida and other Sony executives talk about their aim “to raise the credit rating by improving profitability to a high enough level, in order to enable a flexible issue [of] commercial paper in the U.S.” This implies that they feel the acute importance of investment for growth primarily in the U.S., which is the main battlefield for music, movies and games. If Sony is to step up fundraising through the market, the change in investors’ attitude toward the company will work much in its favor.



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