Toshiba’s exit from crisis is just the first step on a long road

On Wednesday, after 478 days of suspended coverage, Nomura finally decided the coast was clear and put a “neutral” investment rating on Toshiba.

The price target that Japan’s biggest brokerage accompanied that with is timid: Nomura resumed coverage with Toshiba at ¥302 a share and sees a mere ¥18 a share of upside from here. The rating is back because Toshiba is no longer designated a security under supervision, raised ¥600bn through a private stock placement last December to fill a huge hole in shareholder equity and, on June 1, completed the ¥2tn sale of its memory business to a consortium led by Bain Capital.

For all Nomura’s caution, this was a watershed moment for the market and a marking of the end of Toshiba’s crisis. It is a moment to parse, say investors, which lessons, if any, have been learnt and what are the true priorities of a Japanese company retreating from the brink of oblivion.

Nomura’s move is also a critical reminder of the kind of risk taken on by those who held (or accumulated) Toshiba stock even as Nomura and others saw too much uncertainty to rate it. Coming months will reveal, perhaps painfully for Toshiba, what returns those investors who bought when the shares were in the low ¥200s expect as the company prepares to reveal its “Toshiba Next” recovery plan this year.

In the Wednesday note, Nomura reminded clients of why it stopped rating Toshiba last February. Toshiba had at the time postponed its results announcement, citing possible deficiencies of internal controls, and had indicated it planned to divest its biggest growth driver in the form of the memory chip business and Nomura had every reason to expect Toshiba’s net worth to remain negative until big corporate action emerged.

That only roughly sketches how severe the crisis felt. Front of house, there was management paralysis, a brewing legal battle with a key business partner (Western Digital) and the threat of delisting from the Tokyo Stock Exchange. Behind the scenes there was an embittered fight with the new auditor and belligerent power games between the government, Toshiba management and the company’s biggest creditor banks.

But all this reverberated far beyond Toshiba because of the Japanese market’s sharpening focus on corporate governance and stewardship. Toshiba, with a quarter of its board consisting of independent directors and a “three-committee” management structure imported from the US, was supposed to be a poster child for progress on governance. As the crisis unfolded, it became plain that it had made little difference.

The governance structures were window-dressing and did not produce real checks and balances. Like so many Japanese companies, Toshiba’s pre-crisis shareholder register was packed with “allegiant” investors who remained silent and any minority holders who did question management were ignored. Toshiba has, inadvertently, given the rest of corporate Japan a fearsome lesson in the risks that lie at the worst end of the poor governance spectrum.

Toshiba, which is due to record a ¥970bn profit from the sale of its memory business in the full-year results for fiscal 2018, will clearly want to demonstrate that it has learnt that lesson. In mid-May, when the company began to explain how it would allocate resources and invest in growth under the Toshiba Next plan, it prominently mentioned shareholder returns and buybacks — a priority it needs the market to believe in if it ever hopes to repopulate its register with big foreign funds and Japanese retail investors.

But the same May statement clearly hinted that there were considerably higher priorities — restoring the company’s credit rating and mending its factious relationship with its biggest lenders being perhaps the highest. Travis Lundy, an independent analyst writing for Smartkarma, said shareholder return was “one among many priorities. It is decidedly not ‘first’,” adding that the chief goals of Toshiba would now be cost-cutting, growth investment and maximising enterprise value: none compatible with a near-term substantial return of cash to shareholders.

The challenge that Toshiba’s new chief executive, Nobuaki Kurumatani, faces is that while S&P last week upgraded its rating on Toshiba three notches, the level remains below investment grade and the analysts were blunt about the poor competitiveness and profitability of the underlying business that remains now that the US nuclear and memory operations have been sold.

The rating agency precisely laid out what Mr Kurumatani needs to do to get Toshiba upgraded: “We will consider upgrading Toshiba in the coming year or two if we see a heightened likelihood that it will focus heavily on reducing costs and improving its operating efficiency, resulting in an ebitda margin steadily approaching 7 per cent,” said the note accompanying the S&P upgrade.

Toshiba’s exit from crisis marks a significant moment for one of Japan’s most important industrial names. The key now is to turn the sigh of relief into a deep breath before action.

leo.lewis@ft.com