TIDMAJOT
RNS Number : 7482L
AVI Japan Opportunity Trust PLC
14 January 2021
14 January 2021
AVI JAPAN OPPORTUNITY TRUST PLC
(the "Company")
Quarterly Newsletter
The Company presents its Quarterly Newsletter, reporting
operating performance, corporate governance developments and the
progress of the Company's engagements for the period ending 31
December 2020.
This Quarterly Newsletter is available on the Company's website
at:
https://www.ajot.co.uk/content/uploads/2021/01/AJOT-Q4-2020-Letter-4.pdf
Portfolio Statistics
EV/EBIT FCF Yield EV FCF Dividend
Yield(3) Yield
NFV(2)
Net cash(1) as a
as percentage
percentage of
of Market
Market cap cap
--------- ------------ ------------ -------- ---------- ---------- ---------
Q4 2020 47% 82% 4.3 5.3% 19.0% 2.1%
--------- ------------ ------------ -------- ---------- ---------- ---------
Q3 2020 46% 90% 4.3 5.1% 19.1% 2.1%
--------- ------------ ------------ -------- ---------- ---------- ---------
Q2 2020 51% 93% 3.2 6.2% 23.8% 2.4%
--------- ------------ ------------ -------- ---------- ---------- ---------
Q1 2020 52% 96% 2.1 7.1% 34.3% 2.5%
1 Net cash = Cash - Debt - Net Pension Liabilities
2 Net Financial Value (NFV) = Net cash + Investment
Securities
3 The effective free cash flow yield were non-core assets to be
distributed
Dear AJOT Shareholders,
Despite improving earnings, increasing levels of corporate
activity and buoyant markets, small-cap companies in Japan have
been largely ignored by stock market investors. For the quarter
ending 31st Dec 2020, the MSCI Japan Small Cap Index, in GBP,
returned 2.2% while its larger counterpart, MSCI Japan, returned
9.0%. Foreign capital flows into Japan were positive in November
and December - a rare occurrence over the past five years. For the
time being much of that capital appears to be going into large cap
names, although in time, we expect this to broaden out to include
smaller companies too. AJOT's return of 1.0% over the quarter is
disappointing considering the very strong earnings recovery
reported by portfolio companies, as well as the encouraging
backdrop of a recovery in global economic activity. This leaves our
portfolio trading at extremely attractive levels in terms of both
cash/market cap, as well as earnings multiples. With investor
attention increasingly turning towards the Japanese market, and
with animal spirits amongst activist investors firing up, we
believe our portfolio is extremely under-valued.
This quarter's earnings season showed the resilience of our
companies, with weighted sales and profits of our portfolio falling
year-on-year by -4.5% and -6.8%, compared to the companies in the
MSCI Japan Small Cap Index whose sales and profits fell -4.5% and
-19.6%. More importantly is that our companies have shown they are
on the path to recovery, with quarter-on-quarter profits increasing
by a whopping +55%.
Forward estimates for our companies, which in the absence of
sell-side coverage are the only guidance investors have, is overly
conservative and by and large has not been upgraded since the worst
of the coronavirus-related restrictions. The management of our
companies are guiding for profits over the next two quarters to be
only +11% higher than the last two which suffered the worst of the
impact from the coronavirus, and down -11% year-on-year. We expect
guidance for many of our companies to be revised upwards over the
coming quarters. In fact, Alps Logistics in the middle of December
hiked profit forecasts by +17%, with stronger than expected cargo
handling orders. Its share price rose +10% to the end of December
against a +1% increase in the MSCI Japan Small Cap Index.
In 2020 we saw hyperbolic claims from some journalists that
activism in Japan was dead and that Japanese management had been
vindicated in holding cash - proving the Japan way of defying
shareholders wishes. This view quickly diminished with Suga, the
new Prime Minister, declaring that "corporate governance reform is
key in raising the value of Japanese companies". Furthermore,
despite some shareholders holding back from submitting shareholder
proposals this year, the number of companies receiving proposals
from "activists" grew to 26 from 16 last year.
The total value of takeover bids in 2020, up until 6th November,
was +332% higher than the whole of 2019 and +224% higher than the
record high in 2007. Most interestingly, over the quarter we saw
what has been claimed as the first successful unsolicited takeover
bid in Japan. Nitori Holdings' unexpected, and uninvited, bid for
Shimachu, came at a price +31% higher than a bid already accepted
and agreed between Shimachu management and DCM Holdings. While this
is the first successful unsolicited bid, it is one of an increasing
number of unsolicited bids which caught the attention of the FT who
wrote an article in December nicely titled "Japan's icy climate for
hostile takeovers starts to thaw".
Given the valuations of the companies in our portfolio they are
clearly not pricing in the possibility of a change in corporate
control. Aside from the 7 listed subsidiaries which account for 21%
of AJOT's NAV, all of which have a possibility of being taken over
or sold by their parent, there are 3 other companies in our
portfolio where we know, and are in contact with, willing private
equity buyers. It is our role to help and hasten what we believe
will be inevitable take overs of these companies - most likely at
substantial premiums to their current share prices.
TSE Market Restructuring
In February 2020, the Tokyo Stock Exchange (TSE) announced that
it will be reviewing and restructuring its five market segments,
consolidating them into three new segments: the Prime Market, the
Standard Market and the Growth Market. It has long been a problem
that there are too many companies on the 1st section of the TSE,
with the number of companies doubling over the past 30 years to
over 2,000. 10% of those companies have market caps of $10m or less
and would not qualify for listing on the 1st section today
To create a more appropriate market structure the criteria for
continued listing on the new Prime and Standard Markets are
becoming stricter. For example, in December, the TSE confirmed its
intention to exclude shares held by domestic banks, insurance
companies, or business corporations from its free float calculation
- directly attacking Japan's allegiant shareholder problem, and
that companies in the prime market will have to adhere to the 2021
revised corporate governance code - which will place more onerous
governance requirements on companies.
The restructuring has created an opportunity for us to engage
with the four companies in our portfolio who will be affected,
including encouraging management to explore privatisation. King,
which on account of a low market cap and trading volume fails to
meet the requirements to keep its listing on the main market; NS
Solutions, which has a free float of less than the 35% that is
required to be on the prime market; Secom Joshinetsu, which has a
free float of less than the 25% that is required to be on the
standard market; and finally, SK Kaken, which fails to meet the
minimum number of shareholders for the standard market.
That the TSE is taking steps to directly improve corporate
governance, tackle low liquidity and attack allegiant shareholders
is evidence that the institutions in Japan are serious about
creating a more shareholder friendly environment.
Portfolio Activity
Trading activity over the quarter was reasonably modest, with an
annualised turnover of 26%. We took the opportunity to trim our
positions in Pasona and Softbank Group after a period of share
price strength. In Pasona's case to ensure it did not become too
large a weight in the portfolio and for Softbank Group, due to its
discount narrowing to the low 40s from a level greater than 70% in
March we successfully sold 50% of our investment in Kanaden back to
the company through an announced buyback program - which was a
helpful source of liquidity.
We continued to build our position in system integrator, DTS, to
capitalise on the exciting digital transformation theme, and it
ended the period as our third largest position.
We built a new and, so far, small position, in an undisclosed
company, at the start of December. We were able to purchase our
stake at a price similar to that at which we could have purchased
during the March sell-off, due to forced selling pressure from a
large shareholder. We believe there is an opportunity to engage
with management on ways in which to improve the valuation at which
the company trades. However, it is early days, and we will wait and
see how responsive they are to our suggestions before we build the
position further.
Q4 2020 Contributors and Detractors
Pasona was the largest contributor this quarter, adding 140bps
to performance. Its +30% share price return benefitted from a +15%
share price increase from its 50% stake in Benefit One and a more
optimistic outlook on its core recruiting and BPO business, which
reported its highest ever quarterly profit. However, the stellar
performance of Pasona's core businesses was not fully reflected in
Pasona's share price, and our estimated discount that Pasona trades
to its fair value widened from 73% to 76%. We believe Pasona's
valuation became more compelling which is why, despite the strong
performance, it ended the period as our 2nd largest position.
SoftBank Group contributed 90bps to returns, on account of its
discount narrowing from 56% to 41%, and although our estimated net
asset value fell by -7%, Softbank's share price still rose by +25%.
SoftBank Group has proved to be an excellent investment for AJOT,
and a prime example of the returns available from successful
engagement. During the onslaught from the COVID-induced March sell
off when Softbank's discount widened to an astonishing 76%, and its
share price fell by over 50%, SoftBank, with pressure from
shareholders, announced that it would sell assets and fund a
buyback for almost a third of its outstanding shares. Since then,
it has taken further actions to narrow the discount including
increased board independence, improved transparency, and asset
sales.
Our third largest contributor over the period was Digital
Garage, whose share price increased by +19%, recovering from a
period of weak performance. Digital Garage holds assets that should
be huge beneficiaries from the increased adoption of digital
services, including a portfolio of tech start-ups, a digital
advertising business and an ecommerce payment settlement business.
Over 2020 Digital Garage's share price fell -6%, compared to the
MSCI Japan Small Cap return of +2%, and more importantly, an +86%
return from Digital Garage's closet payments peer, GMO Payment
Gateway. Given its lagging performance looks increasingly divorced
from the positive fundamentals, we believe Digital Garage's share
price is poised for a strong 2021.
On the detractors, Teikoku Sen-I was the largest, falling -10%
and reducing AJOT's overall performance by 80bps. Although profits
for this year were expected to be weak, with a difficult comparison
year, strong H1 profits, +21% year-on-year, caused an increase in
expectations. Earnings for the 3rd quarter, reporting a small loss
- a not unexpected occurrence (this quarter is seasonally weak,
with Teikoku reporting larger losses in 2017 and 2018) - dashed the
market's hopes that management were being overly conservative. We
were not so optimistic and since May, with share price strength and
Teikoku's weight approaching 9% of AJOT's NAV, we reduced our
position by -27%. Teikoku's share price has fallen by -20% from its
November peak to leave the company trading on an EV/EBIT of 4.5x.
With a planned expansion of their factories and a tailwind from
structural demand for disaster prevention infrastructure, we are
more sanguine than the consensus seems about its prospects.
Kanaden detracted 60bps from returns as its share price fell
-13%, following lacklustre earnings which fell-37% year-on-year, as
its clients delayed capital expenditure projects, hitting Kanaden's
factory automation division particularly hard. Although we had
built a good relationship with management and successfully
encouraged them to undertake share buybacks and introduce a
compensation and nomination committee, we felt with a difficult
trading environment and no obvious event that our capital was
better placed elsewhere. As mentioned previously, we sold half of
our stake back to the Company.
The third largest detractor was DTS, whose share price fell -5%.
The company reported respectable results, with sales and profits
down only -1% year-on-year and order intake growing +32%
quarter-on-quarter (albeit still down -7% over the year).
Manager's Comment
Most encouragingly, DTS showed progress on building its Digital
Transformation (DX) business, with DX sales growing +17% and
accounting for 29% of sales in the first half of the year. DTS is
one of our highest conviction ideas. We have been consistently
adding to it recently, with the position ending the period at a
6.1% weight.
****
At the start of January, we welcomed Makiko Shimada to the team.
She will be based in London, but due to COVID-travel disruption is
spending the first two months in Tokyo. She joins from Goldman
Sachs where she advised companies (ironically!) on how to defend
themselves against unwanted shareholder attention.
With an expanded team we are ramping up our engagement activity
ahead of the AGM season. We are considering proposals at four
companies, although we anticipate that a number of these, hopefully
all, will be withdrawn as our suggestions are met. Additionally, in
the coming month we expect to send a detailed presentation to
another company outlining their underperformance and undervaluation
-recommending solutions ranging from restructuring, expanding
business lines and improving disclosure.
We feel like the wind is in our sails. Progress to improve
corporate governance is continuing, the Japanese market is
undeniably undervalued and for investors with a bullish economic
outlook, Japan is a highly attractive way to gain exposure to a
global recovery. Considering that the companies in our portfolio
have lagged global markets in 2020, and that share prices have
diverged further from their fundamentals, we are optimistic about
future performance.
Quarterly Contributors/Detractors
Quarterly Contribution
Largest Contributors bps Percent of NAV
---------------------- ----------------------- ---------------
Pasona 1.4% 6.3
---------------------- ----------------------- ---------------
Softbank 0.9% 4.6
---------------------- ----------------------- ---------------
Digital Garage 0.7% 5.4
---------------------- ----------------------- ---------------
Quarterly Contribution
Largest Detractors bps Percent of NAV
---------------------- ----------------------- ---------------
DTS -0.5% 6.1
---------------------- ----------------------- ---------------
Kanaden -0.6% 1.5
---------------------- ----------------------- ---------------
Tecikoku Sen-I -0.8% 5.2
- ENDS -
For further information please contact:
Joe Bauernfreund, Asset Value Investors
Tel: 020 7659 4800
info@ajot.co.uk
Fiona Harris, Quill PR
Tel: 020 7466 5058 / 07792 523455
fiona@quillpr.com
Sarah Gibbons-Cook, Quill PR
Tel: 020 7466 5060/ 07769 648806
sarah@quillpr.com
Andreea Caraveteanu, Quill PR
Tel: 020 7466 5059 / 07902 142991
andreea@quillpr.com
The content of the Company's web-pages and the content of any
website or pages which may be accessed through hyperlinks on the
Company's web-pages, other than the content of the Update referred
to above, is neither incorporated into nor forms part of the above
announcement.
LEI: 894500IJ5QQD7FPT3J73
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END
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