12 April 2024
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 March 2024.
This Quarterly Newsletter is
available on the Company's website at:
https://www.assetvalueinvestors.com/content/uploads/2024/04/AJOT-Q1-2024.pdf
Portfolio Statistics
|
Net cash1
as
percentage
of
market cap
|
NFV2 as
a
percentage
of
market cap
|
EV/EBIT
|
FCF Yield
|
Dividend
Yield
|
Q1
2024
|
35%
|
48%
|
8.7
|
5.1%
|
2.2%
|
Q4
2023
|
38%
|
49%
|
8.7
|
4.6%
|
2.3%
|
Q3
2023
|
37%
|
59%
|
7.0
|
4.6%
|
2.4%
|
Q2
2023
|
35%
|
56%
|
7.8
|
4.4%
|
2.2%
|
1 Net cash = Cash - Debt - Net
Pension Liabilities + Value of Treasury Shares
2 Net Financial Value (NFV) = Net
cash + Investment Securities
THE FUND
(Figures to 31 March
2024)
|
|
Month
|
3 Month
|
YTD
|
1Y
|
3Y
|
SI*
|
GBP
|
AJOT NAV
vs. MSCI Jap Small
Cap
|
6.5%
3.8%
|
5.5%
6.0%
|
5.5%
6.0%
|
13.7%
12.0%
|
32.0%
8.1%
|
48.2%
23.2%
|
JPY
|
AJOT NAV
vs. MSCI Jap Small
Cap
|
7.5%
4.8%
|
12.2%
12.8%
|
12.2%
12.8%
|
32.1%
30.1%
|
65.5%
35.5%
|
94.9%
62.0%
|
* Since
inception
MANAGER'S
COMMENT
Dear AJOT Shareholders,
AJOT's NAV increased by +5.5% over
the quarter and +12.2% in JPY with most of that performance coming
over the last few days of February. Idiosyncratic events at Alps
Logistics (+79%, rumour of parent company selling), Beenos (+45%,
after AVI stake announcement) and JADE GROUP (+30%, announcing
transformative acquisition) drove performance, which again
highlights how the returns from a highly concentrated and high
conviction portfolio such as AJOT's can often be lumpy. Detractors
were modest, with share prices failing to keep pace with a strong
market, rather than changes to fundamentals, with Nihon Kohden
(-10%) and Shin-Etsu Polymer (-7%) being the most
notable.
It was another buoyant period for
Japanese markets, with the MSCI Japan Small Cap Index and MSCI
Japan Index up +12.8% and 19.2% respectively (in JPY). This
remarkable performance is especially noteworthy considering this
follows the impressive returns of +21.1% and 28.6% in 2023. Similar
to last year, performance has so far favoured large cap value
stocks, with the MSCI Japan Value Index up a whopping +22.3% during
the first quarter. This is attributed, at least in part, to the
continued depreciation of the Japanese Yen, with large-cap
exporters reaping the rewards. Since the start of 2023, the Yen has
weakened 13% against the US Dollar (USD) and 17% against the
British Pound (GBP), with -7% and -6% weakening over this quarter
alone. It is worth reminding shareholders that approximately 83% of
portfolio company revenues come from the domestic market and have
not benefitted from a weak Yen.
The ongoing weakness of the Yen
continues to be driven by the BOJ's accommodative monetary policy
stance. Although the BOJ finally ended their negative rate control,
the accompanying hike was a modest 10bps, and, suspiciously,
well-guided by the Nikkei newspaper in the days preceding the
meeting. This year's spring "Shunto" wage negotiations ended with
an average 5.3% YoY uplift, marking the highest increase in 33
years. We believe this provides support for the BOJ to continue
hiking rates. For now, we still await the much-anticipated
potential tailwind from a strengthening Yen, which would be a boon
for AJOT's NAV.
Investors' focus on large caps has
come at the expense of small caps, which have been overlooked. Over
the past six months we have built new positions in nine small
companies, a significant number considering our portfolio consists
of only 25 companies. In each of these cases, we foresee upsides in
the order of 50-100%. We would be hard pressed to find anything
close to these upsides in mid-and-large cap companies (and we have
tried).
During the quarter, we spent a week
in Tokyo, where we visited several existing portfolio companies
and, most interestingly, private equity firms. Management appear to
be actively listening to the strengthening regulations and guidance
from TSE and METI last year. Privatisations, for example,
previously dismissed out of hand, are now being taken more
seriously and there is growing awareness of share prices and
valuations. Private equity firms are waiting on the sidelines with
open arms, and their optimism regarding the changing environment
was evident during our meetings.
We are considering filing shareholder
proposals to three portfolio companies. While we hope these
proposals don't see the light of day, they are an important tool to
instil a sense of urgency in management. Our private engagement
efforts continue in earnest, with new portfolio companies receiving
detailed presentations and letters. The environment remains as
fertile as ever, and despite the buoyant market, we continue to
identify plenty of dislocated pricing opportunities. The EV/EBIT of
the portfolio was 8.7x and NFV accounted for 48% of market cap. We
expect these will become more attractive over the coming months as
we continue to realise maturing, more fully valued positions and
redeploy into new opportunities.
JADE
GROUP (4549) - Showcase of buying a growth company at a value
multiple
JADE GROUP (JADE) (previously
LOCONDO) has ascended to a top ten position in the portfolio and
saw its share price increase +30% over the quarter. Since the date
of our first investment, JADE's share price has increased by +138%,
generating a healthy ROI and IRR of 102% and 41%
respectively.
The shares were propelled higher over
the quarter after it announced the acquisition of Magaseek, a
leading fashion ecommerce platform owned 75% by DOCOMO and 25% by
Itochu. The purchase is expected to double Gross Merchandise Value
(GMV) and, although not yet confirmed by the Company, we believe it
could also double profits by 2026.
We invested in JADE in November 2021,
after its share price had fallen -70% from a COVID-intoxicated high
in August 2020. While JADE was viewed as a "growth stock", and not
an obvious candidate for a value-driven engagement fund, it had
become undervalued with a substantial net cash backing. We
understood JADE's business model having had an indirect investment
in Zalando, JADE's European equivalent, through our global fund. We
watched in marvel as Zalando rolled out its partners program across
Europe and recognised a similar potential for JADE in the Japanese
market.
Over the subsequent three years, led
by President Tanaka and the newly appointed de facto CFO,
Shigetoshi, JADE continued its ambitious expansion. As the largest
shareholder, we have actively supported management in pursuing its
growth strategy. We agreed that the dividend should be scrapped to
focus on M&A and share buybacks, and sent letters highlighting
JADE's undervaluation. Needless to say, it has been a busy period
for management. They have made strides in improving IR
communications, reduced the reliance on sales promoted by YouTube
influencers, and successfully executed six acquisitions the most
notable of which, prior to Magaseek, being Reebok Japan.
The acquisition of Reebok Japan
through a 66/34 JV with Itochu marked a pivotal moment for JADE,
facilitating the move into direct management and ownership of a
well-known brand. Utilising its marketing and logistics expertise,
JADE seamlessly integrated Reebok into its existing infrastructure,
benefiting from operating leverage which will drive operating
profits +77% higher this year (year ending Feb 2024).
Having proved the model with numerous
acquisitions, we believe the market is yet to fully comprehend how
pivotal the Magaseek acquisition could be. Trading on a lowly 10x
forward EV/EBIT, we anticipate that as management communicates the
expected impact from the Magaseek acquisition in the coming months,
the market will gain a better understanding of its significance and
reevaluate accordingly. When asked whether JADE is seeking to
complete more acquisitions, management's response was unequivocal:
"we absolutely want to do more". With JADE cementing itself as the
#2 player in Japan's Y2.4trn fashion e-commerce market, its Y60bn
GMV still has a long way to go to catch up with Zozo's Y560bn, not
to mention its valuation (18x EV/EBIT).
Alps
Logistics (9055) - Another one biting the dust
Continuing the trend of one of our
favoured themes - the collapse of parent-child listings - Alps
Logistics, an investment we've held since we launched AJOT in 2018,
saw its share price rise +79% over the quarter as news broke that
its 49% shareholder, Alps Alpine, was considering selling its
stake. Given the numerous sources cited in the article and the
absence of denial from either company, it appears likely that there
is substance to the speculation.
Alps Logistics' parent company, Alps
Alpine, has seen a deterioration in its business, and to address
the cashflow gap in their mid-term plan, they announced earlier in
the year their intention to explore asset sales. Although the
timing was unexpected, it doesn't come as a huge surprise that Alps
Logistics was a candidate for asset sales, which is why we added to
our holding earlier in the year.
To achieve the highest price for its
stake in Alps Logistics, Alps Alpine will need to structure a deal
where a controlling stake is sold to either private equity or a
trade buyer, enabling privatisation. At the current share price,
Alps Logistics' 14x EV/EBIT valuation represents a slight premium
to its peers (12x), however, it falls below the c.22x at which
Hitachi Transport was taken private by KKR in May 2022. While we
had commented at the end of last month that we were happy to
maintain our position, given the recent surge in the share price by
+26% over the past month, we decided to moderate our exposure on
valuation grounds. At quarter end Alps Logistics was a 4.6%
weight.
Portfolio Trading Activity
It was a reasonably busy period for
trading, which was not unexpected considering the strong markets
presented numerous selling opportunities and left behind plenty of
egregiously undervalued small-cap companies. Already this year we
have built or are building positions in five new companies, three
of which have the potential to become large positions in the
portfolio.
BEENOS (3328) was our largest
purchase, accounting for 5.2% of NAV by the quarter end. Beenos
operates a global ecommerce platform, primarily focused on a
service called 'Buyee', which enables customers living abroad to
purchase items from popular Japanese e-commerce sites, such as
Yahoo! Japan, Mercari and Rakuten. Over the past eight years,
Buyee's gross merchandise value has grown at an annual rate of
31.3%.
At the time of our purchase, Beenos
was trading at a modest 2.9x EV/EBIT multiple, with net cash and
securities comprising over 79% of its market cap. Due to the
persistent undervaluation, investment in non-core businesses, and a
lacklustre share price, an increasing number of shareholders have
expressed opposition to the CEO's reappointment. We see significant
upside if management can simplify the structure, exit loss making
business lines and return excess cash to shareholders.
Aside from trimming a handful of
positions on share price strength, our largest sale was the exit
of Digital
Garage (4819). After publishing a
press release in November, at the end of the year, defiant to the
trend of reducing crossshareholdings, Digital Garage issued 5.3% of
its treasury shares to Resona HD, with Resona HD committed to
purchasing an additional 4.8% in the market. With a consistently
underperforming and mismanaged business, along with the senseless
issuance of undervalued shares, we have more promising
opportunities to allocate our capital toward. After we sold,
Digital Garage's share price limped -8% lower, underperforming a
strong market.
Our special situations trade
in Yaizu
Suisankagaku (2812) came to fruition
over the quarter when it was subject to a Tender Offer Bid (TOB),
19% higher than the failed TOB at the end of last year. Although
only a 1% position, we made a +16% return within a few months,
generating an IRR of +129%.
Net gearing at the end of the quarter
stood at 3.8%, which given the abundance of opportunities, we
expect will increase over the coming months.
Contributors and Detractors
As discussed above,
Alps Logistics
(9055) was the largest contributor,
with a +79% share price increase following speculation that its
controlling 48% shareholder, Alps Alpine, was looking to sell its
stake.
Our new position in
BEENOS
(3328) performed well, with the share
price rising +17% the day following the announcement of our 5%
ownership (which we have subsequently increased to 8% ownership).
Following our declaration, another well known engaged shareholder
increased their holding to 9%. In less than two months, we have
made a return on investment of +38%, and still see significant
upside potential.
Nihon Kohden (6849) was the
largest detractor over the quarter with a -10% share price reducing
returns by 141bps. Aside from profit-taking after a strong share
price jump last December, it was difficult to pinpoint the specific
cause for the share price weakness, especially considering that
over the quarter the MSCI Japan Small Cap Index increased by +13%.
Sales were a little soft in the US, although we suspect part of
that will be shifted to next year. Our investment thesis doesn't
ride on quarterly earnings fluctuations, and focus remains
steadfast on the upcoming mid-term plan in May. After sending
numerous presentations and letters detailing Nihon Kohden's
underwhelming margins, we believe that management are for the first
time seriously reviewing their cost structure. Along with an
improvement in capital efficiency, governance and digital strategy
communication, we have been asking management to put forward a 15%
operating margin target. This would mark a significant improvement
from the current lowly 10% operating margin. Based on our
comprehensive research and analysis of peer cost structure, we are
confident that this is achievable (at a minimum) and believe
management are starting to be convinced of this. Time will tell,
but if the Company fails to put forward a convincing plan, we will
consider making our concerns public.
Shin-Etsu Polymer (7970), one of
our three parent-subsidiary investments, was the next largest
detractor with its share price dwindling -7% lower, reducing
returns by 97bps. Shin-Etsu Polymer is a subsidiary of the chemical
giant Shin-Etsu Chemical, where we have been engaging on ways to
rectify their poor corporate governance and woefully low valuation
(6.9x EV/EBIT). During the quarter, we met with Shin-Etsu Polymer's
President in Tokyo, and while it was a pleasant and cordial
meeting, we found it to be somewhat underwhelming. We didn't get
the impression that management had an ambition to grow corporate
value nor that the Company is taking adequate steps to address the
conflicts and corporate governance shortcomings of its
parent-subsidiary relationship. We continue to believe that the
parent-subsidiary relationship is harming Shin-Etsu Polymer's
corporate value and that, as many listed subsidiaries in Japan have
done already, it should be eliminated.
***
We are pleased to say that AJOT and
Scotiabank have successfully renewed the existing revolving credit
facility for a further two years.
- 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/
07702 412680
sarah@quillpr.com
The content of the Company's
webpages 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