17 July 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 30 June 2024.
This Quarterly Newsletter is
available on the Company's website at:
https://www.assetvalueinvestors.com/content/uploads/2024/07/AJOT-Q2-2024.pdf
Portfolio Statistics
|
Net cash1
as
percentage
of
market cap
|
NFV2 as
a
percentage
of
market cap
|
EV/EBIT
|
FCF Yield
|
Dividend
Yield
|
Q2
2024
|
31%
|
49%
|
7.7x
|
4.9%
|
2.4%
|
Q1
2024
|
35%
|
48%
|
8.7x
|
5.1%
|
2.2%
|
Q4
2023
|
38%
|
49%
|
8.7x
|
4.6%
|
2.3%
|
Q3
2023
|
37%
|
59%
|
7.0x
|
4.6%
|
2.4%
|
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 30 June
2024)
|
|
Month
|
3 Month
|
YTD
|
1Y
|
3Y
|
SI*
|
GBP
|
AJOT NAV
vs. MSCI Jap Small
Cap
|
5.0%
-0.8%
|
2.1%
-5.8%
|
7.7%
-0.2%
|
18.8%
7.1%
|
30.6%
2.8%
|
51.4%
16.0%
|
JPY
|
AJOT NAV
vs. MSCI Jap Small
Cap
|
6.8%
0.8%
|
8.6%
0.2%
|
21.9%
12.9%
|
31.5%
18.5%
|
73.2%
36.4%
|
111.7%
62.2%
|
*23 October 2018 Start Date
MANAGER'S
COMMENT
Dear AJOT Shareholders,
AJOT's NAV increased by +2.1% over
the quarter and +8.6% in JPY. Tender offers for both
Alps
Logistics (+94%) and
NC
Holdings (+31%) drove performance,
while TSI
Holdings (+20%), currently the
largest position in the portfolio, also performed strongly.
Meanwhile, Jade Group (-41%) and
Konishi (-17%) were the most
notable detractors during the period.
It was a relatively flat period for
Japanese markets, with the MSCI Japan Small Cap Index returning
+0.2% and the MSCI Japan Index +1.8% (both in JPY). Once again, our
positive performance over the period was eroded by the continued
depreciation of the Japanese Yen, which declined by -5.9% relative
to both the British Pound (GBP) and US Dollar (USD). More than 80%
of AJOT portfolio company revenues come from the domestic market,
which does not benefit from the weaker Yen.
Over the quarter, we initiated
positions in three companies, highlighting our ability to identify
promising opportunities in the fruitful yet underappreciated
small-cap market. These new positions have contributed a combined
+85bps to AJOT's NAV thus far. The lack of research coverage of
small-caps and their relative underperformance to large-caps
continues to present us with abundant opportunities. We remain
committed to selectively adding the most promising companies to our
concentrated portfolio of 25 holdings.
We filed shareholder proposals to two
portfolio companies during the period, one of which we withdrew.
Proposals remain an important tool for applying pressure on
management to make necessary changes to correct under valuations.
In the case of SK Kaken, where we have now filed
shareholder proposals for four consecutive years, AJOT directors
attended the AGM. It was the first time a foreign investor attended
as a speaker, and the first time any shareholder had asked a
question. Encouragingly, it was the most attended AGM, and we
weren't the only shareholder asking probing questions about SK
Kaken's woeful employee satisfaction track record and lack of
strategic direction. Our presence and the questioning seem to have
shaken the Family who control the Company. Yet again our
shareholder proposals achieved support from the majority of
minority shareholders, and we will continue engaging until the
Company addresses the plethora of issues.
Alongside our public campaign to SK
Kaken, we also prepared an in-depth, 60-page public presentation
on Aichi, focusing on several
constructive suggestions to enhance operational efficiency and
corporate value, while addressing the parent/subsidiary
relationship with Toyota Industries.
At the end of the quarter, the
portfolio's EV/EBIT was 7.7x, with NFV accounting for 49% of the
market cap. This underscores the significant discounts at which
AJOT's portfolio companies trade at relative to peers, largely due
to their over-capitalised balance sheets and poor corporate
governance. It is pleasing to see that the evolution of our
portfolio towards higher quality companies is bearing fruit, and
that despite continued small-cap underperformance, we have kept
pace with our larger peers.
NC
Holdings (6236) - Tender Offer at +51% Premium
In a strong start to June for AJOT,
NC Holdings was the recipient of a tender offer bid at a +51%
premium to the undisturbed share price. As a result, NC Holdings
added 109bps to portfolio performance over the quarter. NC Holdings
currently accounts for 5.0% of AJOT's NAV, making it the 8th
largest position in the portfolio.
AVI has been a shareholder in NCHD
since June 2021. As the second largest shareholder (behind Miri
capital who owned 26.2%) owning over 20% of the votes across AVI
funds, we engaged extensively with the Board, both privately and
publicly, on ways to enhance corporate value and returns to
shareholders. This included our public campaign and subsequent
shareholder proposals at the June 2023 AGM. Three of AVI's
proposals successfully passed, including one that required a
special resolution. More information on AVI's 2023 public campaign
regarding the shareholder proposals can be found here:
(www.enhancingNCHD.com).
It's a pleasing and successful
end to the 3-year investment, that will have seen AJOT generate an
IRR of +19% and an ROI of +47%.
Alps
Logistics (9055) - Tender Offer at +194% Premium
In a takeover bid that reflects the
true underlying value of the company and showcases the stark
valuation differential between listed and private companies in
Japan, KKR- controlled Logisteed paid a 194% premium to the
undisturbed, pre-rumour price in February, to privatise Alps
Logistics. We were shareholders in Alps Logistics since late 2018,
engaging with management on ways to enhance corporate value and
addressing the parent/child subsidiary relationship with Alps
Alpine.
It was a pleasing end to our
investment, which generated a +38% IRR and +306% ROI. A total of 8
AJOT portfolio companies, including NC Holdings have now been
subject to a take-over bid since we launched the strategy almost
six years ago.
TSI
Holdings (3608) - Transformative Mid-term Plan
TSI Holdings, our largest position,
announced a new mid-term plan in April. For the first time, TSI
disclosed a quantified shareholder return policy, aiming for a 4%
dividend on equity target by FY27/3, coupled with an ambitious cost
improvement plan to elevate operating margins to 6% (from the
current 1%). The plan was initially met with excitement; however,
the share price quickly fell back again. It took a few weeks for
the market to digest the significance of the plan, but by the end
of the quarter, the share price had appreciated by +20%.
As TSI's largest shareholder, holding
10% of the vote across AVI funds, we were pleased to see that the
Company had actioned many of our suggestions. TSI has likely
received the most engagement from us this year of any portfolio
company, and we commend management for their proactive approach in
listening to shareholders. However, we remain frustrated by the
lack of concrete answers to several of our recommendations and we
are continuing our intense engagement.
Despite already achieving an +96%
return to date, we still see a further +100% upside to the current
share price. This underscores the enormous upside potential of our
investments, which is not unique to TSI. We do not believe the
market fully comprehends the scale of TSI's transformational
program and its commitment to improving capital efficiency. Full
credit from investors for the mid-term plan and cost reform will
only happen once TSI demonstrates improvements over the coming
quarters. In the meantime, we are happy to wait.
Portfolio Trading Activity
The quarter was again a very active
period of trading, with a 74% annualised turnover of the portfolio
in 2024, which compares to AJOT's historical average annual
turnover of 35%. Over the quarter we initiated new positions in
three companies (Aoyama Zaisan Networks,
Broadmedia and Tecnos Japan) and
substantially increased the weighting of two names added to the
portfolio in Q1, with both entering the top ten of the
portfolio.
The largest purchase over the period
was Aoyama Zaisan Networks, as we increased our position to 4.9% of
NAV, making it the 9th largest holding. Aoyama Zaisan Networks
specialises in providing wealth management services, and we foresee
a further 57% upside in addition to the +11% ROI and +158% IRR
already generated.
Over the period we entered and exited
a position in Sun Corporation, during which
time we benefitted from an +37% share price increase, delivering a
+25% ROI and +406% IRR. Consequently, Sun Corporation was both our
second largest purchase and second largest sale during the
period.
We added to several positions
introduced in the first quarter of 2024, building our stakes
in Araya
Industrial and Beenos.
Our largest sale during the quarter
was in Alps Logistics following the tender offer as discussed
above. We also trimmed our position in DTS on the back of strong share price growth since the beginning of
November 2023.
By month-end, we were able to reduce
our position in A-One Seimitsu
to 0.3% of NAV in a timely manner, limiting the
impact of the -11% fall in the share price over the final week of
June. The investment has generated an ROI of +67% and IRR of
+13%.
Net gearing at the end of the quarter
stood at 5.2%, inclusive of the notional exposure of the underlying
shares held via total return swaps. Given the abundance of
opportunities, we expect gearing will increase modestly toward our
upper limit over the coming months.
Contributors and Detractors
As discussed above, Alps Logistics
(9055) was the largest contributor, with a +94% share price
increase after it received a tender offer at a +194% premium to the
undisturbed pre-rumour price in February. Over the quarter, Alps
Logistics added 172bps to performance. TSI Holdings (3608), as
discussed above, was the second largest contributor over the
period, adding 125bps to performance as its share price rose +20%
higher.
In more positive news, NC Holdings
(6236) was also the beneficiary of a tender offer at a +51%
premium, with its share price increasing by +31% over the quarter.
AVI held a combined 22% stake in NC Holdings, and we are pleased
with the positive end to our three-year investment.
After seeing its share price increase
+31% in the first quarter, JADE GROUP (JADE) (previously LOCONDO)
saw its share price decline by -41% over the period. Over the
quarter, JADE was the largest detractor, reducing performance by
289bps. As a reminder, the share price was propelled higher in the
first quarter after it announced the acquisition of Magaseek, a
leading fashion e-commerce platform owned 75% by DOCOMO and 25% by
Itochu. The purchase is expected to double Gross Merchandise Value
(GMV) and profits by 2026. We attribute the share price reaction to
nonfundamental factors, and the weakness offered an irresistible
opportunity to increase our holding by +44%. Shortly after
quarter-end, in line with our suggestions, JADE made an
announcement confirming the profit improvement from Magaseek, and
the share price rose +17% in response.
Konishi (4956) was the second largest
detractor over the quarter, detracting from performance by 181bps,
as its share price declined -17%. Konishi has held a position in
the portfolio since AJOT inception. We have generated an ROI of
+75% and an IRR of +16% and foresee additional +76% upside to the
current share price.
***
- 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
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the content of the Update referred to above, is neither
incorporated into nor forms part of the above
announcement.
LEI: 894500IJ5QQD7FPT3J73