Prospect Japan benefits from stake in management company

Prospect Japan Fund, which reports its results in US dollar terms, says that for 2015, it achieved a gain, in Dollar terms, of 19.13% as against the MSCI Japan Small Cap Index increase of 15.74%. The Yen:Dollar exchange rate at
31 December, 2015 was virtually unchanged from a year earlier.

The largest contributors to 2015 performance were Prospect Co. (3528), Tri-Stage Inc (2178) and Daito Bank (8563). Prospect Co. saw strong share performance in the early months of 2015, following the ¥3 billion convertible bond issuance to Prospect Japan Fund in November 2014 and an announcement of a tender offer bid for control of Yutaka Shoji (8747), a commodity futures trader. The bulk of the company’s holdings in Prospect Co. during the year resulted from exercise of convertible bonds at ¥60 per share. The average sale price following conversion was ¥81 per share.

Prospect Japan Fund acquired 1,440 stock acquisition rights (“SARs”) in Prospect Co. for a total cost of ¥288 million (US$2,391,431) in December 2015. Each SAR gives the company the right to acquire 100,000 ordinary shares in Prospect Co. at a price of ¥54 per share.  The SARs are exercisable until 20 December, 2020. Prospect Co. is listed on the Tokyo Stock Exchange with a market capitalisation of ¥7,840 million (US$65.1 million). It owns and operates a number of Japanese based businesses in sectors such as real estate, construction, investment management and solar
power generation. Through its investment management business it owns Prospect Asset Management Inc., the investment advisor of the company. Therefore, the exercise of the SARs by the Company will constitute a related party transaction. The company sent a circular to shareholders seeking approval to exercise the SARs in a pre-determined manner pursuant to an exercise agreement with Prospect Co., and such approval was granted at the EGM on 24 February, 2016.

Tri-Stage, a marketing consultant service provider, gained strongly following the company’s announcement in April that it planned to expand its board by increasing the number of outside directors by two (five internal, three external). Tri-Stage also announced a new mid-term business plan, featuring a policy of 100% dividend payout ratio for the next three years. The changes at Tri-Stage are a direct response to long-term engagement between Prospect and management, including proposals put forth regarding increased dividend payout and outside director board membership. Shares rallied again following the October agreement to buy back all 996,000 shares (22% of total outstanding  shares) held by the Company. In early 2015, the Company extended a short term loan to Link Up KK, a privately held Japanese telephone marketing company, which was used to acquire an equity stake in Tri-Stage. In October 2015 the Link Up Loan went into default. Nomura, which held the collateral account, temporarily blocked Prospect Japan Fund from taking possession of the collateral shares in Tri-Stage. The company’s lawyers commenced action against Nomura to enforce its rights to the collateral, and towards year-end, gained possession of the shares.

Daito Bank, a Fukushima based regional bank, performed strongly throughout the year, reaching eight-year highs towards year-end following first half of the year results ahead of guidance and a large upward revision to full year estimates including a 50% increase in dividends. Sentiment was also bolstered by six instances of bank consolidation over the past 12 months. Daito Bank, the second largest bank in the Fukushima prefecture, could benefit from the ongoing consolidation trend in the sector.

The Tokyo District Court advised the results of the case involving the Toho (9602) Tender Offer Bid of Toho Real Estate in March 2015, with the court ordering the price raised 13.6% to ¥835 per share. While an improvement, the price is still a significant discount to the fair value of Toho Real Estate when adjusted for unrealised gains on its real estate holdings. Prospect appealed the ruling. On 30 March, 2016 the company announced that the Tokyo High Court had ruled that the tender offer price amounted to fair value which therefore reversed the previous decision of the lower court and eliminated the award of ¥100 per share. The Company has filed an appeal to this ruling.

Underperformance was led by Shaklee Global Group (8205), a seller of nutrition and personal care products, with a high percentage of overseas sales which fell sharply during the year, following weaker than expected revenues from Asia and higher operating and capital expenditure costs resulting in large downward revision to initial full year forecasts.

PJF : Prospect Japan benefits from stake in management company


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