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Prospect Japan challenges beansprout takeout price

Prospect Japan reports a slight increase in its NAV per share from US cents 135.53 at 31 December 2015 to US cents
137.64 at 30 June, 2016. It underperformed over the period with a gain of 0.7% (based on published NAV) as against the MSCI Japan Small Cap Index (Total Return) for the six months of 2.1%.

The Tokyo First Section has fallen 19.5% to the end of June in local currency terms. Two significant sectors, banks and autos, have both performed very poorly due to the introduction of negative interest rates and the strength of the yen. The Bank of Japan surprised markets with a move to a Negative Interest Rate Policy (“NIRP”) at the end of January and it was applied from 16 February. It has had a number of consequences including the poor performance of bank shares and yields on 10-year government bonds have turned negative.

Holdings providing a positive contribution to performance during the period included Fukushima Bank (8562), Shaklee Global Group (8205) and Maruhachi Warehouse (9313). Fukushima Bank, a regional bank in Fukushima prefecture, fell sharply in February along with other financial shares due to the implementation of the BoJ’s negative interest rate policy, but rallied strongly in April and June following technical adjustments by the BoJ that increased the proportion of current account funds that will be considered part of the “macro add-on balance” not subject to the negative policy rate. Shaklee Global Group, a seller of nutrition and personal care products, gained on low volume towards period end, despite weak FY results. The Company reported lower revenue and profits due to reduced sales and profits in Asia and a move to operating loss in the United States. Maruhachi Warehouse, a warehousing and logistics company, gained strongly towards period end, following efforts to improve liquidity via a 2-for-1 reverse stock split and lowering of trading lots to 100 from 1,000 shares.

Weakness during the period came from holdings in Tri-Stage Inc (2178) and Yasuda Logistics Corporation (9324). Tri-Stage (2178), a marketing consultant service provider has retreated from its six-year highs last seen in December 2015. Shares have started to recover towards the end of the period, following strong FY 2016 results and better than expected Q1 2016 results. Yasuda Logistics, a logistics and real estate leasing company, underperformed following YoY declines in profits owing to increased operating and personnel expenses and lower real estate leasing revenue due to a redevelopment project. The Company maintains ¥15.6 billion in unrealized gains on its rental real  estate holdings, more than 80% of its period end market cap.

Two bits of litigation that the fund is involved in: In March 2016, the Tokyo High Court announced its decision on the appeal involving the Toho (9602) TOB of Toho Real Estate. The High Court ruled that the tender offer price amounted to fair value and has therefore eliminated the award of ¥100 per share decided by The Tokyo District Court. The Company summarily submitted an appeal of the High court decision to the Supreme Court, which accepted the request for appeal in June 2016.

Also, the Company is currently engaged in an appraisal rights petition, challenging the fairness of the JPY 245 per share squeeze out price of Yukiguni Maitake (1378), a manufacturer and seller of fresh mushrooms and bean sprouts, by Bain Capital. A decision is expected around mid-October 2016.

PJF :

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