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Prospect Japan posts “disappointing” results

Prospect Japan’s chairman says that, for the year ended 31 December, 2016, the company  had a disappointing year with a decline in published NAV of 9.49% compared with MSCI Japan Small Cap Index’s increase of 8.22%. Furthermore, the share price has fallen from $1.05 to $0.89 with an increased discount to published NAV of 27% (2015: 23%).

The largest positive contributors to 2016 performance came from holdings in Fukushima Bank (8562) and Daiwa Motor Transportation (9082). 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 over the following months after 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, and into year-end after introduction of the central bank’s yield control policy framework. Daiwa Motor Transportation (9082), a provider of taxi and chartered limousine services, bought back 1.24 million shares from the company at the 15 June closing price
of JPY 553 per share.

In March 2016, the Tokyo High Court announced its decision on the appeal involving the Toho (9602) tender offer bid of Toho Real Estate (8833). The High Court ruled that the tender offer price amounted to fair value and has therefore eliminated the award of JPY 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.

In October 2016, the Niigata District Court announced its decision to uphold 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. The Company has submitted an appeal to the District Court decision.

Holdings resulting in outsized contribution to negative performance during the period include Daito Bank (8563) and Shaklee Global Group (8205). Daito Bank, a regional bank based in Fukushima prefecture, underperformed during the year, after massive outperformance of the overall bank sector in 2015. The bank fell sharply in February along with other financial shares due to the implementation of the BoJ’s negative interest rate policy and subsequent downward pressure on loan interest and investment revenue. Daito Bank, the second largest bank in the Fukushima prefecture, could benefit from the ongoing consolidation trend in the sector.

Shaklee Global Group, a seller of nutrition and personal care products, fell during the year due to sluggish revenue and profits from Asian operations and an adverse foreign exchange environment for much of the year, that saw a strengthening Japanese yen erode profitability from overseas sales that account for 85% of total revenue. Company shares retreated sharply following the November US election, despite the advantageous yen weakening, as US policy towards China became uncertain. China accounts for nearly 40% of total sales.

PJF : Prospect Japan posts “disappointing” results

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