Our Japan strategy takes advantage of a phenomenon unique to Japan: excess cash on balance sheets. An impressive 56% of companies in the Topix index (a broad benchmark containing around 2,000 stocks) have net cash. For the MSCI Europe and S&P 500 indices, the respective figures are just 23% and 16%.
After years of seeing corporate Japan building up cash piles and neglecting shareholders, investors have applied a deep discount to cash, assuming that it will never be used productively. As a result we can find wonderful companies trading at remarkably low valuations.
Our London-listed trust, AVI Japan Opportunity Trust (London: AJOT), is invested in 25 companies that trade on an average 2.6 times EV/EBIT multiple with 50% of their market caps covered by net cash.
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However, being undervalued is not enough to drive share-price performance. We actively engage with the management of these companies to help unlock the trapped value.
An elevator manufacturer on the rise
Fujitec (Tokyo: 6406) is a global lift manufacturer with sales in Japan, China, Southeast Asia, North America and Europe.
The most appealing aspect of the business is the maintenance contracts for the lifts. These last for decades, producing steady, recurring profit, which explains why Fujitec’s global peers trade on EV/EBIT multiples approaching 18.
However, Fujitec, which operates the same business model, trades on a multiple of just eight. In May we launched a public campaign and released a 73-page presentation on assetvalueinvestors.com/fujitec/. We outlined several issues and put forward recommendations on how to improve Fujitec’s margins and, ultimately, the share price.
Moving into the 21st century
Contrary to popular belief, Japan lags other developed countries in the sophistication of its information technology infrastructure. For example, cloud-based accounting and human resources management software are used by only 14% and 19% of companies in Japan, compared with 35% and 55% in the UK.
The situation is so dire that the government warned that if Japanese companies cannot embrace new digital technology the whole Japanese economy could suffer a ¥12trn annual economic loss by 2025, equivalent to 2% of GDP.
DTS (Tokyo: 9682) is a beneficiary of this trend, assisting Japanese companies in finding optimum IT solutions. Net cash covers 40% of the market capitalisation, and over the past five years profits have grown by 66%.
Hidden real estate
King Co. (Tokyo: 8118), a women’s apparel and accessories manufacturer, isn’t known for its real-estate business, but 57% of profits derive from rental income.
We conservatively estimate that its real estate is worth ¥10bn, which, coupled with a ¥9bn cash pile, dwarfs its ¥10bn market value. It has been consistently buying back its shares, which, considering the severe undervaluation, is no bad thing. With cash covering 90% of the market value, we’re well protected against any sudden setbacks while we wait for the value to be unlocked.
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