TIDMAJOT
RNS Number : 8308C
AVI Japan Opportunity Trust PLC
13 February 2020
AVI JAPAN OPPORTUNITY TRUST
ANNUAL REPORT 2019
The Directors present the audited Annual Report for the period
ended 31 December 2019.
Copies of the Annual Report can be obtained from the Company's
website ("AJOT" or the "Company") www.ajot.co.uk or by contacting
the Company Secretary by telephone on 01392 477500.
AVI Japan Opportunity Trust plc ("AJOT" or "the Company")
invests in a focussed portfolio of quality small and mid cap listed
companies in Japan that have a large portion of their market
capitalisation in cash or realisable assets.
Portfolio Statistics as at 31 December 2019(*)
Net cash/Market Cap 45.1%
Net financial value/Market
Cap 81.0%
FCF Yield 5.8%
EV/ FCF Yield 22.3%
EV/ EBIT 3.8
Portfolio discount -36.1%
Portfolio Yield 2.0%
ROE 7.5%
ROE ex non-core financial
assets 18.0%
Performance Summary
Net asset value per share at 31 December
2019 112.00p
Share price at 31 December 2019 114.25p
Premium as at 31 December 2019
(difference between share price and
net asset value) 2.01%
Financial Highlights - Period from 23 October
2018 to 31 December 2019
NAV* +14.3%
Share Price* +14.3%
Benchmark +7.9%
(*) For all Alternative Performance Measures, please refer to
the definitions in the Glossary below.
MSCI Japan Small Cap Total Return Index (GBP adjusted total
return)
Overview
Company Objective & Strategy
AJOT aims to provide Shareholders with total returns in excess
of the MSCI Japan Small Cap Total Return Index in GBP ("MSCI Japan
Small Cap Total Return"), through the active management of a
focused portfolio of equity investments listed or quoted in Japan
which have been identified by Asset Value Investors Limited as
undervalued and having a significant proportion of their market
capitalisation held in cash, listed securities and/or other
realisable assets.
AVI will seek to unlock this value through proactive engagement
with management and taking advantage of the increased focus on
corporate governance, balance sheet e ciency, and returns to
shareholders in Japan.
Benchmark
The MSCI Japan Small Cap Total Return Index.
Capital Structure
As at 31 December 2019, the Company's issued share capital
comprised 113,939,742 Ordinary Shares of 1p each and as at 7
February 2020 it comprised 114,889,742 Ordinary Shares. No shares
were held in Treasury.
Annual General Meeting
The Company's first Annual General Meeting ("AGM") will be held
at 10.30 am on Thursday, 26 March 2020 at the o ces of N+1 Singer,
1 Bartholomew Lane, London EC2N 2AX. Please refer to the Notice of
AGM for further information and the resolutions which will be
proposed at this meeting.
Investment Manager
The Company has appointed Asset Value Investors Limited ("AVI"
or the "Investment Manager") as its Alternative Investment Fund
Manager.
Financial Conduct Authority ("FCA") regulation of
'non-mainstream pooled investments' and MiFID II 'complex
instruments'
The Company currently conducts its a airs so that its shares can
be recommended by Independent Financial Advisers in the UK to
ordinary retail investors in accordance with the Financial Conduct
Authority ("FCA")'s rules in relation to non-mainstream investment
products and intends to continue to do so. The shares are excluded
from the FCA's restrictions which apply to non-mainstream
investment products because they are shares in an authorised
investment trust.
The Company's ordinary shares are not classified as 'complex
instruments' under the FCA's revised appropriateness criteria
adopted in the implementation of MiFID II.
The Association of Investment Companies ("The AIC")
The Company is a member of The AIC.
Website
The Company's website, which can be found at www.ajot.co.uk,
includes useful information on the Company, such as price
performance, news, monthly and quarterly reports as well as the
half year report.
Chairman's Statement
Overview of the Period
It is with great pleasure that I present the first annual report
of AVI Japan Opportunity Trust plc ("the Company" or "AJOT"),
covering the period from incorporation on 27 July 2018 to 31
December 2019.
AJOT launched on 23 October 2018 with subscriptions for 80
million shares, and the Company was fully invested by the beginning
of 2019. Your Investment Manager, Asset Value Investors ("AVI"),
has a strong track record of investing in Japan, and has been
diligent in forging close working relationships with our investee
businesses. Since launch, the AVI team has further deepened those
ties with a program of regular communication and face to face
meetings with management boards. The engagement has been very
positive, and we are especially appreciative of the constructive
dialogue that has resulted.
Naturally, this level of engagement is resource intensive and it
is encouraging to see that AVI has continued to expand its
Japan-focussed staffing, both in London and in Tokyo. These
additions help to ensure that the Investment Manager's research
process to identify and work with our investments remains at an
industry leading standard.
Performance and Dividend
Your Company has generated strong positive returns since launch,
with a net asset value ("NAV") per share total return of 14.3%,
against a return of 7.9% from the benchmark, the MSCI Japan Small
Cap Total Return Index (as measured in GBP). Performance has been
driven by strong contributions from several stocks, as well as a
relative paucity of detractors. The top three contributors added
+8.7% to returns, compared to -1.1% from the worst three
detractors.
As at 7 February 2020 (the latest date prior to the publication
of this document) the NAV per share was 112.62p per share and the
share price 115.60p per share. Since 31 December 2020 the Company
has issued an addition 950,000 shares at an average premium of
3.4%.
The Board has elected to propose a final dividend of 0.9 pence
per share for the period, for approval by shareholders at the
General Meeting. As stated in the prospectus at the Initial Public
Offering ("IPO"), the Company intends to distribute substantially
all of the net revenue arising from the portfolio and is expected
to pay an annual dividend, but this may vary substantially from
year to year.
Investment Strategy
The original thesis behind AJOT is that corporate Japan is
undergoing a paradigmatic shift in governance. Board independence,
over-capitalised balance sheets, and returns on (and of)
shareholder capital, are under particular scrutiny. With pressure
from the government, regulators and investors both foreign and
domestic, Japanese companies feel increasingly compelled to improve
corporate governance and streamline their balance sheets. By
investing high quality, cashflow generative and compellingly valued
stocks, our portfolio stands to profit not only from the sound
underlying businesses but also disproportionately from this move
towards improved governance.
Your Company has benefitted directly from this trend. A good
example of this occurred when electronics maker Toshiba Corp bought
in its listed subsidiaries NuFlare Technology and Toshiba Plant
Systems & Services, both holdings in the portfolio, at
significant premiums to the prevailing share price. The
unsustainability of so-called parent-child subsidiary arrangements
have been a consistent pillar of our strategy since launch and both
companies were significant holdings in our portfolio. For further
details, please refer to the Investment Manager's Report below.
To date, ten of AJOT's portfolio companies have announced
buybacks, and three were subject to takeovers at substantial
premiums. Out of a total of twenty-eight holdings, this is an
impressive pace of change and further evidence in favour of the
investment thesis.
Share Premium and Issuance
As at 31 December 2019, your Company's shares were trading at a
premium of 2.01% to net asset value per share. The Board monitors
this premium carefully and manages it by periodically issuing
shares. Since May 2019, we have utilised both placings and the
Company's authorised block listing facility to increase our shares
in issue. As at 31 December 2019, 33,939,742 shares had been issued
at an average 2.1% premium to NAV, which has the beneficial effect
of modestly increasing NAV per share for existing Shareholders.
Debt Structure and Gearing
As described in the Prospectus, the Board supports the use of
gearing to enhance portfolio performance. In April 2019, we entered
into a one-year unsecured revolving credit facility for Yen1.465
billion with Scotiabank. In October 2019, following the issuance of
additional shares, this facility was increased by a further
Yen1.465 billion in order to maintain a broadly similar level of
gearing for the portfolio. In total the Company currently has a
total debt facility of Yen2.93 billion, equivalent to approximately
GBP20 million. The gearing has been provided at an interest rate of
LIBOR plus 0.75%.
As at 31 December 2019, Yen2.3 billion (GBP16 million) of the
facility has been drawn, with gross gearing standing at 13% of NAV.
Including cash, net gearing was negative at -2% (i.e. the Company
was in a net cash position). This was driven by the realisation of
two large positions at the end of the period, Nuflare and Toshiba
Plant, after they were subject to takeover offers at premia to
their prevailing share prices.
Outlook
Japan has a long and unenviable history of disappointing
investors. Over three 'lost decades' global capital has repeatedly
been deployed in the Japanese markets with the promise of
revaluations that were going to be inevitable once the attractive
valuations and opportunities were recognised. The performance of
our portfolio since launch has been highly satisfactory so at the
risk of sounding overly guarded, it is still worth injecting a word
of caution: it is early days and any Company's true accomplishments
can only be measured across the medium to long-term. Change in
Japan is arduous (as it is in any culture) and the timing of
inflection points, together with the consequent outsized returns,
is di cult to predict. However, it is our conviction that change -
meaningful change - is in the wind in Japan: with the political
will to apply pressure through the revised Stewardship and
Governance Codes, and the increasing presence of
shareholder-conscious institutional investors, a slow-but-sure
shift is coming about in Japan Inc.'s attitude to corporate
governance. Perhaps things really are di erent this time. The
companies we invest in continue to operate attractive businesses
and boast high and growing levels of cash and realisable
securities, all the while trading at valuations not available in
other developed markets today. The opportunity set remains rich and
continues to hold out the o er of highly attractive risk-adjusted
returns. Valuations in the portfolio remain compelling.
The Environmental, Social & Governance ("ESG") Context
There has rightly been a marked increase in the attention paid
to ESG factors in investments all over the world. As a UK based
investment trust, the regulatory stipulations that apply to us are
described and addressed on page 18. In my Chairman's Statement,
with input from Yoshi Nishio a AJOT director with deep knowledge of
Japan and its culture, I want to go a little further and give an
historical overview of how the ESG environment in Japan has
developed to di er from the western world. Some of our portfolio
companies are involved in activities that traditional ESG funds may
seek to avoid. AJOT is not an ESG fund; the basis for making
investment decisions is di erent. However, no responsible citizen,
whether private or corporate, can or should ignore the growing
calls for everyone to work together for the benefit of all. In this
sense, your Board feels that your Company finds itself in an
interesting position.
The history of caring for the environment in Japan is a long
one, having its foundations in a deep-rooted cultural connection to
nature. According to Shinto folklore, the islands that make up the
nation owe their very existence to the ocean surrounding them, when
the gods Izanami and Izanagi dipped their swords into the sea and
the salty water droplets turned into land. Thus, when the air and
water supplies su ered severe and tangible pollution during the
period of rapid industrialisation in the 1950s, the Japanese
people's response was visceral. The government was galvanised into
crafting what now seems a very forward-looking framework placing
heavy responsibilities on corporations not only to do no harm to
the environment, but to take steps to improve it. The recycling of
household waste has been commonplace for over twenty years, while
as early as 1990, the business group Keidanren published detailed
guidelines that required Japanese companies to review their
activities from the viewpoint of reducing the burden on the
environment and specifically integrating precautions and
protections into their operations. More recently, the response to
the nuclear accident in Fukushima in 2011 focussed the world's
attention on an e ective way to ensure that any damage to the
environment is rectified immediately and those responsible be dealt
with appropriately.
There is therefore a case to be made that Japan Inc. already
benefits from high levels of corporate environmental awareness and
responsibility. This is likely to take on increasing relevance to
global investors as the interpretation of ESG develops over time.
Even dedicated ESG funds are now starting to take a more nuanced
approach - no longer just bluntly investing in businesses that are
sustainable and avoiding others that cause harm - but also seeking
out companies that perform traditionally harmful activities in
innovative and less harmful ways, thereby starving the less
responsible actors of investment. Under these criteria, the
universe of companies that AJOT looks at is likely to outperform
their non-Japanese counterparts.
In terms of benefits to society, Japan built its post-war
prosperity on a slightly di erent model to the west, one that
places a strong emphasis on societal advantage. Here again, history
has a lesson to teach. During the Edo period (1603-1868) when the
eponymous city, since renamed Tokyo, was the largest city in Asia
and its most prosperous commercial hub, the merchants and traders
coined a dictum: sanpo yoshi. Literally meaning "tripartite
contentment", every transaction was thought to have three parties:
the buyer, the seller and society. And only if all three parties
were satisfied should any deal be concluded. Implicitly or
explicitly, this is a dictum that has continued to be followed to
this day. Lifetime employment, the paucity of opportunities for
outsized personal enrichment, consensus-based decision making,
seniority based pay - many of the components of what western
commentators have seized on as the essence of what is considered
the 'Japanese way' owe their origins to sanpo yoshi. This does not
mean that Japan doesn't have more improvements to make - the slow
progress on gender equality is a very visible failing - but your
Board feels that relative to global peers, our investee companies
are in a better position to be of benefit to society.
So much for "E" and "S"; the focus for AJOT is "G," where we
believe that real change is due in Japan. Better corporate
governance and the consequent improvement in shareholder returns,
is precisely the opportunity that we are pursuing. As capital flows
become ever more international, Japan needs to evolve its
particular model of capitalism to reflect and incorporate some
aspects of globally accepted standards. AVI has been and always
will be respectful of cultural sensitivities while engaging as
shareholders. Looking forward, if we can be even a small part of
the catalyst that brings about a permanent change in the way
Japanese corporations work with their shareholders, AJOT may well
come to be looked upon as the exemplary investment vehicle for the
21st century.
Closing Remarks
I would like to thank AVI and all of our service providers whose
e orts come together every day to secure AJOT's success. I would
also like to thank you, our Shareholders, for your continued
support and for the trust that you have placed in us. We will
continue working to ensure that we deserve that trust. We hope and
believe that our relationship will be a long and rewarding one. If
you have any queries, please do not hesitate to contact me
personally (norman.crighton@ajot.co.uk), or alternatively speak to
our broker N+1 Singer to arrange a meeting.
Norman Crighton
Chairman
12 February 2020
Investment Manager's Report
AVI Japan Opportunity Trust (AJOT) was launched in October 2018.
This report covers the period from 23 October 2018 to 31 December
2019. Over this time, your Company has returned +14.3% (on a NAV
total return basis in GBP), ahead of the +7.9% total return
generated by the benchmark, the MSCI Japan Small Cap Index (in
GBP). This robust performance has been driven by a combination of
several standout performers and a lack of significant detractors.
The +8.6% contribution from the top three contributors, NuFlare
Technology (+4.1%), Digital Garage (+2.6%) and Fujitec (+1.9%) far
exceeded the combined -1.1% loss from the three largest detractors,
Hi-Lex (-0.5%), Konishi (-0.4%), and TBS (-0.2%).
It has been a difficult time for the Japanese market since AJOT
was launched. The TOPIX's +8.2% return has underperformed that of
the MSCI Europe (+15.6%) and S&P 500 (+17.4%) indices. Japan is
seen as a proxy for global trade and, with the US-China trade war
dominating headlines, global investors have continued to be net
sellers of Japanese equities, notwithstanding an encouraging
reversal of this trend towards the end of the year. However,
beneath the surface, companies are continuing to improve standards
of corporate governance and increasingly focus on shareholder
returns. This is particularly reflected in rising Returns on Equity
(ROE) and in the strong increase in announced share buybacks this
year. Coupled with fundamental valuation metrics that are far more
attractive than the rest of the developed world, we continue to
believe that Japan represents one of the most attractive equity
market opportunities today.
AJOT invests in strong businesses with high levels of cash flow
generation, attractive valuations, and a potential event to unlock
the value trapped within bloated corporate balance sheets. We find
the greatest number of opportunities in cash-rich, small-cap,
Japanese companies that are unloved and under-researched by the
market. There have been an increasing number of successful
shareholder engagements, which is creating the impetus needed to
focus attention on shareholder value. We believe that changes in
mindset and culture surrounding shareholders are the catalyst to
unlock a tremendous amount of value.
The attributes we look for in our investments can be grouped
into three areas: quality, value, and prospects for improving
corporate governance. Quality companies reduce the risk of earnings
deterioration, which means we can be patient long-term
shareholders; the valuation determines the potential upside of the
investment; and improving corporate governance provides a catalyst
to realise the value, mitigating the risk of value traps.
On the quality front, we try to find companies with stable
earnings which over the medium-term have a good chance of growing.
They are typically domestic-focused and provide services or goods
which are highly valued by their customers, resulting in outsized
margins and returns on equity.
Over the past year, the companies in our portfolio grew
operating profits by a weighted average of +9.3%. This mainly came
from margin expansion, particularly so in the case of Pasona, whose
standalone operating profit margin rose from 0.1% to 0.5%. The
portfolio's profit growth was a satisfactory result when compared
to the +5.2% growth for the companies in the MSCI Japan Small Cap
Total Return Index.
Attractive valuations in Japan are caused by a low overall
valuation for Japanese companies and the market's heavy discounting
of cash and investment securities held on companies' balance
sheets. Adjusted for surplus capital, the companies in AJOT's
portfolio trade on a weighted average EV/EBIT of 3.8x and have net
cash and investment securities that cover 81% of their market
caps.
Despite the +14.3% growth in AJOT's NAV, the overall valuation
of the portfolio remains attractive. While the EV/EBIT of the
portfolio increased from 3.6x at the end of February 2019 (when the
portfolio was fully invested) to 3.8x at the end of December 2019,
and net cash as a percentage of market cap decreased from 48% to
45%, net financial value ("NFV") as a percentage of market cap grew
from 78% to 81%. As our portfolio evolves, we expect fluctuations
in its valuation. The slight increase over the year is not
significant and the still-attractive portfolio valuation highlights
that we continue to find compelling opportunities.
Finally, we turn to corporate governance, the overarching theme
of our portfolio. Since the introduction of the Corporate
Governance Code in 2015, we have witnessed a gradual, but
indisputable, shift in Japanese companies' attitudes towards
shareholders.
Over the period, most of our portfolio companies showed signs of
positive changes in their attitudes towards corporate governance.
These changes have been seen in the form of 'softer' policy changes
such as the introduction of stock-based compensation or independent
directors, as well as in more impactful moves like share buybacks
and takeovers. It is the latter two that have been a particular
boon to performance.
Ten of our portfolio companies announced share buybacks over the
period and three were subject to takeovers at substantial premia to
their prevailing share prices. When one considers that your Company
has a portfolio of just 28 investments, and has only been invested
for 14 months, the pace of change has been quite impressive.
The subsidiary buy-out theme is one we have discussed
extensively in our reporting. The issue of parent-child listings
and inadequate protection for minority shareholders is one that is
receiving more attention from shareholders and the Government. It
has been suggested that listed companies with controlling parent
shareholders should be required to have a majority independent
board to increase minority shareholder protection. The clear
intention is to ultimately reduce the prevalence of parent-child
listings, which are rarely seen in developed markets outside of
Japan.
We benefitted from the subsidiary buy-out theme over the period,
with Toshiba Corp's tender offer for NuFlare Technology and Toshiba
Plant Systems & Services, two significant investments for AJOT.
Both were majority controlled by Toshiba Corp and, with Toshiba's
newly revitalised board and the pressure from regulators
surrounding parent-child listings, we felt it was only a matter of
time before something happened. After weeks of rumours, Toshiba
submitted tender offers to minority shareholders for the shares in
each company that it did not already own. These came at premia of
+46% and +28% to the undisturbed prices for NuFlare and Toshiba
Plant respectively, crystallising returns on investments for AJOT
of +93% and +27%.
While the overall standard of corporate governance in Japan has
improved, we believe the pace of change is accelerated by
shareholder engagement. Often not known to the public, we - and
other shareholders like us - are actively engaging with boards
behind closed doors. It is sometimes difficult to attribute
specific actions to our engagement directly, but we have numerous
examples of our portfolio companies announcing steps broadly in
line with those suggested in our letters and face-to-face
meetings.
Since launching AJOT, we have written 33 letters to 18 of our
portfolio companies and met or called them 95 times. Our
discussions with management cover a variety of topics including
balance sheet efficiency, director compensation, the abolition of
poison pills and board independence.
While our investment horizon, and the time frame for judging our
performance, is longer than the 14 months that AJOT has existed, it
has been an encouraging start. We continue to believe that with
growing shareholder engagement, Japanese boards will focus more on
driving corporate value and increasing share prices. The market
seems to underappreciate this phenomenon, which is why we have been
able to build a portfolio at such astonishingly low valuations. The
mismatch between the fundamental improvements we have witnessed and
continued low valuations presents an exciting opportunity.
AVI Team
The team is led by Joe Bauernfreund with the support of two
dedicated Japan analysts, Daniel Lee and Cameron Dryburgh, and Tom
Treanor, Head of Research. Since launching AJOT we hired Cameron, a
full-time Japanese speaking analyst based in London, added a
part-time analyst based in Tokyo who works with us on research
projects and increased our utilisation of locally based legal and
corporate governance experts. Our increased resource has allowed us
to enhance the quality and pace of engagement while allocating more
time to researching new ideas. There is no shortage of engagement
opportunities or new ideas, and we will continue to invest in the
appropriate infrastructure to support the strategy.
Contributors
NuFlare
Contribution to total
return +4.1%
------------------------ -------
Weight in AJOT net
assets 0.0%
------------------------ -------
EV/EBIT n/a
------------------------ -------
NFV/Market Cap n/a
------------------------ -------
NuFlare added +4.1% to returns, the strongest performer over the
period. While our thesis was for a trade sale of the business, it
was still pleasing to see Toshiba Corp make an offer to buyout
minorities at a +46% premium to the undisturbed price. With the
offer coming after an already strong period in the share price, we
realised a return on investment of +93% and an IRR of +110%.
Toshiba Corp's offer is a vindication of the parent-child theme
within AJOT's portfolio. We have argued that listed subsidiaries
should be either bought in or sold off by the parent company, given
that the potential for the abuse of minority shareholders' rights
depresses the share price. With the Abe administration having been
critical of these sorts of arrangements, and Toshiba Corp's
recently refreshed board, it felt like simply a matter of time
before the company would be required to either acquire or sell off
its stake in NuFlare.
Our confidence in a premium offer being made for NuFlare was
underpinned by our analysis of the business. At the end of March
NuFlare was trading on a 10% free cash flow yield, an EV/EBIT of
1.7x with net cash covering 68% of its market cap. Putting the
issues of governance and liquidity to one side, as a strategic
buyer would, the valuations the market was subscribing did not
correspond to a business with highly valuable technology and a
near-monopolistic market share. The lack of NuFlare's sell-side
coverage and the market's lack of interest in small-cap Japanese
companies allowed us to take advantage of the situation and exploit
the inefficiency.
Digital Garage
Contribution to total
return +2.6%
------------------------ -------
Weight in AJOT net
assets 5.8%
------------------------ -------
EV/EBIT 9.3
------------------------ -------
NFV/Market Cap 62.3%
------------------------ -------
Digital Garage was the second strongest contributor over the
period, adding +2.6% to performance. The returns were driven
equally by an increase in our estimated fundamental value for the
company and a narrowing of the discount at which it trades to that
value.
Digital Garage has a 20% stake in Kakaku.com, which operates
online price comparison and restaurant reservation sites. This
investment accounts for 55% of Digital Garage's market cap and
obscures the hidden value of Digital Garage's two main businesses,
online marketing and credit card payment processing.
We did not acquire shares in Digital Garage until almost two
months after launching on valuation grounds. This proved to be a
wise decision as we were able to purchase our stake two months
later at a price -18% lower than if we had purchased at launch. We
then trimmed our position in May as the share price had risen +41%
from our initial purchase, before opportunistically adding to our
position in August after a -10% fall in the price, bringing our
total average buy in price to Yen3,028 vs an end of year price of
Yen4,585.
For the first half of Digital Garage's financial year (six
months from March to September), Digital Garage's marketing and
credit card processing businesses grew profits by +50% and +28%
respectively. Being able to purchase these businesses on only a
9.3x EV/EBIT multiple despite such impressive growth rates make for
an attractive investment.
Fujitec
Contribution to total
return +1.9%
------------------------ -------
Weight in AJOT net
assets 5.5%
------------------------ -------
EV/EBIT 8.4
------------------------ -------
NFV/Market Cap 45.5%
------------------------ -------
Fujitec, a global elevator manufacturer, was AJOT's third most
significant contributor, adding +1.9% to returns. While seemingly a
cyclical business tied to construction spending, over half of
Fujitec's business, in fact, comes from maintenance and renewal
work. Elevator manufacturers are usually awarded the maintenance
contract following a new installation. This constitutes a sticky,
stable and high-margin revenue stream and can last for decades.
Additionally, once an elevator has reached the end of its useful
life, the manufacturer who built the lift and then maintained it,
is typically awarded the contract for its replacement.
The appeal of the business model is not lost on investors. Kone
and Schindler, two European-listed global manufacturers trade on
EV/EBIT multiples of 24x and 19x respectively. These valuations far
exceed the 8x that Fujitec trades on.
We attribute Fujitec's lower valuation to several factors. 1)
Poor balance sheet efficiency. One third of Fujitec's balance sheet
is allocated to low yielding cash and investment securities, which
accounts for 46% of Fujitec's market cap. These contribute little
to profits and are valued at a heavy discount by the market. 2)
Poison pill. Fujitec first introduced a poison pill in 2007 to fend
off a proposed buyout. By restricting potential buyers, it removes
the possibility of a takeover, thus leading to a valuation
discount. 3) Weaker margins. Fujitec suffers from lower margins
than peers, 7% vs 12%, driven by lower scale and an overly
diversified exposure to non-core geographies. 4) Lack of sell-side
coverage. No sell-side analysts cover Fujitec while 30 cover Kone
and 21 Schindler.
We are working with management and the Board to address these
problems who have so far been receptive to our suggestions.
Considering not only the valuation upside but also margin upside,
Fujitec represents one of the most compelling investments in AJOT's
portfolio.
Toshiba Plant
Contribution to total
return +1.5%
------------------------ -------
Weight in AJOT net
assets 0.0%
------------------------ -------
EV/EBIT n/a
------------------------ -------
NFV/Market Cap n/a
------------------------ -------
Even though Toshiba Plant spent most of the period as a
detractor from performance, after an offer from Toshiba Corp at a
+28% premium, it ended the period as our fourth-largest contributor
adding +1.5% to returns.
Toshiba Plant is an engineering and construction company
offering a full solution to industrial projects, such as power
plants, factories and solar farms. With the know-how acquired from
construction, Toshiba Plant offers maintenance solutions
post-build, which are stable and highly profitable. Since it became
a fully integrated engineering and construction company in 2004,
profits have grown at an annualised rate of 12.3% and in 16 years,
profits declined only once.
Toshiba Plant's business is intertwined with Toshiba Corp's.
Toshiba Plant is given subcontract work from Toshiba, most notably
for the maintenance of Toshiba's nuclear power plants, and as such
it made little sense for Toshiba Plant to operate as a separate
entity with minority shareholders. It has always been our
contention that Toshiba Corp would ultimately buy-in Toshiba Plant,
given the quality of Toshiba Plant's business and the synergies
that would accrue to the combined entity.
Our thesis was vindicated when in November, Toshiba Corp finally
made an offer to minority shareholders at a +28% premium. AJOT made
a +27% return on its investment, which given the short holding
period, crystallised a +35% IRR.
Nitto FC
Contribution to total
return +1.4%
------------------------ -------
Weight in AJOT net
assets 0.0%
------------------------ -------
EV/EBIT n/a
------------------------ -------
NFV/Market Cap n/a
------------------------ -------
Despite a relatively brief holding period, Nitto FC was our
fifth largest contributor. Nitto FC's strong business model and
extreme undervaluation was noticed by a Japanese private equity
firm, who took the company private at a +38% premium in May. Before
the takeover, Nitto FC was trading with 83% of its market cap
covered by net cash, and an EV/EBIT of 3.3x. In a little over six
months, our investment in Nitto FC garnered a profit of +56%,
adding 1.4% to returns.
Nitto FC is a good example of the opportunity for private equity
investors. Given compelling valuations and potential for efficiency
gains, global private equity managers are increasing their exposure
to Japan. George Roberts, of KKR, remarked that Japan is KKR's
highest priority other than the US. With increasing scrutiny from
public shareholders going private is becoming a viable option for
companies. For AJOT, the presence of private equity increases the
chances of our companies being taken over at a large premium,
providing a catalyst for realising the underlying value in the
portfolio.
Detractors
Hi-Lex
Contribution to total
return -0.5%
------------------------ -------
Weight in AJOT net
assets 1.1%
------------------------ -------
EV/EBIT 2.4
------------------------ -------
NFV/Market Cap 81.7%
------------------------ -------
Hi-Lex was our largest detractor over the period, hindering
overall returns by -0.5%. Hi-Lex produces a small range of
essential auto components including window and door opening systems
and control cables. The Company faces a declining market for a
portion of their control cable sales (approximately 10% of total
sales) which, over the coming decades are not needed in electric
vehicles. As a result Hi-Lex has been allocating capital to door
and window products, which are lower margin. This expansionary
capital expenditure and lower margin product mix has led to
declining profitability.
The last twelve months have been tough for Hi-Lex, cutting full
year forecasts midway through the year, with operating profits
falling over -30% for a second year in a row as the auto industry
continues to be surrounded by uncertainty and weak sentiment.
Although the company expects weaker sales in 2020, they also guided
for a big upswing in operating profits, to which the market has
responded favourably. Despite a difficult year Hi-Lex remains
attractive on valuation grounds. Net cash accounts for 58% of
Hi-Lex's market cap which, when including stakes in other listed
companies, rises to 82% of the market cap. Hi-Lex thus trades on an
EV/EBIT of 2.4x.
Although Hi-Lex has fallen -15% from our purchase price, its
small average 1.5% weight over the period reduced its impact on
portfolio returns, detracting only -0.5% overall.
Konishi
Contribution to total
return -0.4%
------------------------ -------
Weight in AJOT net
assets 4.7%
------------------------ -------
EV/EBIT 3.3
------------------------ -------
NFV/Market Cap 56.1%
------------------------ -------
Konishi was a lacklustre performer over the period, more painful
in relative rather than absolute terms. Its share price fell -4%
from our average buy-in price, on weaker than anticipated operating
profits and a lack of corporate governance improvement.
Konishi is a chemical company that manufactures adhesives,
sealants and tape. It is best known for its glue brand in Japan
called "Bondo", the equivalent of "Super Glue" in the UK. It also
sells sealants for DIY home repairs and to professionals in the
construction industry. Through the sale of sealants to
professionals, it has successfully expanded its business into
construction, particularly infrastructure repair work. With Japan's
aging infrastructure, repair work is a useful tailwind for Konishi.
A pure play peer in this area trades on an EV/EBIT of 19x showing
the exciting dynamics of the industry.
We have been disappointed with the lack of progress Konishi has
made to improve corporate governance. With a payout ratio of just
20%, only two independent directors on a nine-person board, and 31%
of total assets in cash and investment securities, there is much to
be improved. Collectively with AVI Global Trust, we own 3.6% of
Konishi's voting rights, and given the underwhelming share price
performance, we plan to step up our engagement with the Board over
the coming year.
Tokyo Broadcasting System
Contribution to total
return -0.2%
------------------------ --------
Weight in AJOT net
assets 5.0%
------------------------ --------
EV/EBIT <0.0
------------------------ --------
NFV/Market Cap 113.9%
------------------------ --------
Tokyo Broadcasting System ("TBS") has continued to be a
frustrating holding in the portfolio. Since the launch of AJOT its
share price has fallen -13.7%, even as the share prices of its two
largest cross-shareholdings, Tokyo Electron and Recruit, rose by
+67.1% and +27.6% respectively. TBS's stakes in these two companies
have now swollen to 95% of TBS's market cap.
In their full-year results management gave a weak outlook for
the FY2020 profitability due to reorganisation costs and the
beginning of 4K broadcasting. This was compounded by announcing a
dividend pay-out ratio of only 23% (below the company's stated 30%
policy) and giving no further strategy for reducing
cross-shareholdings. Investors had previously been hopeful for the
prospects of a strategic change in policy, following a sell-side
research note in February which explicitly mentioned the
possibility of a large-scale sale of securities and greater
shareholder returns through buybacks and dividends. The market
reaction to the announcements was distinctly negative, with the
stock falling by -15%.
Further disappointment came when TBS declined to take part in
either Tokyo Electron's buyback or a block offering of Recruit
shares. We were disappointed by this as both represented
opportunities to reduce the extraordinarily large allocation in
TBS's NAV.
Against this, there are some grounds for optimism: in March, TBS
sold down around 8% of one of its largest holdings, Tokyo Electron,
introduced stock-based compensation for directors, and there was a
3% reduction in key allegiant shareholders' stakes.
Despite a difficult year, we believe that the investment case
for TBS remains strong. It has excess cash, listed securities, and
prime Tokyo real estate which cover its market capitalisation
almost two times over. TBS is, in effect, an asset manager with a
small broadcasting business. Whilst thus far TBS has been ambiguous
in its intentions for these assets, we believe that if it were to
announce a clearly defined strategic policy to reduce its
over-capitalised balance sheet, the market would reward the company
with a much higher share price. We remain in regular dialogue with
TBS's board of directors in order to produce a satisfactory outcome
for all stakeholders. We added to our position on share price
weakness during the year.
Environmental, Social & Governance Issues
AVI undertakes detailed research on its existing and candidate
holdings, and environmental, social and governance (ESG) factors
form part of this research process. Our process does not involve
the use of a filter to screen out stocks that score poorly on an
ESG scale, or a filter to only include positive-scoring ESG stocks.
We assess each potential investment on a case-by-case basis to
identify potential strengths and weaknesses in a firm's conduct and
operations. We believe that firms which score highly on ESG metrics
have a beneficial impact on society and, as such, we work hard with
the companies we invest in where we see deficiencies that can be
corrected.
The emphasis in AJOT's portfolio is on governance factors. A
significant amount of AVI's research process is dedicated to
understanding the shortcomings in governance practices that may
occur at your Company's investments. These shortcomings include,
among others: ine cient balance sheets, low dividend payouts and
share buybacks, depressed returns on equity, excessive board tenure
policies, lack of board independence, and outdated corporate
defence tools (such as poison pills). Where our analysis reveals
less-than-ideal corporate governance practices, we engage with the
board and management in a constructive and private manner in order
to provide our expertise on the matter and to suggest solutions
that will benefit all stakeholders. In so doing, we believe that we
can unlock value for shareholders.
AVI respects the protection of the environment. We are
encouraged that the World Business Council for Sustainable
Development (WBCSC) has reported positively on Japan in their 2019
report : 'There is a strong focus on disclosure of corporate
performance on environmental issues. Environmental topics are
covered by 71% of reporting provisions in Japan, compared to 62%
for the rest of the world and 65% for major economies.'
We aim to understand the network of relationships within which
the investee company exists, including relationships with
suppliers, customers, employees and society-at-large. We engage in
dialogue with companies where we see practices that could be
improved; an area of particular focus is employee relationships. In
this regard, we have been pleased to see progress in Japan on
minimum wage laws, greater female participation in the workforce
generally, and a reduction in the levels of overtime required of
employees.
Outlook
Standards of corporate governance in Japan are improving, along
with an increased focus on shareholder returns. Record share
buybacks during 2019 point to a growing acceptance by Japanese
corporates that their ever increasing levels of surplus cash ought
to be put to better use than simply sitting idly on their balance
sheets. With large parts of the Japanese stock market -
particularly the small and midcap segments - trading at low
valuation multiples, there is huge scope for prices to re-rate
upwards. At the heart of the renewed focus on shareholder returns,
lies shareholder engagement. This has not been a particularly
fruitful or popular activity in the past. However, the Stewardship
Code along with the Corporate Governance Code, are encouraging
domestic and foreign investors to engage with the management of the
companies they are invested in. The increased levels of shareholder
engagement are having an impact and we believe they will continue
to do so.
Alongside shareholder engagement and company share buybacks, we
have also seen increased levels of corporate activity. During the
year Japan even experienced a number of contested takeovers-
something that the country has rarely experienced before. This
points to a recognition that some Japanese companies are
under-valued and there is plenty of scope for unlocking this
value.
AJOT will continue to try and identify the best possible
candidates for inclusion in our concentrated portfolio. We will
continue to engage pro-actively with the companies we are invested
in on your behalf. And we are confident that there is plenty of
upside within the existing portfolio.
We thank you for your support.
Joe Bauernfreund
Asset Value Investors Limited
Top 10 investments*
1. SK Kaken (7.1% of portfolio, 5.2 ev/ebit)
SK Kaken specialises in industrial paints, commanding more than
50% domestic market share. It is a stable business with consistent
earnings and margins but a low payout ratio has led to cash
ballooning on the balance sheet. This capital inefficiency masks an
otherwise high-quality business.
2. Teikoku Sen-i (6.9% of portfolio, 4.9 ev/ebit)
Founded as a textile company, Teikoku Sen-i's main business now
is in manufacturing disaster prevention equipment. It has a strong
track record of growth with high operating margins. Despite this it
trades at a 34% discount due to an inefficient balance sheet and
other corporate governance failings.
3. Digital Garage (5.7% of portfolio, 9.3 ev/ebit)
Its three main business interests are in: credit card payment
processing, online market, and venture investments. Digital Garage
has a good track record of incubating young tech businesses in
Japan and being at the front of digital innovation. It also has a
large stake in the online price comparison site Kakaku.com which
accounts for 47% of Digital Garage's NAV.
4. Fujitec (5.5% of portfolio, 8.4 ev/ebit)
A leading manufacturer of lifts and escalators with a global
presence. It trades at a significant discount compared to global
peers due to weak margins outside of Japan, low ROE exacerbated by
a large cash pile on its balance sheet, and the presence of a
poison pill. We believe that with some improvements in corporate
governance and margins Fujitec should be trading at the same
multiples as its global competitors and there is room for
considerable upside.
5. C Uyemura (5.3% of portfolio, 4.9 ev/ebit)
C Uyemura makes plating and surface finishing related chemical
products. Although it has a long history of developing and
manufacturing high-quality products, several years of hoarding
cash, opaque business and capital allocation strategies have
depressed its value. We were very pleased to see C Uyemura conduct
its first buyback in eight years, which the market viewed very
favourably.
6. Pasona (5.3% of portfolio, <0 ev/ebit)
A staffing company providing dispatch workers and recruitment
services throughout Japan. Pasona has a 50% stake in Benefit One, a
provider of welfare agency services. Benefit One has grown rapidly
in recent years and Pasona's stake in the company is worth 277% of
its market cap. The listed subsidiary phenomenon is a problem
particularly acute in Japan and one we have paid close attention to
as it comes under increasing scrutiny and pressure.
7. Secom Joshinetsu (5.2% of portfolio, 2.8 ev/ebit)
Secom Joshinetsu, a regional subsidiary of Secom, is another
example of the problems of parent- subsidiary listings in Japan. It
operates in Niigata, Gunma, and Nagano prefectures providing
security services. Despite having similar business characteristics
to its parent, Secom, Secom Joshinetsu trades at a severe
discount.
8. Kato Sangyo (5.1% of portfolio, 2.8 ev/ebit)
A leading wholesaler of food and drinks, primarily in Japan but
growing fast abroad, particularly in South East Asia. As with many
other companies in AJOT the strength of its core business contrasts
strongly with inefficient deployment of its capital. Alongside a
string of unnecessary cross-shareholdings tying up capital, cash
takes up 36% of balance sheet assets, weighing down heavily on its
ROE.
9. Tokyo Broadcasting System (5.0% of portfolio, <0
ev/ebit)
TBS is a well-known broadcaster in Japan. The bulk of TBS's
value lies in its large real estate holdings and its
cross-shareholdings, most significantly in Tokyo Electron and
Recruit Holdings. The company justifies this misallocation of
capital on the grounds of protecting key business relationships,
but these reasons stand up to little scrutiny and consequently TBS
trades at a 47% discount.
10. Toyota Industries (4.7% of portfolio, 4.6 ev/ebit)
Originally the core of the Toyota Group, the links between
Toyota Industries and the Toyota Motor Group are still strong.
Toyota Industries owns 6.7% of the auto company and in turn is 30%
owned by Toyota Motor. This 6.7% stake is worth 85% of Toyota
Industries' market cap. Toyota Industries itself manufactures
forklifts, compressors for engines and air conditioning units. It
is the largest manufacturer worldwide of forklifts.
*All ev/ebit figures are estimates provided by AVI. Please refer
to the Glossary below.
Portfolio Construction
The objective of AVI's portfolio construction process is to
create a concentrated portfolio of about 20-30 holdings,
facilitating a clear monitoring process of the entire portfolio.
AVI picks stocks that meet our investment criteria and once we
decide to invest a minimum position size of approximately 2% of the
portfolio is initiated. In determining position sizes, AVI is
mindful of liquidity and the likely timing of any catalysts to
unlock value. Often, a key consideration will be the make-up of the
shareholder register, as this will indicate the likely support AVI
could expect in any shareholder proposal it submits to the company.
The portfolio is diverse in the industries within it but we are
sector agnostic and select investments based on quality and
value.
Geographic Location of Portfolio Company Headquarters
Tokyo 48%
------------ -----
Kansai 41%
------------ -----
Nagoya 5%
------------ -----
Niigata 5%
------------ -----
Hiroshima 1%
Equity Portfolio Value by Market Capitalisation
35.5% GBP250m-GBP500m
------- -----------------
27.5% GBP500m-GBP1bn
------- -----------------
25.0% >GBP1 billion
------- -----------------
12.0% <GBP250m
Portfolio Value by Sector
39.7% Industrials
------- ------------------------
21.1% Materials
------- ------------------------
17.2% Consumer Discretionary
------- ------------------------
7.1% Information Technology
------- ------------------------
5.2% Consumer Staples
------- ------------------------
5.1% Communication Services
------- ------------------------
4.6% Health Care
Investment Portfolio
At 31 December 2020
% of
Stock % of Market AJOT
Exchange investee Cost value net NFV/Market
Company Identifier company GBP'000* GBP'000 assets Capitalisation(1) EV/EBIT(1)
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
SK Kaken JASDAQ: 4628 0.8 8,763 9,110 7.1% 62% 5.2
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Teikoku Sen-i TSE: 3302 2.0 8,513 8,775 6.9% 58% 4.9
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Digital
Garage TSE: 4819 0.5 5,203 7,242 5.7% 62% 9.3
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Fujitec TSE: 6406 0.6 5,460 7,049 5.5% 46% 8.4
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
C. Uyemura TSE: 4966 1.2 5,895 6,760 5.3% 57% 4.9
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Pasona TSE: 2168 1.5 6,228 6,722 5.3% 274% <0
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Secom
Joshinetsu TSE:4342 1.8 5,564 6,565 5.2% 74% 2.8
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Kato Sangyo TSE: 9869 0.7 6,327 6,522 5.1% 77% 2.8
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Tokyo
Broadcasting
System TSE: 9401 0.3 6,624 6,409 5.0% 114% <0
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Toyota
Industries TSE: 6201 0.0 6,051 6,039 4.7% 72% 4.6
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Top ten investments 64,628 71,193 55.8%
------------------------------- ---------- ----------- ----------- ---------- -------------------- -------------
Konishi TSE: 4956 1.3 6,282 5,901 4.6% 56% 3.3
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Fukuda Denshi JASDAQ: 6960 0.5 5,203 5,735 4.5% 65% 3.8
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Daiwa
Industries TSE: 6459 1.1 4,920 4,957 3.9% 90% 1.0
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Seikisui
Jushi TSE: 4212 0.6 4,467 4,897 3.8% 69% 3.4
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Toagosei TSE: 4045 0.4 4,507 4,733 3.7% 58% 4.5
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Kanden TSE: 8081 1.6 3,997 4,282 3.3% 72% 2.9
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Tokyo
Radiator MFG TSE: 7235 3.3 3,105 3,028 2.4% 91% 1.1
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Alps
Logistics TSE: 9055 1.4 2,989 2,976 2.3% 38% 4.8
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
King TSE: 8118 2.8 2,638 2,652 2.1% 108% <0
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Nishimatsuya
Chain TSE: 7545 0.6 2,605 2,502 2.0% 97% 4.6
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Top twenty investments 105,341 112,856 88.4%
------------------------------- ---------- ----------- ----------- ---------- -------------------- -------------
Tachi-S TSE: 7239 0.7 2,523 2,298 1.8% 65% 5.1
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
A-One
Seimitsu JASDAQ: 6156 4.0 2,339 2,295 1.8% 96% 0.5
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Soft99 TSE: 4464 1.3 1,988 2,071 1.6% 94% 0.6
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
CAC Holdings TSE: 4725 0.8 1,541 1,719 1.4% 50% 5.4
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Nishikawa
Rubber TSE: 5161 0.6 1,594 1,466 1.2% 71% 1.4
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Hi-Lex TSE: 7279 0.3 1,658 1,416 1.1% 82% 2.4
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Aichi TSE: 6345 0.3 1,186 1,242 1.0% 57% 3.2
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Techno
Associe TSE: 8249 0.1 150 168 0.1% 80% 1.8
--------------- -------------- ---------- ----------- ----------- ---------- -------------------- -------------
Total investments 118,320 125,531 98.4%
------------------------------- ---------- ----------- ----------- ---------- -------------------- -------------
Other net assets and
liabilities 2,079 1.6%(2)
------------------------------- ---------- ----------- ----------- ---------- -------------------- -------------
Net assets 127,610 100.0%
* Please refer to Glossary below.
(1) Estimates provided by AVI. Refer to Glossary below.
(2) Gearing. Please refer to Glossary below.
Business Model
Company Status
The Company is registered as a public limited company under the
Companies Act 2006 and is an investment company under Section 833
of the Companies Act 2006. It is a member of The AIC.
The Company was incorporated on 27 July 2018 and listed on the
London Stock Exchange on 23 October 2018.
The Company has been approved as an investment trust under
Sections 1158/1159 of the Corporation Tax Act 2010. The Directors
are of the opinion, under advice, that the Company continues to
conduct its affairs as an Approved Investment Trust under the
Investment Trust (Approved Company) (Tax) Regulations 2011.
The Company qualifies as an Alternative Investment Fund in
accordance with the Alternative Investment Fund Managers Directive
("AIFMD").
Investment Objective
The Company's investment objective is to provide Shareholders
with capital growth in excess of the MSCI Japan Small Cap Total
Return Index, through the active management of a focused portfolio
of equity investments listed or quoted in Japan which have been
identified by AVI as undervalued and having a significant
proportion of their market capitalisation held in cash, listed
securities and/or realisable assets.
Investment Policy
The Company invests in a diversified portfolio of equities
listed or quoted in Japan which are considered by the Investment
Manager to be undervalued and where cash, listed securities and/or
realisable assets make up a significant proportion of the market
capitalisation. AVI seeks to unlock this value through proactive
engagement with management and taking advantage of the increased
focus on corporate governance and returns to shareholders in Japan.
The Board has not set any limits on sector weightings or stock
selection within the portfolio. Whereas it is not expected that a
single holding (including any derivative instrument) will represent
more than 10% of the Company's gross assets at the time of
investment, the Company has discretion to invest up to 15% of its
gross assets in a single holding, if a suitable opportunity
arises.
No restrictions are placed on the market capitalisation of
investee companies, but the portfolio is weighted towards small and
mid-cap companies. The portfolio normally exists of between 20 and
30 holdings although it may contain a lesser or greater number of
holdings at any time.
The Company may invest in exchange traded funds, listed anywhere
in the world, in order to gain exposure to equities listed or
quoted in Japan. On acquisition, no more than 15% of the Company's
gross assets will be invested in other UK listed investment
companies.
The Company may also use derivatives for gearing and efficient
portfolio management purposes.
The Company will not be constrained by any index benchmark in
its asset allocation.
Borrowing Policy
The Company may use borrowings for settlement of transactions,
to meet on-going expenses and may be geared through borrowings
and/or by entering into long-only contracts for difference or
equity swaps that have the effect of gearing the Company's
portfolio to seek to enhance performance.
The aggregate of borrowings and long-only contracts for
difference and equity swap exposure will not exceed 25% of NAV at
the time of drawdown of the relevant borrowings or entering into
the relevant transaction, as appropriate. It is expected that any
borrowings entered into will principally be denominated in JPY.
Hedging Policy
The Company does not currently intend to enter into any
arrangements to hedge its underlying currency exposure to
investments denominated in JPY, although the Investment Manager and
the Board may review this from time to time.
Material Changes to the Investment Policy
No material change will be made to the Company's investment
policy without Shareholder approval. In the event of a breach of
the Company's investment policy, the Directors will announce
through a Regulatory Information Service the actions which have
been taken to rectify the breach.
Management Arrangements
The Company has an independent Board of Directors which has
appointed AVI, the Company's Investment Manager, as Alternative
Investment Fund Manager ("AIFM") under the terms of an Investment
Management Agreement ("IMA") dated 6 September 2018. The IMA is
reviewed annually by Board and may be terminated by one year's
notice from either party subject to the provisions for earlier
termination as stipulated therein.
The portfolio is managed by Joe Bauernfreund, the Chief
Executive Officer and Chief Investment Officer of AVI. He also
manages AVI Global Trust Plc and is responsible for all investment
decisions across the Investment Manager's strategies. He conducts
regular visits to Japan, engaging with prospective and current
investments, which he has done for over 15 years.
Management fees are charged in accordance with the terms of the
management agreement, and provided for when due. The Investment
Manager is entitled to an annual fee of 1% per annum of the lesser
of the Company's Net Asset Value or the Company's Market
Capitalisation, invoiced monthly in arrears. The IMA requires AVI
to invest not less than 25% of the management fee in shares in the
Company. Management fees paid during the period were GBP1,060,000
and the number of shares held by AVI is set out in note 14.
J.P. Morgan Europe Limited was appointed as Depositary under an
agreement with the Company and AVI dated 6 September 2018 (the
"Depositary Agreement"). The Depositary Agreement is terminable on
90 calendar days' notice from either party.
JPMorgan Chase Bank, London Branch, has been appointed as the
Company's Custodian under an agreement dated 6 September 2018 (the
"Custodian Agreement"). The Custodian Agreement is terminable on 90
calendar days' notice from the Company or 180 calendar days' notice
from the Custodian.
Link Company Matters Limited was appointed as corporate Company
Secretary on 27 July 2018. The current annual fee is GBP60,000,
which is subject to an annual RPI increase. The agreement may be
terminated by either party on six months' written notice.
Link Alternative Fund Administrators Limited has been appointed
to provide general administrative functions to the Company. The
Administrator receives an annual fee of GBP90,000. The agreement
can be terminated by either the Administrator or the Company on six
months' written notice, subject to an initial term of one year.
Directors' Duties
Overview
The Directors' overarching duty is to act in good faith and in a
way that is the most likely to promote the success of the Company
as set out in Section 172 of the Companies Act 2006 ("Section
172"). In doing so, Directors must take into consideration the
interests of the various stakeholders of the Company, the impact
the Company has on the community and the environment, take a
long-term view on consequences of the decisions they make as well
as aim to maintaining a reputation for high standards of business
conduct and fair treatment between the members of the Company.
Fulfilling this duty naturally supports the Company in achieving
its investment objective and helps to ensure that all decisions are
made in a responsible and sustainable way. In accordance with the
requirements of the Companies (Miscellaneous Reporting) Regulations
2018, the Company explains how the Directors have discharged their
duty under Section 172 below.
To ensure that the Directors are aware of, and understand, their
duties they are provided with the pertinent information when they
first join the Board as well as receive regular and ongoing updates
and training on the relevant matters. They also have continued
access to the advice and services of the Company Secretary, and
when deemed necessary, the Directors can seek independent
professional advice. The schedule of matters reserved for the
Board, as well as the terms of reference of its committees are
reviewed on at least an annual basis and further describe
Directors' responsibilities and obligations, and include any
statutory and regulatory duties. The Audit Committee has the
responsibility for the ongoing review of the Company's risk
management systems and internal controls and, to the extent that
they are applicable, risks related to the matters set out in
Section 172 are included in the Company's risk register and are
subject to periodic and regular reviews and monitoring.
Decision-making
The importance of the stakeholder considerations, in particular
in the context of decision-making, is taken into account at every
Board meeting. All discussions involve careful considerations of
the longer-term consequences of any decisions and their
implications for stakeholders.
Stakeholders
The Board seeks to understand the needs and priorities of the
Company's stakeholders and these are taken into account during all
its discussions and as part of its decision-making. During the
period under review, the Board has discussed which parties should
be considered as stakeholders of the Company. Following thorough
review, it was concluded that, as the Company is an externally
managed investment company and does not have any employees or
customers, its key stakeholders comprise its Shareholders and
service providers. The section below discusses why these
stakeholders are considered of importance to the Company and the
actions taken to ensure that their interests are taken into
account.
Importance Board Engagement
------------------------------ --------------------------------------------------------------
Shareholders
------------------------------ --------------------------------------------------------------
Continued shareholder The Company has over 200 shareholders,
support and engagement including institutional and retail investors.
are critical to existence The Board is committed to maintaining
of the business and open channels of communication and to
the delivery of the engage with Shareholders in a manner which
long-term strategy they find most meaningful, in order to
of the business. gain an understanding of the views of
Shareholders. These include:
The Directors intend
to offer shareholders * Annual General Meeting ("AGM") - The Company welcomes
the opportunity to and encourages attendance and participation from
exit the Company at shareholders at the AGM. Shareholders have the
close to NAV in October opportunity to meet the Directors and Investment
2022 and every two Manager and to address questions to them directly.
years thereafter. The Investment Manager attends the AGM and will
The Board and Corporate provide a presentation on the Company's performance
Broker will canvass and the future outlook. The Company values any
opinion from Shareholders feedback and questions it may receive from
in the months leading Shareholders ahead of and during the AGM and will
up to October 2022 take action or make changes, when and as appropriate;
(and at each appropriate
interval thereafter)
when making any decision * Publications - The Annual Report and Half-Year
in respect of any results are made available on the Company's website
potential Exit Opportunity. and the Annual Report is circulated to Shareholders.
These reports provide Shareholders with a clear
understanding of the Company's portfolio and
financial position. This information is supplemented
by the daily calculation and publication of the NAV
per share and a monthly factsheet and quarterly
reports which are available on the Company's website
and the publication of which is announced via a
Regulatory Information Service. Feedback and/or
questions the Company receives from the Shareholders
help the Company evolve its reporting, aiming to
render the reports and updates transparent and
understandable;
* Shareholder meetings - Unlike trading companies,
Shareholder meetings often take the form of meeting
with the Investment Manager rather than members of
the Board. Shareholders are able to meet with the
Investment Manager throughout the period and the
Manager provides information on the Company and
videos of the Investment Manager on the Company's
website and via various social medial channels.
Feedback from all meetings between the Investment
Manager and Shareholders is shared with the Board.
The Chairman, the Chairman of the Audit Committee or
other members of the Board are available to meet with
shareholders to understand their views on governance
and the Company's performance where they wish to do
so. With assistance from the Manager, the Chairman
seeks meetings with Shareholders who might wish to
meet with him;
* Shareholder concerns - In the event Shareholders wish
to raise issues or concerns with the Directors, they
are welcome to do so at any time by writing to the
Chairman at the registered office. Other members of
the Board are also available to Shareholders if they
have concerns that have not been addressed through
the normal channels; and
* Investor Relations updates - at every Board meeting,
the Directors receive updates from the Company's
broker on the share trading activity, share price
performance and any Shareholders' feedback, as well
as an update from the Investment Manager on any
publications or comments by press. To gain a deeper
understanding of the views of its Shareholders and
potential investors, the Investment Manager will also
undertake regular Investor Roadshows. Any pertinent
feedback is taken into account when Directors discuss
the share capital, any possible fundraisings or the
dividend policy and actioned as and when appropriate.
The willingness of the shareholders, including the
partners and staff of the Investment Manager, to
maintain their holdings over the long term period is
another way for the Board to gauge how the Company is
meeting its objectives and suggests a presence of a
healthy corporate culture.
------------------------------ --------------------------------------------------------------
Other stakeholders
------------------------------ --------------------------------------------------------------
The Investment Manager
------------------------------ --------------------------------------------------------------
Holding the Company's Maintaining a close and constructive working
shares offers investors relationship with the Investment Manager
an investment vehicle is crucial as the Board and the Investment
through which they Manager both aim to continue to achieve
can obtain exposure consistent, long-term returns in line
to AJOT's diversified with its investment objective. Important
portfolio of Japanese components in the collaboration with the
equities. The Investment Investment Manager, representative of
Manager's performance the Company's culture are:
is critical for the
Company to successfully * Encouraging open discussion with the Manager,
deliver its investment allowing time and space for original and innovative
strategy and meet thinking;
its objective to provide
Shareholders with
capital growth in * The IMA requires AVI to invest not less than 25% of
excess of the MSCI the management fee in shares in the Company and to
Japan Small Cap Index hold these for a minimum of two years, which ensures
through active management that that the interests of Shareholders and the
of the portfolio and Investment Manager are well aligned;
engagement with portfolio
companies.
* Recognising the alignment of interests mentioned
above, adopting a tone of constructive challenge,
balanced with robust negotiation of the Manager's
terms of engagement if those interests should not be
fully congruent;
* Drawing on Board Members' individual experience and
knowledge to support the Manager in its monitoring of
and engagement with portfolio companies; and
* Willingness to make the Board Members' experience
available to support the Manager in the sound
long-term development of its business and resources,
recognising that the long-term health of the
Investment Manager is in the interests of
Shareholders in the Company.
------------------------------ --------------------------------------------------------------
The Administrator, the Company Secretary, the Registrar, the
Depositary, the Custodian and the Corporate Broker
----------------------------------------------------------------------------------------------
In order to function The Board maintains regular contact with
as an investment trust its key external providers and receives
with a premium listing regular reporting from them, both through
on the London Stock the Board and committee meetings, as well
Exchange, the Company as outside of the regular meeting cycle.
relies on a diverse Their advice, as well as their needs and
range of reputable views are routinely taken into account.
advisors for support The Board formally assesses their performance,
in meeting all relevant fees and continuing appointment at least
obligations. annually to ensure that the key service
providers continue to function at an acceptable
level and are appropriately remunerated
to deliver the expected level of service.
The Audit Committee reviews and evaluates
the control environments in place at each
service provider.
------------------------------ --------------------------------------------------------------
Lender
------------------------------ --------------------------------------------------------------
Availability of funding Therefore, the Company aims to demonstrate
and liquidity are to lenders that it is a well-managed business,
crucial to the Company's capable of consistently delivering long-term
ability to take advantage returns.
of investment opportunities
as they arise.
------------------------------ --------------------------------------------------------------
Proxy Advisors
------------------------------ --------------------------------------------------------------
The evolving practice The Board recognises that the views, questions
and support (or lack from, and recommendations of many proxy
thereof) of proxy adviser agencies provide a valuable feedback
adviser agencies are mechanism and play a part in in highlighting
important to the Directors, evolving Shareholders' expectations and
as the Company aims concerns. When deemed relevant, the Company
to build a good reputation will engage with proxy advisers regarding
and maintain high resolutions that will be proposed to the
standards of corporate Company's Shareholders at AGMs and, based
governance, which on feedback received, incorporate changes
contribute to the to future Annual Reports and Accounts
long-term sustainable to enhance disclosures.
success of the Company.
------------------------------ --------------------------------------------------------------
Regulators
------------------------------ --------------------------------------------------------------
The Company can only The Company follows voluntary and best-practice
operate with the approval guidance and regularly considers how it
of its regulators meets various regulatory and statutory
who have a legitimate obligations and how any governance decisions
interest in how the it makes can have an impact on its stakeholders,
Company operates in both in the shorter and in the longer-term.
the market and treats
its shareholders.
The above mechanisms for engaging with stakeholders are kept
under review by the Directors and will be discussed on a regular
basis at Board meetings to ensure that they remain effective.
Culture
The Directors agree that establishing and maintaining a healthy
corporate culture within the Board and in its interaction with the
Investment Manager, Shareholders and other stakeholders will
support the delivery on its purpose, values and strategy. The Board
seeks to promote a culture of openness, debate and integrity
through ongoing dialogue and engagement with its service providers,
principally the Investment Manager.
The Board strives to ensure that its culture is in line with the
Company's purpose, values and strategy. The Company has a number of
policies and procedures in place to assist with maintaining a
culture of good governance including those relating to diversity,
Directors' conflicts of interest and Directors' dealings in the
Company's shares. The Board assesses and monitors compliance with
these policies as well as the general culture of the Board
regularly through Board meetings and in particular during the
annual evaluation process which is undertaken by each Director (for
more information see the performance evaluation section on page 30
of the Annual Report).
The Board seeks to appoint the best possible service providers
and evaluates their service on a regular basis. The Board considers
the culture of the Investment Manager and other service providers,
including their policies, practices and behaviour, through regular
reporting from these stakeholders and in particular during the
annual review of the performance and continuing appointment of all
service providers.
Environmental, Social and Governance Matters
As an investment company, the Company's own direct environmental
impact is minimal. The Company has no greenhouse gas emissions to
report from its operations, nor does it have responsibility for any
other emissions producing sources under the Companies Act 2006
(Strategic Report and Directors' Reports) Regulations 2013 or the
Companies (Directors' Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018.
The Company's operations are delegated to third-party service
providers, and the Company has no employees. The Board seeks
assurances, at least annually, from its suppliers that they comply
with the provisions of the relevant Acts.
The Directors do not have service contracts. There are four
Directors, two male and two female. Further information on the
Board's policy on diversity and recruitment of new Directors is on
pages 28 and 29 of the Annual Report.
Both the Board and AVI recognise that social, human rights,
community, governance and environmental issues have an effect on
its investee companies. The Board supports AVI in its belief that
good corporate governance will help to deliver sustainable
long-term shareholder value. AVI is an investment management firm
that invests on behalf of its clients and its primary duty is to
produce returns for its clients. AVI seeks to exercise the rights
and responsibilities attached to owning equity securities in line
with its investment strategy. A key component of AVI's investment
strategy is to understand and engage with the management of public
companies. AVI's Stewardship Policy recognises that shareholder
value can be enhanced and sustained through the good stewardship of
executives and boards. It therefore follows that in pursuing
Shareholder value AVI will implement its investment strategy
through proxy voting and active engagement with management and
boards. Further details on AVI's Environmental, social and
governance policy can be found on page 22 of the Annual Report.
KPIs
The Company's Board meets regularly and at each meeting reviews
performance against a number of key measures. In selecting these
measures, the Directors considered the key objectives and
expectations of typical investors in an investment trust such as
the Company.
Net Asset Value Performance in Absolute and Relative Terms
+14.3% 23 October 2018 to 31 December 2019
+11.9% Annualised
The Directors regard the Company's NAV total return as being the
overall measure of value delivered to Shareholders over the long
-term. Total return reflects both the net asset value growth of the
Company and also dividends paid to Shareholders. Since the launch
on 23 October 2018 the Company's NAV has increased 14.3% resulting
in an annualised return of 11.9%. The Investment Manager's
investment style is such that performance is likely to deviate
materially from that of any broadly based equity index. The Board
considers the most useful comparator to be the MSCI Japan Small Cap
Total Return Index. Since the launch on 23 October 2018 the
benchmark has increased 7.9% resulting in an annualised return of
6.6%. A full description of performance and the investment
portfolio is contained in the Investment Manager's Report.
Discount/Premium
2.0% Premium - 31 December 2019
12.4% Premium - High for the period
0.8% Discount - Low for the period
The Board believes that an important driver of an investment
trust's discount or premium over the long-term is investment
performance. However, there can be volatility in the discount or
premium. Therefore, the Board seeks Shareholder approval each year
to buy back and issue shares with a view to limiting the volatility
of the share price discount or premium. During the period under
review, 34.9 million new shares were issued through placings and
under the authorisation granted by the Company's Block Listing
Facility.
Peer Group NAV Performance Total Return AIC Japanese Smaller
Companies Sector*
+14.3% AVI Japan Opportunity Trust
+16.9% Atlantis Japan Growth
+11.7% JPMorgan Japan Smaller Companies
+10.8% Average AIC peer group
+3.9% Baillie Gifford Shin Nippon
The Board is aware of other investment trusts in The AIC
Japanese Smaller Companies Sector. Each investment trust has its
own focus and strategy which will di er from the one implemented by
AVI. The Company's activist approach is concurrent with the focus
on corporate governance reform taking place in Japan.
*Returns are for the period 23 October 2018 to 31December
2019
Ongoing Charges
1.64% - 31 December 2019
The Board continues to be conscious of expenses and aims to
maintain a sensible balance between good service and costs. In
reviewing charges, the Board reviews in detail each year the costs
incurred and ongoing commercial arrangements with each of the
Company's key suppliers. The majority of the ongoing charges ratio
is the cost of the fees paid to the Investment Manager. This fee is
reviewed annually and the Board believes that the cost is
reasonable, given the Investment Manager's activist approach to
fund management and the resources required to provide the level of
service. The Company adheres to The AIC guidance in calculating its
ongoing charges ratio.
Going Concern
The Directors have made an assessment of the Company's ability
to continue as a going concern and are satisfi ed that the Company
has adequate resources to continue in operational existence for the
foreseeable future (being a period of at least 12 months from the
date these fi nancial statements were approved). Furthermore, the
Directors are not aware of any material uncertainties that may cast
signifi cant doubt upon the Company's ability to continue as a
going concern, having taken into account liquidity of the Company's
investment portfolio and the Company's fi nancial position in
respect of its cash fl ows, borrowing facilities and investment
commitments (of which there are none of signifi cance). Therefore
the financial statements have been prepared on a going concern
basis.
Viability
The Directors consider viability as part of their continuing
programme of monitoring risk. The Directors believe five years to
be a reasonable time horizon to consider the continuing viability
of the Company, reflecting a balance between a longer-term
investment horizon and the inherent shorter-term uncertainties
within equity markets, although they do have due regard to
viability over the longer term and particularly to key points
outside this time frame, such as the due dates for the repayment of
long-term debt. The Company is an investment trust whose portfolio
is invested in readily realisable listed securities and with some
short-term cash deposits.
The five year time horizon is deemed appropriate despite the
fact that Shareholders will be given the opportunity to redeem
their investment at NAV on the fourth anniversary of the Company
(October 2022). Considering investment- and share price
performance, as well as apparent Shareholder satisfaction, the
Board does not anticipate more than a minimal take-up of the
redemption opportunity. The investment strategy remains robust and
the Board expects this to remain viable well beyond October
2022.
The following facts support the Directors' view of the viability
of the Company:
-- In the period under review, expenses (including finance costs
and taxation) were adequately covered by investment income;
-- The Company's investment portfolio is made up of listed equities;
-- The Company has short-term debt of Yen 2.3bn via an unsecured
revolving credit facility. This debt was covered over 9 times as at
the end of December 2019 by the Company's total assets. The
Directors are of the view that, subject to unforeseen
circumstances, the Company will have sufficient resources to meet
the costs of annual interest and eventual repayment of principal on
this debt; and
-- The Company has a large margin of safety over the covenants on its debt.
The Company's viability depends on the Japanese and the global
economy and markets continuing to function. The Directors also
consider the possibility of a wide-ranging collapse in corporate
earnings and/or the market value of listed securities. To the
latter point, it should be borne in mind that a significant
proportion of the Company's expenses are in ad valorem investment
management fees, which would reduce if the market value of the
Company's assets were to fall.
In order to maintain viability, the Company has a robust risk
control framework which follows the FRC guidelines and has the
objectives of reducing the likelihood and impact of: poor judgement
in decision-making, risk-taking that exceeds the levels agreed by
the Board, human error or control processes being deliberately
circumvented.
Taking the above into account, and the potential impact of the
principal risks as set out below, the Directors have a reasonable
expectation that the Company will be able to continue in operation
and meet its liabilities as they fall due for a period of five
years from the date of approval of this Annual Report.
Principal Risks and Uncertainties
The Prospectus issued in September 2018 (available from the
Company's website - www.ajot.co.uk) includes details of what the
Company considers to be the key principal risks faced by the
business. The Board has a robust ongoing process for identifying,
evaluating and managing the principal risks and uncertainties faced
by the Company, including those that could threaten its business
model, future performance, solvency or liquidity. However, as AJOT
has a limited operating history, some risks are not yet known and
some that are currently not deemed material, could later turn out
to be material. Following the risk assessment process described
above, the Board considers the following as the principal risks
faced by the Company and the following controls are in place to
manage or mitigate these risks:
Risk Area Controls and mitigation
------------------------------------------ --------------------------------------------
Investment Objective
------------------------------------------ --------------------------------------------
The Company may be unsuccessful The Company has a clearly defined
in achieving its investment strategy and investment remit.
objective, leading to a potential The portfolio is managed by
loss of demand for its shares. a highly experienced Investment
Manager backed by a strong team.
The Board relies on the Investment
Manager's skills and judgement
to make investment decisions
based on research and analysis
of individual stocks and sectors.
The Board reviews the performance
of the portfolio against the
Company's Benchmark Index, that
of its competitors and the outlook
of the markets on a regular
basis.
The Board ensures that there
is regular dialogue with major
investors, primarily through
the Company's broker and the
Investment Manager; it follows
up on any concerns and regularly
reviews the discount control
policy.
------------------------------------------ --------------------------------------------
Investment opportunities matching The Board monitors the portfolio's
the criteria encapsulated in composition, performance and
the investment objective may development. Should appropriate
become less available in the opportunities diminish, the
future. Board will consider the future
of the Company and may
recommend that the Company's
investments are sold, it is
wound up and cash returned to
Shareholders.
------------------------------------------ --------------------------------------------
Gearing
------------------------------------------ --------------------------------------------
The use of borrowings by the The Board and the Investment
Company has the e ect of amplifying Manager regularly review gearing,
the gains or losses the Company as well as the e ect of interest
experiences. rate movements on the Company's
finances and the Company's on-going
A significant fall in portfolio compliance with the loan covenants.
value could cause gearing levels Aggregate borrowings may not
to exceed pre-set limits, requiring exceed 25% of net assets.
the Company to sell investments
at short notice. The Company entered into a 364
day Yen1.465 billion unsecured
revolving facility agreement
with Scotiabank Europe PLC which
was increased by Yen1.465 billion
in October 2019. As at 31 December
2019, Yen2.3 billion (GBP16
million) of the facility had
been drawn. Interest is payable
at a rate equal to LIBOR plus
0.75%. As at 31 December 2019,
gearing stood at 13%.
------------------------------------------ --------------------------------------------
Reliance on the Investment Manager and Other Service Providers
----------------------------------------------------------------------------------------
The Company has no employees The Board carries out regular
and relies on a number of third-party reviews of the delegated services
service providers, principally to ensure their continued competitiveness
the Investment Manager, Registrar, and e ectiveness, which include
Administrator and Custodian assessment of the providers'
/ Depositary. It is dependent control systems, whistleblowing
on the e ective operation of policies and business continuity
its service providers' control plans.
systems with regard to the security
of the Company's assets, dealing
procedures, accounting records
and the maintenance of regulatory
and legal requirements.
------------------------------------------ --------------------------------------------
The Company is heavily reliant The Investment Manager has an
on the Investment Manager's established investment process
processes, both in terms of which has proven to be successful
making investment decisions within the AVI Global Trust
and compliance with the investment plc portfolio. The Board evaluates
policy. the investment process and compliance
with investment limits and restrictions
in conjunction with its portfolio
review at every board meeting.
------------------------------------------ --------------------------------------------
Cyber Security
------------------------------------------ --------------------------------------------
The Company has limited direct The Board monitors the preparedness
exposure to cyber risk. However, of its service providers in
the Company's operations or this regard and is satisfied
reputation could be a ected that the risk is given due priority.
if any of its service providers
su ered a major cyber security
breach.
------------------------------------------ --------------------------------------------
Portfolio Liquidity
------------------------------------------ --------------------------------------------
The market for smaller Japanese The Investment Manager monitors
stocks can be illiquid. The trading volumes and prices and
Company is exposed to the risk looks to ensure that a proportion
that it will not be able to of the portfolio is invested
sell its investments at the in readily realisable assets.
current market value or on a
timely basis, when the Investment The Board also receives updates
Manager chooses or is required on the liquidity of the portfolio
to do so to meet financial liabilities. and the current level of liquidity
of the Company on a regular
basis.
------------------------------------------ --------------------------------------------
Foreign Exchange
------------------------------------------ --------------------------------------------
The functional and presentational It is the Company's current
currency of the Company is Pounds policy not to hedge against
Sterling. All investments with currency risk, however the Investment
income derived from these investments Manager and the Board continuously
are denominated in Japanese monitor currency movements and
Yen. Costs of the Company are exposure.
denominated in Pounds Sterling.
The Company is subject to currency The revolving credit facility
risk on exchange rate movements is denominated in Yen and therefore
between Pounds Sterling and the e ect of Yen exchange rate
Japanese Yen. movements on the drawn down
facility will be o set against
the assets.
Environmental, social and governance policy
Factor What we look at The tools we use
--------------- ------------------------------------------------------------- -------------------------------------------------------
Governance Good governance has always We engage with our investee
been at the core of AVI's businesses in a variety
investment approach. The of ways. Our preference
two areas of focus are: is for collaborative engagement
with management, although
* How managers and directors guide a business. This we will have the ability
includes topics such as dividend policy, capital and willingness to bring
expenditure, merger and acquisition activity, and issues to broader attention
buybacks. where we deem it necessary.
The Corporate Governance
and Stewardship Codes provide
* The set of rules that describes the company's a useful framework for
governing mechanisms, including incentive and our interactions with companies,
compensation structures, tenure policy, shareholde as they provide a set of
r standards against which
rights and remedies, and (specifically in Japan) we can measure a company's
poison pills. standing and progress.
The various methods through
which we engage with companies
include: voting at AGMs;
letters to boards requesting
change; dialogue (usually
via meetings and letters)
with management and boards
about governance issues.
--------------- ------------------------------------------------------------- -------------------------------------------------------
Social We try to understand the As a minority shareholder,
social system that an investee AVI advises and guides
company operates within. its investee companies
The areas of focus are: in these areas.
* The stakeholder relationships between the company and In this regard, we have
its suppliers, customers, employees, and been pleased to see progress
society-at-large. in Japan on minimum wage
laws, and a reduction in
levels of
overtime required of employees.
Areas of engagement for
the 'Social' aspect include:
* Discussions on unequal relationships between
stakeholders and how they can be remedied.
* How employees are remunerated.
--------------- ------------------------------------------------------------- -------------------------------------------------------
Environmental As a responsible steward Our influence is limited
of capital, AVI fully supports as AVI is not involved
policies and actions implemented in the day-today activities
by its portfolio companies of its portfolio companies.
to support a sustainable However, we look to understand
environment. a company's stewardship
of the environment to ensure
that there are no egregious
practices.
--------------- ------------------------------------------------------------- -------------------------------------------------------
Approval of Strategic Report
The Strategic Report has been approved by the Board and is
signed on its behalf by:
Norman Crighton
Chairman
12 February 2020
Board of Directors
Norman Crighton, non-executive Chairman
Ekaterina Thomson (known as Katya), non-executive Chairperson of
the Audit Committee
Yoshi Nishio, non-executive Director
Margaret Stephens, non-executive Director
Extracts from the Directors' Report
Share Capital
The Company's share capital comprises Ordinary Shares with a
nominal value of 1p each. The voting rights of the shares on a poll
are one vote for each share held. There are no restrictions on the
transfer of the Company's Ordinary Shares or voting rights, no
shares which carry specific rights with regard to the control of
the Company and no agreement which the Company is party to that
affects its control following a takeover bid. To the extent that
they exist, the revenue profits of the Company (including
accumulated revenue reserves) are available for distribution by way
of dividends to the holders of the Ordinary Shares. Upon a
winding-up, after meeting the liabilities of the Company, the
surplus assets would be distributed to the Shareholders pro rata to
their holding of Ordinary Shares.
At 31 December 2019, there were 113,939,742 Ordinary Shares of
1p each in issue, of which none were held in treasury and therefore
the total voting rights attaching to Ordinary Shares in issue were
113,939,742. 950,000 shares were issued in the period from 1
January 2020 to 7 February 2020 and the voting rights attaching to
Ordinary Shares as at 7 February 2020 was 114,889,742.
The Directors intend to seek annual authority from Shareholders
to allot new Ordinary Shares, to disapply pre-emption rights of
existing shareholders and to buyback Ordinary Shares for
cancellation or to be held in treasury.
Issues of Shares
At the General Meeting held on 24 August 2018, the Company was
granted authority to allot up 200,000,000 shares under a share
issuance programme. This authority expired on 6 September 2019. On
23 October 2018, 80,000,000 Ordinary Shares were issued at GBP1.00
each, pursuant to a placing and offer for subscription.
The Company undertook an equity placing on 26 April 2019, which
resulted in 12,854,742 new Ordinary Shares of 1 pence each being
issued at a price of GBP1.0113 per share, raising gross proceeds of
approximately GBP13.0 million (before expenses). These shares were
admitted to trading on the premium listing segment of the Official
List of the FCA and to trading on the London Stock Exchange on 15
May 2019. The terms of issue were fixed on 10 May 2019 and the
market price on that date was GBP1.0325 per share.
On 28 June 2019 pursuant to the authority to allot shares
granted at the General Meeting held on 24 August 2018, the Company
made an application to the FCA for a block listing of 16,000,000
Ordinary Shares to be admitted to the Official List of the FCA and
to trading on the London Stock Exchange. The block listing became
effective on 4 July 2019 and shares were issued under the block
listing on the dates and at the price indicated in the table below.
All were issued at a premium to NAV.
As at 31 December 2019, the remaining authority under the block
listing facility was 8,015,000 Ordinary Shares and as at 7 February
2020 the remaining authority is 7,065,000 Ordinary Shares.
At the General Meeting held on 28 October 2019, the Company was
granted authority to allot up to 18,897,948 Ordinary Shares. In
addition, the Company was granted authority to issue up to
14,365,000 Ordinary Shares to Finda Oy, a significant Shareholder,
as a related party. On 8 November 2019, the Company announced that
Finda Oy had subscribed for 13,100,000 Ordinary Shares at GBP1.0708
each (mid market price on 8 November 2019: GBP1.0625 per share).
These shares were admitted to trading on the London Stock Exchange
on 11 November 2019.
As at 31 December 2019, the remaining authority to allot
Ordinary Shares under the authority granted at the General meeting
held on 28 October 2019 was 18,852,948 shares and at 7 February
2020 the remaining authority was 17,902,948 Ordinary Shares.
Date Number of shares Price paid per Mid market price
share
-------------- ------------------ ---------------- ------------------
10/05/2019* 12,854,742 GBP1.01130 GBP1.0325
-------------- ------------------ ---------------- ------------------
09/07/2019 275,000 GBP1.07150 GBP1.0750
-------------- ------------------ ---------------- ------------------
17/07/2019 300,000 GBP1.07814 GBP1.0775
-------------- ------------------ ---------------- ------------------
18/07/2019 410,000 GBP1.05000 GBP1.0575
-------------- ------------------ ---------------- ------------------
19/07/2019 200,000 GBP1.06050 GBP1.0650
-------------- ------------------ ---------------- ------------------
06/08/2019 450,000 GBP1.03500 GBP1.0450
-------------- ------------------ ---------------- ------------------
24/10/2019 4,200,000 GBP1.03560 GBP1.0425
-------------- ------------------ ---------------- ------------------
08/11/2019* 13,100,000 GBP1.07080 GBP1.0625
-------------- ------------------ ---------------- ------------------
13/11/2019 200,000 GBP1.12250 GBP1.1100
-------------- ------------------ ---------------- ------------------
18/11/2019 600,000 GBP1.14000 GBP1.1450
-------------- ------------------ ---------------- ------------------
25/11/2019 300,000 GBP1.14450 GBP1.1500
-------------- ------------------ ---------------- ------------------
25/11/2019 200,000 GBP1.14450 GBP1.1500
-------------- ------------------ ---------------- ------------------
26/11/2019 250,000 GBP1.14670 GBP1.1550
-------------- ------------------ ---------------- ------------------
18/12/2019 600,000 GBP1.13400 GBP1.1350
-------------- ------------------ ---------------- ------------------
06/01/2020 600,000 GBP1.14500 GBP1.1450
-------------- ------------------ ---------------- ------------------
08/01/2020 250,000 GBP1.14000 GBP1.1600
-------------- ------------------ ---------------- ------------------
15/01/2020 100,000 GBP1.17500 GBP1.1750
-------------- ------------------ ---------------- ------------------
Total 34,889,742
-------------- ------------------ ---------------- ------------------
* Share issue pursuant to equity placing as discussed above
Share premium account
The share premium relates to amounts subscribed for share
capital in excess of nominal value less associated issue costs of
the subscriptions. On 4 June 2019, the Company's share premium
account of GBP77,588,000 was cancelled and the balance transferred
to a distributable reserve.
Purchase of shares
At the general meeting held on 24 August 2018, the Company was
granted authority to purchase up to 14.99% of the Company's
Ordinary Shares in issue following initial Admission, such
authority to expire on conclusion of the 2020 AGM. No Ordinary
Shares have been bought back under this authority.
Sale of Shares from Treasury
At the General Meeting held on 24 August 2018, the Company was
authorised to waive pre-emption rights in respect of Treasury
Shares, such authority to expire on conclusion of the 2020 AGM. No
shares were held in Treasury and no shares were sold from Treasury
during the period. As at the date of this report, no shares are
held in Treasury.
Related party transactions
The Company's transactions with related parties in the period
were with its Directors, the Investment Manager and Finda Oy as the
Company's largest shareholder.
There have been no material transactions between the Company and
its Directors during the period and the only amounts paid to them
were in respect of expenses and remuneration for which there were
no outstanding amounts payable. Directors' shareholdings are
disclosed on page 34 of the Annual Report.
In relation to the provision of services by the Investment
Manager, other than fees payable by the Company in the ordinary
course of business and the facilitation of marketing activities
with third parties, there have been no material transactions with
the Investment Manager a ecting the financial position of the
Company during the period under review. During the period, the
Company and AVI entered into a side letter to the IMA, to adjust
the reference date for the calculation of the management fee to
ensure that the monthly payments more precisely reflect the latest
NAV or market capitalisation. No change has been made to the
percentage paid or the method of calculating the Management Fee.
More details on transactions with the Investment Manager, including
amounts outstanding at 31 December 2020, are given in note 14.
Listing Rule 9.8.4
Listing Rule 9.8.4 requires the Company to include certain
information in a single identifiable section of the Annual Report
or a cross reference table indicating where the information is set
out. The information required under Listing Rule 9.8.4(7) in
relation to Shares issued by the Company is set out on pages 24 and
25 of the Annual Report.
By order of the Board
For and on behalf of Link Company Matters Limited
Corporate Secretary
12 February 2020
Statement of Directors' Responsibilities in Relation to the
Annual Report and Financial Statements
The directors are responsible for preparing the Annual Report
and the Financial Statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the financial statements for each financial
year and have elected to prepare the company financial statements
in accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union. Under company law the
Directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of
affairs of the Company and of the profit or loss for the Company
for that period.
In preparing these financial statements, the directors are
required to:
-- select suitable accounting policies and then apply them consistently;
-- make judgements and accounting estimates that are reasonable and prudent;
-- state whether they have been prepared in accordance with
IFRSs as adopted by the European Union, subject to any material
departures disclosed and explained in the financial statements;
-- prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business; and
-- prepare a Director's report, a strategic report and
Director's remuneration report which comply with the requirements
of the Companies Act 2006.
The Directors are responsible for keeping adequate accounting
records that are su cient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006 and, as
regards the Company financial statements, Article 4 of the IAS
Regulation. They are also responsible for safeguarding the assets
of the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities. The
Directors are responsible for ensuring that the Annual Report and
Financial Statements, taken as a whole, are fair, balanced, and
understandable and provide the information necessary for
Shareholders to assess the Company's performance, business model
and strategy.
The Directors considered it appropriate to adopt the going
concern basis of accounting in preparing the financial statements
based on the Directors' identification of any material
uncertainties to the Company's ability to continue to do so over a
period of at least twelve months from the date of approval of the
financial statements.
Website Publication
The directors are responsible for ensuring the annual report and
the financial statements are made available on a website. Financial
statements are published on the Company's website in accordance
with legislation in the United Kingdom governing the preparation
and dissemination of financial statements, which may vary from
legislation in other jurisdictions. The maintenance and integrity
of the Company's website is the responsibility of the directors.
The directors' responsibility also extends to the ongoing integrity
of the financial statements contained therein.
Directors' Responsibilities Pursuant to Disclosure Guidance and
Transparency Rules
The Directors listed above, being the persons responsible,
hereby confirm to the best of their knowledge:
-- The Company's financial statements have been prepared in
accordance with IFRSs as adopted by the European Union and Article
4 of the IAS Regulation and give a true and fair view of the
assets, liabilities, financial position and profit and loss of the
group.
-- The Annual Report includes a fair review of the development
and performance of the business and the financial position of the
Company, together with a description of the principal risks and
uncertainties that they face.
In the opinion of the Board, the Annual Report and Financial
Statements taken as a whole, is fair, balanced and understandable
and it provides the information necessary to assess the Company's
position and performance, business model and strategy.
Directors Statement as to the Disclosure of Information to
Auditors
All of the current directors have taken all the steps that they
ought to have taken to make themselves aware of any information
needed by the Company's auditors for the purposes of their audit
and to establish that the auditors are aware of that information.
The directors are not aware of any relevant audit information of
which the auditors are unaware.
For and on behalf of the Board
Norman Crighton
Chairman
12 February 2020
Non-statutory accounts
The financial information set out below does not constitute the
Company's Annual financial statements for the period ended 31
December 2019. The Annual Report, including the Annual financial
statements, for the period ended 31 December 2019 was approved by
the Board on 12 February 2020. The Auditor has reviewed those
accounts; their report was (i) unqualified, (ii) did not include a
reference to any matters to which the Auditor drew attention by way
of emphasis without qualifying their report and (iii) did not
contain a statement under Section 498 (2) or (3) of the Companies
Act 2006.
Statement of Comprehensive Income
For the period ended 31 December 2019
For the period from 27 July
2018 to
31 December 2019
----------------------------------
Revenue Capital
return return Total
Notes GBP'000 GBP'000 GBP'000
-------------------------------- ------- ---------- ---------- ----------
Income
Investment income 2 2,345 - 2,345
Gains on investments held
in fair value 8 - 14,905 14,905
Exchange losses on currency
balances - (791) (791)
-------------------------------- ------- ---------- ---------- ----------
2,345 14,114 16,459
Expenses
Investment management fee 3 (106) (954) (1,060)
Other expenses (including
irrecoverable VAT) 3 (738) - (738)
-------------------------------- ------- ---------- ---------- ----------
Profit before finance costs
and tax 1,501 13,160 14,661
Finance costs 4 (9) (77) (86)
Exchange gains on revolving
credit facility revaluation 4 - 62 62
-------------------------------- ------- ---------- ---------- ----------
Profit before taxation 1,492 13,145 14,637
Taxation 5 (230) - (230)
-------------------------------- ------- ---------- ---------- ----------
Profit for the period 1,262 13,145 14,407
-------------------------------- ------- ---------- ---------- ----------
Earnings per Ordinary Share 7 1.40p 14.63p 16.03p
The total column of this statement is the Income Statement of
the Company prepared in accordance with IFRS, as adopted by the
European Union. The supplementary revenue and capital columns are
presented in accordance with the Statement of Recommended Practice
issued by the Association of Investment Companies ("AIC SORP").
All revenue and capital items in the above statement derive from
continuing operations. No operations were acquired or discontinued
during the period.
There is no other comprehensive income, and therefore, the
profit for the period after tax is also the total comprehensive
income.
The accompanying notes are an integral part of these financial
statements.
Statement of Changes in Equity
For the period ended 31 December 2019
Ordinary Capital
Share redemption Share Special Capital Revenue
capital reserve premium reserve* reserve reserve Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------ ---------- ------------- ---------- ----------- ---------- ---------- ----------
Issue of Ordinary Shares 1,139 - 114,412 - - - 115,551
Expenses of share issue - - (2,322) - - - (2,322)
Cancellation of share
premium
account as at 4 June 2019 - - (77,588) 77,588 - - -
Expenses in relation to
cancellation
of share premium account - - (26) - - - (26)
Total comprehensive income
for the period - - - - 13,145 1,262 14,407
Ordinary dividends paid - - - - - - -
------------------------------ ---------- ------------- ---------- ----------- ---------- ---------- ----------
Balance as at 31 December
2019 1,139 - 34,476 77,588 13,145 1,262 127,610
------------------------------ ---------- ------------- ---------- ----------- ---------- ---------- ----------
*Following Court approval and the subsequent registration of the
Court order with the Registrar of Companies on 4 June 2019, the
cancellation of the Company's share premium account became e ective
and an amount of GBP77,588,000 was transferred from the share
premium account to the special reserve which is distributable by
way of dividend.
Within the balance of the capital reserve, GBP5,934,000 relates
to realised gains which under the Articles of Association is
distributable by way of dividend. The remaining GBP7,211,000
relates to unrealised gains and losses on investments and is
non-distributable.
**Revenue reserve is fully distributable by way of dividend.
The accompanying notes are an integral part of these financial
statements.
Balance Sheet
As at 31 December 2019
As at
31 December
2019
Notes GBP'000
------------------------------------------------ ------- --------------
Non-current assets
Investments held at fair value through profit
or loss 8 125,531
------------------------------------------------ ------- --------------
125,531
Current assets
Other receivables 9 296
Cash and cash equivalents 17,995
------------------------------------------------ ------- --------------
18,291
------------------------------------------------ ------- --------------
Total assets 143,822
------------------------------------------------ ------- --------------
Current liabilities
Revolving credit facility 10 (15,965)
Other payables 10 (247)
------------------------------------------------ ------- --------------
(16,212)
------------------------------------------------ ------- --------------
Total assets less current liabilities 127,610
------------------------------------------------ ------- --------------
Net assets 127,610
------------------------------------------------ ------- --------------
Equity attributable to equity Shareholders
Ordinary Share capital 11 1,139
Share premium 34,476
Special reserve 77,588
Capital reserve 13,145
Revenue reserve 1,262
------------------------------------------------ ------- --------------
Total equity 127,610
------------------------------------------------ ------- --------------
Net asset value per Ordinary Share - basic 12 112.00p
------------------------------------------------ ------- --------------
Number of shares in issue 11 113,939,742
------------------------------------------------ ------- --------------
These financial statements were approved and authorised for
issue by the Board of AVI Japan Opportunity Trust plc on 12
February 2020 and were signed on its behalf by:
Norman Crighton
Chairman
12 February 2020
The accompanying notes are an integral part of these financial
statements.
Registered in England & Wales No. 11487703
Statement of Cash Flows
For the period ended 31 December 2019
Period to
31 December
2019
GBP'000
---------------------------------------------------- --------------
Reconciliation of profit before taxation to net
cash outflow from operating activities
Profit before taxation 14,637
Gains on investments held at fair value through
profit or loss (14,905)
Increase in other receivables (296)
Exchange gains on revolving credit facility (62)
Increase in other payables 247
Taxation paid (230)
---------------------------------------------------- --------------
Net cash outflow from operating activities (609)
---------------------------------------------------- --------------
Investing activities
Purchases of investments (143,350)
Sales of investments 32,724
---------------------------------------------------- --------------
Net cash outflow from investing activities (110,626)
---------------------------------------------------- --------------
Financing activities
Issue of shares net of costs 113,229
Issue of revolving credit facility net of cost 16,027
Share premium cancellation costs (26)
Cash inflow from financing activities 129,230
---------------------------------------------------- --------------
Increase in cash and cash equivalents 17,995
---------------------------------------------------- --------------
Reconciliation of net cash flow movement in funds
Cash and cash equivalents at beginning of period -
Increase in cash and cash equivalents 17,995
---------------------------------------------------- --------------
Cash and cash equivalents at end of period 17,995
---------------------------------------------------- --------------
The accompanying notes are an integral part of these financial
statements.
Notes to the Financial Statements
For the period ended 31 December 2019
1 General information and accounting policies
AVI Japan Opportunity Trust plc is a company incorporated on
27July 2018 and registered in England and Wales. The principal
activity of the Company is that of an investment trust company
within the meaning of Sections 1158/1159 of the Corporation Tax Act
2010 and its investment approach is detailed in the Strategic
Report.
The Company commenced trading and was listed on the London Stock
Exchange on 23 October 2018.
The financial statements of the Company have been prepared in
conformity with IFRS as adopted by the European Union, which
comprise standards and interpretations approved by the
International Accounting Standards Board ("IASB"), and as applied
in accordance with the provisions of the Companies Act 2006. The
financial statements have also been prepared in accordance with the
AIC SORP for the financial statements of investment trust companies
and venture capital trusts, except to the extent it is not
consistent with the requirements of IFRS.
Basis of preparation
The financial statements of the Company have been prepared for
the period 27 July 2018 to 31 December 2019.
In order to better reflect the activities of an investment trust
company and in accordance with guidance issued by The AIC,
supplementary information which analyses the Statement of
Comprehensive Income between items of revenue and a capital nature
has been prepared alongside the Statement of Comprehensive
Income.
The Company invests in Japan with subsequent cash-flows
(dividend receipts and interest payments) being received in
Japanese Yen however the Directors consider the Company's
functional currency to be Pound Sterling as the Shares of the
Company are listed on the London Stock Exchange, it is regulated in
the United Kingdom, principally having its Shareholder base in the
United Kingdom and pays dividend and expenses in Pounds Sterling.
The Directors have chosen to present the financial statements in
Pounds Sterling rounded to the nearest thousand except where
otherwise indicated.
Going concern
The financial statements have been prepared on a going concern
basis and on the basis that approval as an investment trust company
will continue to be met.
The Directors have made an assessment of the Company's ability
to continue as a going concern and are satisfied that the Company
has adequate resources to continue in operational existence for the
foreseeable future (being a period of at least 12 months from the
date these financial statements were approved). Furthermore, the
Directors are not aware of any material uncertainties that may cast
significant doubt upon the Company's ability to continue as a going
concern, having taken into account liquidity of the Company's
investment portfolio and the Company's financial position in
respect of its cash flows, borrowing facilities and investment
commitments (of which there are none of significance). Therefore
the financial statements have been prepared on a going concern
basis.
Segmental reporting
The Directors are of the opinion that the Company is engaged in
a single segment of business, being investment business.
The Company invests in companies listed in Japan on recognised
exchanges.
Accounting developments
The Company has early adopted IFRS 16 Leases although applicable
for financial periods commencing from 1 January 2019. IFRS 16
Leases sets out the principles for the recognition, measurement,
presentation and disclosure of leases by lessors and lessees. The
early adoption has not had any material impact on these financial
statements.
Critical accounting judgements and key sources of estimation
uncertainty
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that a ect the application of policies and the reported amounts in
the Balance Sheet, the Statement of Comprehensive income and the
disclosure of contingent assets and liabilities at the date of the
financial statements. The estimates and associated assumptions are
based on historical experience and various other factors that are
believed to be reasonable under the circumstances, the results of
which form the basis of making judgments about discounts to fair
valuation, carrying value of assets and liabilities that are not
readily apparent from other sources. Actual results may di er from
these estimates.
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised in
the period in which the estimate is revised if the revision a ects
only that period, or in the period of the revision and future
period if the revision a ects both current and future periods. The
Directors consider the Company's functional currency to be Pound
Sterling. There are no further significant judgements or estimates
in these financial statements
Investments
The investment objective of the Company is to provide
Shareholders with capital growth in excess of the MSCI Japan Small
Cap Total Return Index in GBP, through the active management of a
focused portfolio of equity investments listed or quoted in Japan
which have been identified by the Investment Manager as undervalued
and having a significant proportion of their market capitalisation
held in cash, listed securities and/or realisable assets.
The investments held by the Company are designated 'at fair
value through profit or loss'. All gains and losses are allocated
to the capital return within the Statement of Comprehensive Income
as 'Gains or losses on investments held through profit or loss'.
Also included within this heading are transaction costs in relation
to the purchase or sale of investments. When a purchase or sale is
made under a contract, the terms of which require delivery within
the timeframe of the relevant market, the investments concerned are
recognised or derecognised on the trade date.
All investments are designated upon initial recognition as held
at fair value through profit or loss, and are measured at
subsequent reporting dates at fair value, which is the bid price.
The Company derecognises a financial asset only when the
contractual right to the cash flows from the asset expire, or when
it transfers the financial asset and subsequently all the risks and
rewards of ownership to another entity. On derecognition of a
financial asset, the di erence between the asset's carrying value
carrying amount and the sum of the consideration received and
receivable, and the cumulative gain or loss that had been
accumulated is recognised in profit or loss.
All investments for which fair value is measured or disclosed in
the financial statements are categorised within the fair value
hierarchy in note 13.
Foreign currency
Transactions denominated in currencies other than Pounds
Sterling are recorded at the rates of exchange prevailing on the
date of transaction. Items which are denominated in foreign
currencies are translated at the rates prevailing on the Balance
Sheet date. Any gain or loss arising from a change in exchange rate
subsequent to the date of the transaction is included as exchange
gain or loss in the capital reserve or revenue reserve depending on
whether the gain or loss is capital or revenue in nature.
Cash and cash equivalents
Cash comprises cash in hand and demand deposits. Cash
equivalents are short-term highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to insignificant risk of changes in value.
For the purpose of the Statement of Cash Flows, cash and cash
equivalents consist of cash and cash equivalents as defined above
net of outstanding bank overdrafts when applicable.
Other receivables and payables
Trade and other receivables and payables are measured where
applicable, at amortised cost and balances revalued for exchange
rate movements.
Revolving credit facility
The revolving credit facility is shown at amortised cost and
revalued for exchange rate movements. Any gain or loss arising from
changes in exchange rates is included in the capital reserve and
shown in the capital column of the Statement of Comprehensive
Income.
Income
Dividends receivable on quoted equity shares are taken to
revenue on an ex-dividend basis. Dividends receivable on equity
shares where no ex-dividend date is quoted are brought into account
when the Company's right to receive payment is established. Fixed
returns on non-equity shares are recognised on a time-apportioned
basis. Dividends from overseas companies are shown gross of any
withholding taxes. Irrecoverable withholding taxes are disclosed
separately within taxation in the Statement of Comprehensive
Income.
Special dividends are taken to the revenue or capital account
depending on their nature. In deciding whether a dividend should be
regarded as a capital or revenue receipt, the Board reviews all
relevant information as to the reasons for the sources of the
dividend on a case-by-case basis.
When the Company has elected to receive scrip dividends in the
form of additional shares rather than cash, the amount of the cash
dividend forgone is recognised as income. Any excess in the value
of cash dividend is recognised as income. Any excess in the value
of the cash dividend is recognised in the capital column.
All other income is accounted for on a time-apportioned accruals
basis and is recognised in the Statement of Comprehensive
Income.
Expenses and Finance Costs
All expenses and finance costs are accounted for on an accruals
basis. On the basis of the Board's expected long-term split of
total returns the Company charges 90% of its management fee and
finance costs to capital.
Taxation
The charge for taxation is based on the net revenue for the
period and takes into account taxation deferred or accelerated
because of temporary di erences between the treatment of certain
items for accounting and taxation purposes.
Deferred tax is provided using the liability method on temporary
di erences between the tax bases of assets and liabilities and
their carrying amount for financial reporting purposes at the
reporting date. Deferred tax assets are only recognised if it is
considered more likely than not that there will be suitable profits
from which the future reversal of timing di erences can be
deducted. In line with the recommendations of the SORP, the
allocation method used to calculate the tax relief on expenses
charged to capital is the 'marginal' basis. Under this basis, if
taxable income is capable of being o set entirely by expenses
charged through the revenue account, then no tax relief is
transferred to the capital account.
Dividends payable to Shareholders
Dividends to Shareholders are recognised as a liability in the
period in which they are paid or approved in general meetings and
are taken to the Statement of Changes in Equity. Dividends declared
and approved by the Company after the Balance Sheet date have not
been recognised as a liability of the Company at the Balance Sheet
date.
Share premium
The share premium account represents the accumulated premium
paid for shares issued above their nominal value less issue
expenses. This is a reserve forming part of the non-distributable
reserves. The following items are taken to this reserve:
-- costs associated with the issue of equity; and
-- premium on the issue of shares
Special reserve
The special reserve was created by the cancellation of the share
premium account by order of the court.
Capital reserve
The following are taken to the capital reserve through the
capital column in the Statement of Comprehensive Income:
Capital reserve - other, forming part of the distributable
reserves:
-- gains and losses on the disposal of investments;
-- issue expenses on revolving credit facility;
-- exchange di erences of a capital nature; and
-- expenses, together with the related taxation e ect, allocated
to this reserve in accordance with the above policies.
Capital reserve - investment holding gains, not
distributable:
-- increase and decrease in the valuation of investments held at the period end.
Revenue reserve
The revenue reserve represents the surplus of accumulated
profits and is distributable by way of dividends.
2. Income
31 December
2019
GBP'000
------------------------------- -------------
Income from investments
Overseas dividends 2,304
Bank and deposit interest 39
Exchange gains on receipt of
income* 2
------------------------------- -------------
Total income 2,345
------------------------------- -------------
*Exchange movements arise from ex-dividend date to payment
date.
3. Investment management fee and other expenses
2019 2019 2019
Revenue Total Total
GBP'000 GBP'000 GBP'000
---------------------------------------------- ---------- ---------- ----------
Management fee 106 954 1,060
---------------------------------------------- ---------- ---------- ----------
Other expenses:
Directors' emoluments - fees 132 - 132
Directors' and officers' insurances 12 - 12
Directors' National Insurance Contributions 10 - 10
Auditor's remuneration - audit services 20 - 20
Auditor's remuneration - non-audit
services in respect of agreeing procedures
for Adjusted Share Capital 3 - 3
Marketing 170 - 170
Printing and postage costs 6 - 6
Registrar fees 14 - 14
Custodian fees 40 - 40
Depositary fees 39 - 39
Advisory and professional fees 271 - 271
Regulatory fees 21 - 21
---------------------------------------------- ---------- ---------- ----------
738 - 738
---------------------------------------------- ---------- ---------- ----------
The management fee of 1% per annum is calculated on the lesser
of the Company's Net Asset Value or Market Capitalisation at each
quarter end. The Investment Manager will invest 25% of the
management fee it receives in shares of the Company (through open
market purchases) and will hold these for a minimum of two
years.
4. Finance costs
2019 2019
Revenue Capital 2019
return return Total
GBP'000 GBP'000 GBP'000
---------------------------------------- ---------- ---------- ----------
JPY revolving credit facility 9 77 86
Exchange gain on JPY revolving credit
facility* - 62 62
---------------------------------------- ---------- ---------- ----------
On 5 April 2019 the Company entered into a Yen1,465,000,000
unsecured revolving credit facility with the option to increase the
amount available under the facility to a maximum of
Yen2,930,000,000. During the period Yen2,297,500,000 was drawn
down, which is repayable on 3 April 2020.
Interest is payable at a rate equal to LIBOR plus 0.75%.
* Revaluation of revolving credit facility.
5. Taxation
Period ended 31 December 2019
-----------------------------------
Revenue Capital
return return Total
GBP'000 GBP'000 GBP'000
-------------------------------- ---------- ---------- -----------
Analysis of charge for period
Overseas tax not recoverable 230 - 230
Tax cost for the period 230 - 230
-------------------------------- ---------- ---------- -----------
The tax assessed for the period is the standard rate of
corporation tax in the United Kingdom of 19%. The di erences are
explained below:
Period to 31 December
2019
-----------------------------------
Revenue Capital
return return Total
GBP'000 GBP'000 GBP'000
---------------------------------------------- ---------- ---------- -----------
Return on ordinary activities after
interest payable but before appropriations 1,492 13,145 14,637
---------------------------------------------- ---------- ---------- -----------
Theoretical tax at UK corporation tax
rate 19% 283 2,498 2,781
Effects of the non-taxable items:
- Tax-exempt overseas investment income (438) - (438)
- Gains on investments and exchange
losses on capital items - (2,693) (2,693)
- Excess management expenses carried
forward 151 195 346
- Disallowed expenses 4 - 4
- Overseas tax recoverable 230 - 230
Tax credit for the period 230 - 230
---------------------------------------------- ---------- ---------- -----------
At 31 December 2019, the Company had unrelieved losses of
GBP1,825,000 that are available to o set future taxable revenue. A
deferred tax asset of GBP310,000 has not been recognised because
the Company is not expected to generate su cient taxable income in
future periods in excess of the available deductible expenses and
accordingly, the Company is unlikely to be able to reduce future
tax liabilities through the use of existing surplus losses.
Deferred tax is not provided on capital gains and losses arising
on the revaluation or disposal of investments because the Company
meets (and intends to continue for the foreseeable future to meet)
the conditions for approval as an investment trust company.
6. Dividends
The final dividend proposed on Ordinary Shares in respect of the
financial period, which is the basis on which the requirements of
Section 1159 of the Corporation Tax Act 2010 are considered.
Period ended
31 December
2019
GBP'000
----------------------------------------------------- --------------
Proposed final dividend for the period ended 31
December 2019 of 0.9p per Ordinary Share 1,034
----------------------------------------------------- --------------
Based on shares in circulation on 7 February 2020.
7. Earnings per Ordinary Share
The earnings per Ordinary Share is based on the Company's net
profit after tax of GBP 14,407,000 and on 89,867,183 Ordinary
Shares, being the weighted average number of Ordinary Shares in
issue during the period.
The earnings per Ordinary Share detailed above can be further
analysed between revenue and capital as follows:
Period to 31 December 2019
----------------------------------
Revenue Capital Total
-------------------------------------- --------- --------- ------------
Net profit (GBP'000) 1,262 13,145 14,407
Weighted average number of Ordinary
Shares 89,867,183
-------------------------------------- --------- --------- ------------
Earnings per Ordinary Share
(GBP) 1.40 14.63 16.03
-------------------------------------- --------- --------- ------------
There are no dilutive instruments by the Company.
8. Investments held at fair value through profit or loss
31 December
2019
GBP'000
--------------------------------------- -------------
Financial assets held at fair value
--------------------------------------- -------------
Opening fair value -
Movement in the period:
Purchases at cost:
Equities 143,350
Sales proceeds:
Equities (32,724)
- realised gains on equity sales 7,694
Increase in investment holding gains 7,211
--------------------------------------- -------------
Closing fair value 125,531
--------------------------------------- -------------
Closing book cost 118,320
Closing investment holding gains 7,211
--------------------------------------- -------------
Closing fair value 125,531
--------------------------------------- -------------
Period ended
31 December
2019
GBP'000
--------------------------------------------------------- --------------
Transaction costs
Cost of acquisition 88
Cost on disposal 19
--------------------------------------------------------- --------------
107
Analysis of capital gains
Gains on sales of financial assets based on historical
cost 7,694
Movement in investment holding gains for the period 7,211
Net gains on investments held at fair value 14,905
--------------------------------------------------------- --------------
9. Other receivables
31 December
2019
GBP'000
-------------------- -------------
Other receivables 296
Total 296
-------------------- -------------
10. Current liabilities
31 December
2019
GBP'000
---------------------------- -------------
Revolving credit facility 15,965
Other payables:
Management fees 33
Interest payable 24
Other payables 190
---------------------------- -------------
Total other payables 247
---------------------------- -------------
Total current liabilities 16,212
---------------------------- -------------
Revolving credit facility
On 5 April 2019 the Company entered into an agreement with
Scotiabank Europe Plc for a Yen1,465,000,000 unsecured revolving
credit facility (the "facility") for a period of 364 days, with the
option to increase the amount available under the facility to a
maximum of Yen2,930,000,000. During the period Yen2,297,500,000 was
drawn down, which is repayable on 3 April 2020.
The facility bears interest at the rate of 0.75% over LIBOR on
any drawn balance. Undrawn balances above Yen1,465,000 are charged
at 0.275% and any undrawn portion below this is charged at 0.225%.
Under the terms of the facility, the net assets shall not be less
than GBP35m and the adjusted net asset coverage to borrowing shall
not be less than 4.5:1.
The facility is shown at amortised cost and revalued for
exchange rate movements. Any gain or loss arising from changes in
exchange rates are included in the capital reserves and shown in
the capital column of the Statement of Comprehensive Income.
Interest costs are charged to capital and revenue in accordance
with the Company's accounting policies.
11. Share capital
Ordinary Shares of 1p
each
Number of Nominal value
shares (GBP)
Allocated, called up, and fully paid 113,939,742 1,139,397
--------------------------------------- ------------- ---------------
During the period to 31 December 2019 113,939,742 Ordinary
Shares were issued for a net consideration of GBP113,229,000. This
comprised the initial o ering on 23 October 2018 of 80,000,000
Ordinary Shares at 100p and subsequent placings of 33,939,742
shares at an average of 104.75p.
12. Net asset value per Ordinary Share
The net asset value per Ordinary Share is based on net assets of
GBP 127,610,000 on 113,939,742 Ordinary Shares, being the number of
Ordinary Shares in issue at 31 December 2019.
13. Financial instruments and capital disclosures
Investment objective and policy
The investment objective of the Company is to achieve capital
growth through a focused portfolio of investments, particularly in
companies whose share prices stand at a discount to estimated
underlying net asset value. The Company's investment objective and
policy are detailed above.
The Company's financial instruments comprise equity investments,
cash balances, receivables, payables and borrowings. The Company
makes use of borrowings to achieve improved performance in rising
markets. The risk of borrowings may be reduced by raising the level
of cash balances held.
Risks
The risks identified arising from the financial instruments are
market risk (which comprises market price risk, interest rate risk
and foreign currency risk), liquidity risk and credit and
counterparty risk. The Company may also enter into derivative
transactions to manage risk.
The Board and Investment Manager consider and review the risks
inherent in managing the Company's assets which are detailed
below.
Market risk
Market risk arises mainly from uncertainty about future prices
of financial instruments used in the Company's business. It
represents the potential loss which the Company might su er through
holding market positions by way of price movements, interest rate
movements and exchange rate movements. The Investment Manager
assesses the exposure to market risk when making each investment
decision and these risks are monitored by the Investment Manager on
a regular basis and the Board at quarterly meetings with the
Investment Manager.
Market price risk
The portfolio is managed with an awareness of the e ects of
adverse price movements through detailed and continuing analysis
with the objective of maximising overall returns to Shareholders.
If the fair value of the Company's investments at the period end
increased or decreased by 10%, then it would have had an impact on
the Company's capital return and equity of GBP12,553,000.
Foreign currency
The value of the Company's assets and the total return earned by
the Company's Shareholders can be significantly a ected by foreign
exchange rate movements as most of the Company's assets are
denominated in currencies other than Pounds Sterling, the currency
in which the Company's financial statements are prepared. Income
denominated in foreign currencies is converted to Pounds Sterling
upon receipt. The JPY exchange rate at 31 December 2019 is
Yen143.905 : GBP1.
Currency Risk
GBP JPY Total
GBP'000 GBP'000 GBP'000
------------------------------------ ---------- ---------- ----------
At 31 December 2019
Other receivables 15 281 296
Cash and cash equivalents 345 17,650 17,995
JPY revolving credit facility - (15,965) (15,965)
Other payables (223) (24) (245)
------------------------------------ ---------- ---------- ----------
Currency exposure on net monetary
items 137 1,942 2,079
Investment held at fair value
through profit or loss - 125,531 125,531
------------------------------------ ---------- ---------- ----------
Total net currency exposure 137 127,473 127,610
------------------------------------ ---------- ---------- ----------
If the above level of cash was maintained for a year a 1%
increase in interest rates would increase the revenue return and
net assets by GBP20,000. Management proactively manages cash
balances. If there was a fall of 1% in interest rates, it would
potentially impact the Company by turning positive interest to
negative interest. The total e ect would be a cost increase/revenue
reduction of GBP20,000.
A 5% rise or decline in Sterling against foreign currency
denominated (i.e. non Pounds Sterling) assets and liabilities held
at the period end would have increased/decreased the net asset
value by GBP6,374,000.
This exposure is representative at the Balance Sheet date and
may not be representative of the period as a whole. The balances
are shown in the reporting currencies of the investee companies and
may not represent the underlying currency exposures of the investee
companies.
Interest rate risk
Interest rate movements may a ect:
-- the level of income receivable on cash deposits; and
-- the interest payable on variable rate borrowings.
The possible e ects on fair value and cash flows that could
arise as a result of changes in interest rates are taken into
account when making investment decisions.
The exposure at 31 December 2019 of financial assets and
financial liabilities to interest rate risk is shown by reference
to floating interest rates.
31 December
2019
GBP'000
-------------------------------------- -------------
Exposure to floating interest rates
Cash and cash equivalents 17,995
JPY revolving credit facility (15,965)
-------------------------------------- -------------
If the above level of cash was maintained for a year, a 1%
increase in interest rates would increase the revenue return and
net assets by GBP20,000 . Management proactively manages cash
balances. If there was a fall of 1% in interest rates, it would
potentially impact the Company by turning positive interest to
negative interest. The total e ect would be a cost increase/revenue
reduction of GBP20,000 .
Liquidity risk
The Company's assets mainly comprise readily realisable
securities which can be easily sold to meet funding commitments, if
necessary. Unlisted investments, if any, in the portfolio are
subject to liquidity risk. The risk is taken into account by the
Directors when arriving at their valuation of these items.
The remaining contractual payments on the Company's financial
liabilities at 31 December 2019, based on the earliest date on
which payment can be required and current exchange rates at the
Balance Sheet date, were as follows:
Due in
1 year or
less
GBP'000
-------------------------------- ------------
At 31 December 2019
JPY revolving credit facility (15,965)
Other payables (222)
-------------------------------- ------------
(16,188)
-------------------------------- ------------
Credit risk
Credit risk is mitigated by diversifying the counterparties
through which the Investment Manager conducts investment
transactions. The credit standing of all counterparties is reviewed
periodically, with limits set on amounts due from any one
counterparty.
The total credit exposure represents the carrying value of cash
and receivable balances and totals GBP18,291,000 .
Fair values of financial assets
The Company measures fair values using the following fair value
hierarchy that reflects the significance of the inputs used in
making the measurements.
The fair value is the amount at which the asset could be sold or
the liability transferred in an orderly transaction between market
participants, at the measurement date, other than a forced or
liquidation sale.
Categorisation within the hierarchy has been determined on the
basis of the lowest level input that is significant to the fair
value measurement of the relevant assets as follows:
-- Level 1 - valued using quoted prices unadjusted in active
markets for identical assets or liabilities.
-- Level 2 - valued by reference to valuation techniques using
observable inputs for the asset or liability other than quoted
prices included within Level 1.
-- Level 3 - valued by reference to valuation techniques using
inputs that are not based on observable market data for the asset
or liability.
The table below sets out fair value measurements of financial
instruments as at the period end, by the level in the fair value
hierarchy into which the fair value measurement is categorised.
Financial assets at fair value Level Level Level Total
through profit or loss at 31 1 2 3 GBP'000
December 2019 GBP'000 GBP'000 GBP'000
Equity investments 125,531 - - 125,531
----------------------------------- ---------- ---------- ---------- ----------
125,531 - - 125,531
----------------------------------- ---------- ---------- ---------- ----------
There have been no transfers during the period between Levels 1,
2 and 3.
Capital management policies and procedures
The structure of the Company's capital is described above and
details of the Company's reserves are shown in the Statement of
Changes in Equity.
The Company's capital management objectives are:
-- to ensure that it will be able to continue as a going concern;
-- to achieve capital growth through a focused portfolio of
investments, particularly in companies whose share prices stand at
a discount to estimated underlying net asset value, through an
appropriate balance of equity capital and debt; and
-- to maximise the return to Shareholders while maintaining a
capital base to allow the Company to operate e ectively and meet
obligations as they fall due.
The Board, with the assistance of the Investment Manager,
regularly monitors and reviews the broad structure of the Company's
capital on an ongoing basis. These reviews include:
-- the level of gearing, which takes account of the Company's
position and the Investment Manager's views on the market; and
-- the extent to which revenue in excess of that which is
required to be distributed should be retained.
The Company's objectives, policies and processes for managing
capital are set out in the Strategic Report. The Company is subject
to externally imposed capital requirements:
-- as a public company, the Company is required to have a
minimum share capital of GBP50,000; and
-- in accordance with the provisions of Sections 832 and 833 of
the Companies Act 2006, the Company, as an investment company:
o is only able to make a dividend distribution to the extent
that the assets of the Company are equal to at least one and a half
times its liabilities after the dividend payment has been made;
and
o is required to make a dividend distribution each year such
that it does not retain more than 15% of the income that it derives
from shares and securities.
The Company has complied with these requirements at all times
since commencing trading on 23October 2018.
14. Related party disclosures and investment management fees
Fees paid to the Company's Directors are disclosed in the Report
on Remuneration Implementation within the Annual Report and in note
3.
The Company paid management fees to AVI during the period
amounting to GBP1,027,000. As at the period end, GBP33,000 remained
outstanding in respect of management fees. As at 31 December 2019,
AVI held 325,000 shares of the Company.
Finda Oy, a significant Shareholder of the Company, is deemed to
be a related party of the Company for the purposes of the Listing
Rules by virtue of its holding in the Company's issued share
capital. During the period under review the following transactions
took place:
-- 15 May 2019 placing of 3,913,774 shares at 101.13 p which was
classed as a smaller related party transaction under Listing Rule
11.1.10R;
-- 28 October 2019 an Extraordinary General Meeting gave
authority to issue up to 14,365,000 shares;
-- 8 November 2019 placing of 13,100,000 shares at 107.08p
At 31 December 2019 Finda Oy held 30,000,000 shares representing
26.33 % of shares in issue.
15. Post Balance Sheet events
Since 31 December 2019 the Company has issued 950,000 Ordinary
Shares at an average price of 114.68p.
AIFMD Disclosures
The Company's AIFM is Asset Value Investors Limited. The AIFMD
requires certain information to be made available to investors in
AIFs before they invest and requires that material changes to this
information be disclosed in the annual report of each AIF. Those
disclosures that are required to be made pre-investment are
included within an AIFMD Investor Disclosure Document. This,
together with other necessary disclosures required under AIFMD, can
be found on the Company's website www.ajot.co.uk. All authorised
AIFMs are required to comply with the AIFMD Remuneration Code. The
AIFM's remuneration disclosures can be found on the Company's
website www.ajot.co.uk.
Glossary
Alternative Performance Measure ("APM")
An APM is a numerical measure of the Company's current,
historical or future financial performance, financial position or
cash flows, other than a financial measure defined or specified in
the applicable financial framework.
The definitions below are utilised for the measures of the
Company, the investment portfolio and underlying individual
investments held by the Company. Certain of the metrics are to look
through to the investments held, excluding certain non-core
activities, so the performance of the actual core of the investment
may be evaluated. Where a company in the investment portfolio holds
a number of listed investments these are excluded in order to
determine the actual core value metrics.
Comparator Benchmark
The Company's Comparator Benchmark is the MSCI Japan Small Cap
Index, expressed in Sterling terms. The benchmark is an index which
measures the performance of the Japan equity market. The weighting
of index constituents is based on their market capitalisation.
Dividends paid by index constituents are assumed to be reinvested
in the relevant securities at the prevailing market price. The
Investment Manager's investment decisions are not influenced by
whether a particular company's shares are, or are not, included in
the benchmark. The benchmark is used only as a yard stick to
compare investment performance.
Cost
The book cost of each investment is the total acquisition value,
including transaction costs, less the value of any disposals or
capitalised distributions allocated on a weighted average cost
basis.
Discount/Premium
If the share price is lower than the NAV per share it is said to
be trading at a discount. The size of the discount is calculated by
subtracting the share price from the NAV per share and is usually
expressed as a percentage of the NAV per share. If the share price
is higher than the NAV per share, this situation is called a
premium.
The discount and performance are calculated in accordance with
guidelines issued by The AIC. The discount is calculated using the
net asset values per share inclusive of accrued income with debt at
market value.
Earnings Before Interest and Taxes ("EBIT")
EBIT is equivalent to profit before finance costs and tax set
out in the statement of comprehensive income.
Enterprise Value ("EV")
Enterprise Value reflects the economic value of the business by
taking the market capitalisation less cash, investment securities
and the value of treasury shares plus debt and net pension
liabilities.
Enterprise Value ("EV")/Earnings Before Interest and Taxes
("EBIT")
A multiple based valuation metric that takes account of the
excess capital on a company's balance sheet. For example, if a
company held 80% of its market capitalisation in NFV (defined under
Net Financial Value / Market Capitalisation), had a market
capitalisation of 100 and EBIT of 10, the EV/EBIT would be 2x,
(100-80)/10.
Enterprise Value ("EV") Free Cash Flow Yield ("EV FCF
Yield")
A similar calculation to free cash flow yield except the free
cash flow excludes interest and dividend income and is divided by
enterprise value. This gives a representation for how
overcapitalised and undervalued a company is. If a company were to
pay out of all of its NFV (defined under Net Financial Value/Market
Capitalisation) and the share price remained the same, the EV FCF
Yield would become the FCF yield. For example, take a company with
a market capitalisation of 100 that had NFV of 80 and FCF of 8. The
FCF yield would be 8%, 8/100, but if the company paid out all of
its NFV the FCF yield would become 40%, 8/(100-80). This gives an
indication of how cheaply the market values the underlying business
once excess capital is stripped out.
Free Cash Flow ("FCF") Yield
Free cash flow is the amount of cash profits that a business
generates, adjusted for the minimum level of capital expenditure
required to maintain the company in a steady state. It measures how
much a business could pay out to equity investors without impairing
the core business. When free cash flow is divided by the market
value, we obtain the free cash flow yield.
Gearing
Gearing refers to the ratio of the Company's debt to its equity
capital. The Company may borrow money to invest in additional
investments for its portfolio. If the Company's assets grow, the
Shareholders' assets grow proportionately more because the debt
remains the same. But if the value of the Company's assets falls,
the situation is reversed. Gearing can therefore enhance
performance in rising markets but can adversely impact performance
in falling markets.
The gearing of 12.5 represents borrowings of GBP15,965,000
expressed as a percentage of Shareholders' funds of GBP127,610,000.
The gearing of 1.6% represents borrowings net of cash of
GBP2,079,000 expressed as a percentage of Shareholders' funds of
GBP127,610,000.
Net Asset Value ("NAV")
The NAV is Shareholders' funds expressed as an amount per
individual share. Shareholders' funds are the total value of all of
the Company's assets, at their current market value, having
deducted all liabilities and prior charges at their par value, or
at their asset value as appropriate. The total NAV per share is
calculated by dividing the NAV by the number of Ordinary Shares in
issue.
Net Cash/Market Capitalisation
Net cash consists of cash and the value of treasury shares less
debt and net pension liabilities. It is a measure of the excess
cash on a company's balance sheet and, by implication, how much
value the market attributes to the core operating business. For
example, the implied valuation of the core operating business of a
company trading with a net cash/market capitalisation of 100% is
zero.
Net Financial Value ("NFV")/Market Capitalisation
Net Financial Value consists of cash, investment securities
(less capital gains tax) and the value of treasury shares less debt
and net pension liabilities. A measure of the excess cash on a
company's balance sheet and, by implication, how much value the
market attributes to the core operating business. For example, the
implied valuation of the core operating business of a company
trading with a NFV/market capitalisation of 100% is zero.
Ongoing Charges Ratio
As recommended by The AIC in its guidance, ongoing charges are
the Company's annualised expenses of GBP1,509,000 (excluding
finance costs and certain non-recurring items) expressed as a
percentage of the average monthly net assets of GBP92,170,000 of
the Company during the period.
Portfolio Discount
A proprietary estimate of how far below fair value a given
company is trading. For example, if a company with a market
capitalisation of 100 had 80 NFV and a calculated fair value of the
operating business of 90, we would attribute it a discount of -41%,
100/(90+80)-1. This indicates the amount of potential upside. The
company trading on a -41% discount has a potential upside of +69%,
1/(1-0.41).
Portfolio Yield
The weighted-average dividend yield of each underlying company
in AJOT's portfolio.
Return on Equity ("ROE")
A measure of performance calculated by dividing net income by
Shareholder equity.
ROE ex Non-Core Financial Assets
Non-core financial assets consists of cash and investment
securities (less capital gains tax) less debt and net pension
liabilities. The ROE is calculated as if non-core financial assets
were paid out to shareholders. Companies with high balance sheet
allocations to non-core, low yielding financial assets have
depressed ROEs. The exclusion of non-core financial assets gives a
fairer representation of the true ROE of the underlying
business.
Total Return - NAV and Share Price Returns
The combined effect of any dividends paid, together with the
rise or fall in the share price or NAV. Total return statistics
enable the investor to make performance comparisons between
investment trusts with different dividend policies. Any dividends
received by a Shareholder are assumed to have been reinvested in
either additional shares in the Company or in the assets of the
Company at the prevailing NAV, in either case at the time that the
shares begin to trade ex-dividend.
Investing in the Company
The Company's Ordinary Shares are listed on the London Stock
Exchange and can be bought directly on the London Stock Exchange or
through the platforms listed on
www.ajot.co.uk/how-to-invest/platforms/.
Share Prices
The share price is published daily in The Financial Times, as
well as on the Company's website: www.ajot.co.uk
Dividends
Shareholders who wish to have dividends paid directly into a
bank account rather than by cheque to their registered address can
complete a mandate form for the purpose. Mandate forms may be
obtained from Link Asset Services, using the contact details given
below or via www.signalshares.com. The Company operates the BACS
system for the payment of dividends. Where dividends are paid
directly into Shareholders' bank accounts, dividend tax vouchers
are sent to Shareholders' registered addresses.
Registrar Customer Support Centre
Link Asset Services' Customer Support Centre is available to
answer any queries you have in relation to your shareholding:
- By phone: from the UK, call 0871 664 0300, from overseas call
+44 (0) 371 664 0300 (calls cost 12p per minute plus your phone
company's access charge. Calls outside the United Kingdom will be
charged at the applicable international rate. Lines are open
between 09:00-17:30, Monday to Friday excluding public holidays in
England and Wales);
- By email: shareholderenquiries@linkgroup.co.uk;
- By post: The Registry, 34 Beckenham Road, Beckenham, Kent, BR3 4TU.
Change of Address
Communications with Shareholders are mailed to the last address
held on the share register. Any change or amendment should be
notified to Link Asset Services using the contact details given
above, under the signature of the registered holder.
Daily Net Asset Value
The daily net asset value of the Company's shares can be
obtained from the London Stock Exchange or via the website:
www.ajot.co.uk
Company Information
Directors Investment Manager and AIFM
Norman Crighton (Chairman) Asset Value Investors Limited
Ekaterina (Katya) Thomson 25 Bury Street
Yoshi Nishio London
Margaret Stephens SW1Y 6AL
Administrator Registered o ce
Link Alternative Fund Administrators Beaufort House
Limited 51 New North Road
Beaufort House Exeter
51 New North Road Devon
Exeter EX4 4EP
EX4 4EP
Auditor Solicitors
BDO LLP Stephenson Harwood LLP
150 Aldersgate Street 1 Finsbury Circus
London London
EC1A 4AB EC2M 7SH
Corporate Broker Secretary
N+1 Singer Link Company Matters Limited
1 Bartholomew Lane Beaufort House
London 51 New North Road
EC2N 2AX Exeter
Devon
EX4 4EP
Custodian Registrar and Transfer Office
J.P. Morgan Chase Bank Link Asset Services
National Association The Registry
London Branch 34 Beckenham Road
25 Bank Street Beckenham
Canary Wharf Kent
London BR3 4TU
E14 5JP
Registrar's Shareholder Helpline
Depositary Tel. 0871 664 0300
J.P. Morgan Europe Limited From overseas call: +44 (0) 371 664
25 Bank Street 0300
Canary Wharf Calls cost 12p per minute plus your
London phone company's access charge. Calls
E14 5JP from outside the United Kingdom will
be charged at the applicable international
rate. Lines are open between 09:00-17:30,
Monday to Friday, excluding public
holidays in England and Wales.
LEI: 894500IJ5QQD7FPT3J73
Neither the contents of the Company's website nor the contents
of any website accessible from hyperlinks on the Company's website
(or any other website) is incorporated into, or forms part of this
announcement.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR FLFEDFSIFLII
(END) Dow Jones Newswires
February 13, 2020 02:00 ET (07:00 GMT)
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