Baillie Gifford Japan Trust PLC Half Year Results

RNS Number : 4015A

Baillie Gifford Japan Trust PLC

24 March 2017

 

RNS Announcement

The Baillie Gifford Japan Trust PLC

Results for the six months to 28 February 2017

Legal Entity Identifier: 54930037AGTKN765Y741

In the six months to 28 February 2017, The Baillie Gifford Japan Trust's net asset value per share (after deducting borrowings at fair value) increased by 13.3% compared to a 13.6% increase in the TOPIX total return (in sterling terms). The Company's share price increased by 19%.

·         There were strong share price performances from a variety of individual stocks such as Start Today, the online fashion retailer, Yaskawa Electric, one of the robotics holdings, as well as trading companies, Toyota Tsusho and Itochu.

·         Stocks that disappointed included Rakuten, Japan’s largest e-commerce company, M3, the online medical portal and Sysmex, the world leading haematology company.

·         During the reporting period, new holdings were taken in Cyberdyne, which makes exo-skeleton robots, and Keyence, one of the leading factory automation companies in Japan. We sold holdings in Hamakyorex, Otsuka, Modec and Mitsui.

·         An additional 1.5bn was drawn down under an existing loan facility in December 2016. Gearing was 16.0% as at 28 February 2017.

The Baillie Gifford Japan Trust aims to achieve long term capital growth principally through investment in medium and smaller sized Japanese companies which are believed to have above average prospects for growth, although it invests in larger companies when considered appropriate. At 28 February 2017, the Company had total assets of £564.4m (before deduction of bank loans of £84.0m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £156bn under management and advice as at 23 March 2017.

Past performance is not a guide to future performance. The value of an investment and any income from it is not guaranteed and may go down as well as up and investors may not get back the amount invested. This is because the share price is determined by the changing conditions in the relevant stock markets in which the Company invests and by the supply and demand for the Company's shares. You should view your investment as long term. You can find up to date performance information about The Baillie Gifford Japan Trust PLC on the Company website at www.japantrustplc.co.uk.

23 March 2017

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director

Four Broadgate

Tel: [phone] or 07831 401 309
 

The following is the unaudited Interim Financial Report for the six months to 28 February 2017.

Responsibility statement

We confirm that to the best of our knowledge:

a)         the condensed set of Financial Statements has been prepared in accordance with FRS 104 'Interim Financial Reporting';

b)        the Interim Management Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.7R (indication of important events during the first six months, their impact on the Financial Statements and a description of the principal risks and uncertainties for the remaining six months of the year); and

c)         the Interim Financial Report includes a fair review of the information required by Disclosure and Transparency Rules 4.2.8R (disclosure of related party transactions and changes therein).

By order of the Board

Nick AC Bannerman

Chairman

23 March 2017

 

Interim Management Report

Over the six months to February 2017 the NAV of the Trust rose by 13.3% to 605.8p, after deducting borrowings at fair value, whilst the benchmark index appreciated by a marginally higher 13.6%.  Sterling appreciated slightly against the yen during the period.  The growth stocks which make up the bulk of the portfolio were out of favour in this period, as more cyclical companies did well, but the gearing supported performance.  Longer term performance remains very strong and the NAV and share price reached new highs.  The share price moved from a discount to a premium to NAV during the six months and rose by 19%.

In sterling terms, the Japanese stock market has performed very similarly to global indices recently, as optimism about global reflation has returned.  The yield on 10 year Japanese Government Bonds, negative last summer, meaning that investors paid to own bonds, has now risen to a low positive level, a more normal situation.  As the Bank of Japan has pledged to keep these yields near zero, the policy, which was irrelevant when originally announced, should begin to have more traction as longer dated bond yields increase.  Reported inflation levels have also started to rise and the labour market in Japan is tightening further, with shortages in several industries as employment levels increase and the labour force shrinks.  It seems possible that a clear exit from deflation, with the huge change in mind-set that should accompany that, could occur in 2017. 

There were strong share price performances from a variety of individual stocks such as Start Today, the online fashion retailer which has exceeded sales expectations, Yaskawa Electric, one of the robotics holdings where orders are growing, two of our trading companies, Toyota Tsusho and Itochu, as well as Disco, which provides cutting equipment for semiconductor manufacturing. The stocks that disappointed were equally mixed: Rakuten Japan's largest e-commerce company, M3 the online medical portal and Sysmex the world leading haematology company were three of the growth stocks that lagged. The two car manufacturers with large exports to the US, Fuji Heavy Industries, soon to change its name to Subaru, and Mazda, were weak as fears about increased tariffs affected sentiment. 

In this reporting period we have added Cyberdyne, a company that makes advanced mind-controlled exo-skeleton robots to help rehabilitate those suffering from spinal injury or from strokes. This company is still at an early stage of development but already has agreements for treating patients in Germany and Saudi Arabia as well as Japan. We also took a holding in Keyence, which produces sensors and is one of the leading factory automation companies in Japan. We have sold holdings in Hamakyorex, where it was not possible to have a significant holding given the Trust's current size, Otsuka and Modec, where current prospects seemed fully priced into shares, and Mitsui to reinvest in existing holdings. 

With recent changes in the rules of the Liberal Democratic Party, Prime Minister Abe, already in office for over four years, could still be there at the time of the 2020 Olympics. His run in charge may give Japan relative political stability among the developed countries. The economy, whilst not growing rapidly, has been steadily expanding for over a year and there has been a continuity in policy-making that may allow Japan to escape deflation. This would be beneficial for equities, which are inherently inflation-proofed versus other forms of investment, and most of Japanese domestic savings are held in cash or bonds.  Corporate governance changes are continuing in Japan: more independent directors have been appointed, and dividends and share-buy backs have increased. Against this background, in December an additional ¥1.5bn was drawn down under an existing loan facility. Gearing stands at 16%.

Past performance is not a guide to future performance.

See disclaimer at the end of this announcement.

Income statement (unaudited)

	For the six months ended 28 February 2017			For the six months ended 29 February 2016
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	5,902	5,902		-	1,272	1,272
Changes in investment holding gains	-	46,759	46,759		-	7,085	7,085
Currency gains/(losses)	-	1,588	1,588		-	(8,811)	(8,811)
Income from investments and interest receivable	4,075	-	4,075		3,256	-	3,256
Investment management fee	(1,477)	-	(1,477)		(1,201)	-	(1,201)
Other administrative expenses	(262)	-	(262)		(297)	-	(297)
Net return before finance costs and taxation	2,336	54,249	56,585		1,758	(454)	1,304
Finance costs of borrowings	(802)	-	(802)		(663)	-	(663)
Net return on ordinary activities before taxation	1,534	54,249	55,783		1,095	(454)	641
Tax on ordinary activities	(407)	-	(407)		(302)	-	(302)
Net return on ordinary activities after taxation	1,127	54,249	55,376		793	(454)	339
Net return per ordinary share (note 5)	1.43p	68.90p	70.33p		1.04p	(0.59p)	0.45p

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance published by the Association of Investment Companies.

All revenue and capital items in this statement derive from continuing operations. 

A Statement of Comprehensive Income is not required as all gains and losses of the Company have been reflected in the above statement.

 

Balance sheet (unaudited)

	At 28 February 2017 £'000	At 31 August 2016 £'000
Fixed assets
Investments held at fair value through profit or loss (note 6)	557,379	498,419
Current assets
Debtors	1,196	1,930
Cash and cash equivalents	7,101	2,473
	8,297	4,403
Creditors
Amounts falling due within one year:
Bank loans (note 7)	(32,321)	(22,145)
Other creditors	(1,269)	(2,531)
	(33,590)	(24,676)
Net current liabilities	(25,293)	(20,273)
Total assets less current liabilities	532,086	478,146
Creditors
Amounts falling due after more than one year:
Bank loans (note 7)	(51,713)	(53,149)
Net assets	480,373	424,997
Capital and reserves
Called up share capital	3,937	3,937
Share premium	89,123	89,123
Capital redemption reserve	203	203
Capital reserve	389,977	335,728
Revenue reserve	(2,867)	(3,994)
Shareholders' funds	480,373	424,997
Net asset value per ordinary share (after deducting borrowings at fair value)	605.8p	534.6p
Net asset value per ordinary share (after deducting borrowings at par value)	610.1p	539.8p
Ordinary shares in issue (note 8)	78,734,925	78,734,925

 

Statement of changes in equity (unaudited)

For the six months ended 28 February 2017

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2016	3,937	89,123	203	335,728	(3,994)	424,997
Net return on ordinary activities after taxation	-	-	-	54,249	1,127	55,376
Shareholders' funds at 28 February 2017	3,937	89,123	203	389,977	(2,867)	480,373

For the six months ended 29 February 2016

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2015	3,756	73,272	203	251,739	(5,817)	323,153
Shares issued (note 8)	141	12,298	-	-	-	12,439
Net return on ordinary activities after taxation	-	-	-	(454)	793	339
Shareholders' funds at 29 February 2016	3,897	85,570	203	251,285	(5,024)	335,931

∗      The Capital Reserve balance as at 28 February 2017 includes investment holding gains on investments of £282,078,000 (29 February 2016 - gains of £147,301,000).

 

Condensed cash flow statement (unaudited)

	Six months to 28 February 2017 £'000	Six months to 29 February 2016 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	55,783	641
Net gains on investments	(52,661)	(8,357)
Currency (gains)/losses	(1,588)	8,811
Finance costs of borrowings	802	663
Overseas withholding tax	(350)	(255)
Changes in debtors and creditors	(559)	(729)
Cash from operations	1,427	774
Interest paid	(764)	(646)
Net cash inflow from operating activities	663	128
Cash flows from investing activities
Acquisitions of investments	(27,528)	(26,262)
Disposals of investments	21,166	12,690
Exchange differences	(115)	333
Net cash outflow from investing activities	(6,477)	(13,239)
Shares issued	-	12,439
Bank loans drawn down	10,360	-
Net cash inflow from financing activities	10,360	12,439
Increase/(decrease) in cash and cash equivalents	4,546	(672)
Exchange movements	82	973
Cash and cash equivalents at 1 September	2,473	8,742
Cash and cash equivalents at 28 February*	7,101	9,043

* Cash and cash equivalents represent cash at bank and short term money market deposits repayable on demand.

Twenty largest holdings at 28 February 2017 (unaudited)

Name	Business	Value £'000	% of total  assets*
SoftBank	Telecom operator and technology investor	19,111	3.4
Temp Holdings	Employment and outsourcing services	14,901	2.6
Start Today	Internet fashion retailer	14,009	2.5
Yaskawa Electric	Robots and factory automation	13,613	2.4
Rakuten	Internet retail and financial services	13,482	2.4
Sysmex	Medical equipment	13,201	2.3
Misumi Group	Precision machinery parts distributor	13,163	2.3
Itochu	Trading conglomerate	13,142	2.3
Cyberagent	Internet advertising and content	12,470	2.2
GMO Internet	Internet conglomerate	12,112	2.2
Pigeon	Baby care products	12,047	2.1
M3	Online medical database	11,791	2.1
Fuji Heavy Industries	Subaru cars	11,682	2.1
Sony	Consumer electronics, films and finance	11,441	2.0
SBI	Online broker and venture capital investor	11,403	2.0
Tokyo Tatemono	Property leasing and development	11,103	2.0
SMC	Pneumatic control equipment	11,003	2.0
Don Quijote	Discount store operator	10,777	1.9
Kubota	Agricultural machinery	10,540	1.9
Toyo Tire & Rubber	Tyre manufacturer	10,475	1.9
		251,466	44.6

* Before deduction of bank loans.

 

Notes to the condensed financial statements (unaudited)

1.	The condensed Financial Statements for the six months to 28 February 2017 comprise the statements set out on the previous pages together with the related notes below. They have been prepared in accordance with FRS 104 'Interim Financial Reporting' and the AIC's Statement of Recommended Practice issued in November 2014 and have not been audited or reviewed by the Auditor pursuant to the Auditing Practices Board Guidance on 'Review of Interim Financial Information'. The Financial Statements for the six months to 28 February 2017 have been prepared on the basis of the same accounting policies as set out in the Company's Annual Report and Financial Statements at 31 August 2016, which included the early adoption of Amendments to FRS 102 'The Financial Reporting Standard applicable in the UK and Republic of Ireland - fair value hierarchy disclosures'. Going Concern Having considered the Company's principal risks and uncertainties, together with its current position, investment objective and policy, its assets and liabilities, and projected income and expenditure, it is the Directors' opinion that the Company has adequate resources to continue in operational existence for the foreseeable future. The Company's assets, the majority of which are investments in quoted securities which are readily realisable, exceed its liabilities significantly. All borrowings require the prior approval of the Board. Gearing levels and compliance with borrowing covenants are reviewed by the Board on a regular basis. In accordance with the Company's Articles of Association, shareholders have the right to vote annually at the Annual General Meeting on whether to continue the Company. The next continuation vote will be in November 2017. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the Financial Statements and confirm that they are not aware of any material uncertainties which may affect the Company's ability to do so over a period of at least twelve months from the date of approval of these Financial Statements.
2.	The financial information contained within this Interim Financial Report does not constitute statutory accounts as defined in sections 434 to 436 of the Companies Act 2006. The financial information for the year ended 31 August 2016 has been extracted from the statutory accounts which have been filed with the Registrar of Companies. The Auditor's Report on those accounts was not qualified and did not contain statements under sections 498(2), (3) or (4) of the Companies Act 2006.
3.	Baillie Gifford & Co Limited, a wholly owned subsidiary of Baillie Gifford & Co, has been appointed by the Company as its Alternative Investment Fund Manager and Company Secretary. The investment management function has been delegated to Baillie Gifford & Co. The management agreement can be terminated on not less than 6 months' notice, or on shorter notice in certain circumstances. The annual management fee is 0.95% on the first £50 million of net assets and 0.65% on the next £200 million of net assets and 0.55% the remaining net assets, calculated and payable quarterly.
4.	No interim dividend will be declared.
5.	Net return per ordinary share		Six months to 28 February 2017 £'000	Six months to 29 February 2016  £'000
	Revenue return on ordinary activities after taxation		1,127	793
	Capital return on ordinary activities after taxation		54,249	(454)
	Net return per ordinary share is based on the above totals of revenue and capital and on 78,734,925 ordinary shares (29 February 2016 - 76,593,122), being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.

Notes to the condensed financial statements (unaudited) (continued)
6.	Fair Value The fair value hierarchy used to analyse the basis on which the fair values of financial instruments held at fair value through the profit or loss account are measured is described below. Fair value measurements are categorised on the basis of the lowest level input that is significant to the fair value measurement. Level 1 -  using unadjusted quoted prices for identical instruments in an active market; Level 2 -  using inputs, other than quoted prices included within Level 1, that are directly or indirectly observable (based on market data); and Level 3 -  using inputs that are unobservable (for which market data is unavailable). The fair value of listed investments is the last traded price which is equivalent to the bid price on Japanese markets. The financial assets designated as valued at fair value through profit or loss are all categorised as Level 1 in the above hierarchy. None of the financial liabilities are designated at fair value through profit or loss in the Financial Statements.
7.	Bank loans of £84.0 million (¥11.7 billion) have been drawn down under yen loan facilities which are repayable between November 2017 and August 2020 (31 August 2016 - £75.3 million (¥10.2 billion)). The revolving loan facilities are shown under short term creditors as these are repayable within one year.
8.	The Company has the authority to issue shares/sell treasury shares at a premium to net asset value as well as to buy back shares at a discount to net asset value. During the period, no shares (29 February 2016 - 2,813,175) were issued at a premium to net asset value (29 February 2016 - £12,439,000). Between 1 March 2017 and 23 March 2017, the Company issued a further 575,000 shares at a premium to net asset value raising proceeds of £3,688,000).
9.	Transaction costs incurred on the purchase and sale of the investments are added to the purchase cost or deducted from the sales proceeds, as appropriate. During the period, transaction costs on purchases amounted to £9,000 (29 February 2016 - £10,000) and transaction costs on sales amounted to £12,000 (29 February 2016 - £7,000).
10.	Principal Risks and Uncertainties The principal risks facing the Company are financial risk, regulatory risk, custody and depositary risk, smaller company risk, operational risk, premium/discount volatility, leverage risk and political risk. An explanation of these risks and how they are managed is set out on pages 6 and 7 of the Company's Annual Report and Financial Statements for the year to 31 August 2016 and is available on the Company's website www.japantrustplc.co.uk†. The principal risks and uncertainties have not changed since the date of that report.
11.	The Interim Financial Report is available at www.japantrustplc.co.uk† and will be posted to shareholders on or around       7 April 2017.
None of the views expressed in this document should be construed as advice to buy or sell a particular investment.

^†        Neither the contents of the Managers' website nor the contents of any website accessible from hyperlinks on the Managers' website (or any other website) is incorporated into, or forms part of, this announcement.

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