The Baillie Gifford Japan Trust PLC Interim Report

RNS Number : 8089S

Baillie Gifford Japan Trust PLC

22 March 2016

 

RNS Announcement

The Baillie Gifford Japan Trust PLC

Results for the six months to 29 February 2016

In the six months to 29 February 2016, The Baillie Gifford Japan Trust's net asset value per share (after deducting borrowings at fair value) increased by 0.1% compared to a 1.0% increase in the TOPIX total return (in sterling terms). The Company's share price decreased by 1.3%.

¾ Although the Company's equity holdings outperformed the index during the six months, this was more than offset by the negative impact of the gearing for the portfolio as a whole.

¾ There were strong share price performances from stocks related to the sharing economy which helped performance including Next, an online property broker, and Park 24, which operates car parking and car club services.

¾ The portfolio was also helped by the lack of holdings in the mega-banks, which have been weak since the Bank of Japan cut interest rates.

¾ The positive changes in corporate governance and large potential for improvements in balance sheet management and dividend payments continue to provide attractive stock picking opportunities for long term investment.

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 29 February 2016, the Company had total assets of £400.8m (before deduction of bank loans of £64.8m).

The Company is managed by Baillie Gifford, an Edinburgh based fund management group with around £121bn under management and advice as at 21 March 2016.

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.

21 March 2016

For further information please contact:

Alex Blake, Baillie Gifford & Co

Tel: [phone]

Roland Cross, Director

Four Broadgate 

Tel: [phone]
 

The following is the unaudited Interim Financial Report for the six months to 29 February 2016.

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

21 March 2016

 

Interim Management Report

Over the six months to 29 February 2016 the NAV was essentially static, whilst the benchmark index appreciated by 1.0% in sterling terms.  In yen terms though the TOPIX was weak, falling around 15% whilst the yen gained against sterling by roughly the same amount.  Although the Company's equity holdings outperformed the index during the six months, this was more than offset by the negative impact of the gearing for the portfolio as a whole.  Longer term the performance remains strong. 

The Japanese stock market has been following global markets in falling as the outlook for growth has weakened.  As a result of these concerns and the continuing efforts of the government to try and exit deflation, the Bank of Japan cut interest rates on excess reserves to -10bps, the first time that Japan has had negative nominal interest rates.  The ramifications of this policy change are still being felt, but it is hoped that it will stimulate faster cash deployment.  There are some tentative signs that share buy backs by companies are accelerating and the drive to improve corporate governance in Japan continues, with some successes. 

Otherwise trends in the domestic economy continue as before with a tight labour market, growing inbound tourism and rising prices.   Exports have been weak, owing to global trends, but the import bill has fallen sharply as lower oil prices feed through to energy costs and Japan has been running a trade surplus in the last few months for the first time since the devastating effects of the 2011 tsunami.  Although estimates for corporate earnings have been lowered slightly, overall profits in Japan are expected to be quite resilient with most of the expected weakness coming from a higher yen.  We continue to believe that corporate Japan remains in reasonable shape and that there continues to be significant scope to increase dividends and use cash balances more effectively over the next few years.  The increase in the proportion of earnings coming from overseas, whether yen sensitive or not, does however mean that earnings for the market are more closely correlated with global trends than they used to be. 

There were strong share price performances from stocks related to the sharing economy which helped performance.  Next, an online property broker, aims to enter the market to compete with AirBnB.  As hotel rooms have become scarcer and more expensive in Japan, the growing number of tourists will require more accommodation and we expect further regulatory changes to allow developments in accommodation as Tokyo looks forward to hosting world sporting events.  Park 24, which operates car parking and car club services, has also been strong as their dominance in the car sharing space widens and the business becomes more profitable.  The portfolio was also helped by the lack of holdings in the mega-banks, which have been weak since the Bank of Japan cut interest rates.  We have sold holdings in Aeon Mall and Shin-Etsu Chemical as prospects look unenticing and bought a new holding in Takara Leben, which develops flats for first-time buyers and also invests in solar power plants, with various additions being made to some of the smaller holdings.

Overall global uncertainties will continue to affect sentiment in Japan but the unprecedented action of the Bank of Japan reflects the government's determination to boost growth.  The next big policy decision will be on the implementation of the next consumption tax rise which is scheduled for April 2017.  The last increase had a larger negative impact than was expected on consumption and the next rise is increasingly controversial.  However despite this uncertainty we think that the positive changes in corporate governance and large potential for improvements in balance sheet management and dividend payments continue to provide attractive stock picking opportunities for long term investment. 

Past performance is not a guide to future performance.

 

Income statement (unaudited)

	For the six months ended 29 February 2016			For the six months ended 28 February 2015
	Revenue £'000	Capital £'000	Total £'000		Revenue £'000	Capital £'000	Total £'000
Gains on sales of investments	-	1,272	1,272		-	2,728	2,728
Changes in investment holding gains	-	7,085	7,085		-	44,826	44,826
Currency (losses)/gains	-	(8,811)	(8,811)		-	2,633	2,633
Income from investments and interest receivable	3,256	-	3,256		2,087	-	2,087
Investment management fee	(1,201)	-	(1,201)		(993)	-	(993)
Other administrative expenses	(297)	-	(297)		(273)	-	(273)
Net return before finance costs and taxation	1,758	(454)	1,304		821	50,187	51,008
Finance costs of borrowings	(663)	-	(663)		(507)	-	(507)
Net return on ordinary activities before taxation	1,095	(454)	641		314	50,187	50,501
Tax on ordinary activities	(302)	-	(302)		(209)	-	(209)
Net return on ordinary activities after taxation	793	(454)	339		105	50,187	50,292
Net return per ordinary share (note 5)	1.04p	(0.59p)	0.45p		0.15p	72.23p	72.38p

The total column of this statement is the profit and loss account of the Company.

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

 

Balance sheet (unaudited)

	At 29 February 2016 £'000	At 31 August 2015 £'000
Fixed assets
Investments held at fair value through profit or loss	391,497	369,568
Current assets
Debtors	1,039	345
Cash and cash equivalents	9,043	8,742
	10,082	9,087
Creditors
Amounts falling due within one year:
Bank loans (note 6)	(19,072)	(16,096)
Other creditors	(804)	(776)
	(19,876)	(16,872)
Net current liabilities	(9,794)	(7,785)
Total assets less current liabilities	381,703	361,783
Creditors
Amounts falling due after more than one year:
Bank loans (note 6)	(45,772)	(38,630)
Net assets	335,931	323,153
Capital and reserves
Called up share capital	3,897	3,756
Share premium	85,570	73,272
Capital redemption reserve	203	203
Capital reserve	251,285	251,739
Revenue reserve	(5,024)	(5,817)
Shareholders' funds	335,931	323,153
Net asset value per ordinary share (after deducting borrowings at fair value)	425.9p	425.4p
Net asset value per ordinary share (after deducting borrowings at par value)	431.0p	430.2p
Ordinary shares in issue (note 7)	77,934,925	75,121,750

 

Statement of changes in equity (unaudited)

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 7)	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

For the six months ended 28 February 2015

	Share capital £'000	Share premium £'000	Capital redemption reserve £'000	Capital reserve* £'000	Revenue reserve £'000	Shareholders' funds £'000
Shareholders' funds at 1 September 2014	3,467	47,092	203	203,968	(6,016)	248,714
Shares issued	12	917	-	-	-	929
Net return on ordinary activities after taxation	-	-	-	50,187	105	50,292
Shareholders' funds at 28 February 2015	3,479	48,009	203	254,155	(5,911)	299,935

*      The Capital Reserve balance as at 29 February 2016 includes investment holding gains on investments of £147,301,000 (28 February 2015 - gains of £148,458,000).

 

Condensed cash flow statement (unaudited)

	Six months to 29 February 2016 £'000	Six months to 28 February 2015 £'000
Cash flows from operating activities
Net return on ordinary activities before taxation	641	50,501
Net gains on investments	(8,357)	(47,554)
Currency losses/(gains)	8,811	(2,633)
Finance costs of borrowings	663	507
Overseas withholding tax	(255)	(181)
Changes in debtors and creditors	(729)	(168)
Cash from operations	774	472
Interest paid	(646)	(502)
Net cash inflow/(outflow) from operating activities	128	(30)
Net cash outflow from investing activities	(13,239)	(6,689)
Shares issued	12,439	929
Bank loans drawn down	17,581	8,070
Bank loans repaid	(17,581)	-
Net cash inflow from financing activities	12,439	8,999
(Decrease)/increase in cash and cash equivalents	(672)	2,280
Exchange movements	973	(82)
Cash and cash equivalents at start of period	8,742	5,231
Cash and cash equivalents at end of period*	9,043	7,429

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

Twenty largest holdings at 29 February 2016 (unaudited)

Name	Business	Value £'000	% of total  assets*
Sysmex	Medical equipment	12,602	3.1
SoftBank	Telecom operator and internet investor	11,275	2.8
Japan Exchange Group	Stock Exchange operator	10,241	2.6
Misumi Group	Precision machinery parts distributor	10,216	2.5
Temp Holdings	Employment and outsourcing services	9,973	2.5
M3	Online medical database	9,846	2.5
Itochu	Trading conglomerate	9,515	2.4
Fuji Heavy Industries	Subaru cars	9,084	2.3
Cookpad	Recipe website	8,877	2.2
Pigeon	Baby care products	8,504	2.1
Rakuten	Internet retail and financial services	8,306	2.1
Don Quijote	Discount store operator	8,248	2.1
Shimadzu	Environmental testing equipment	8,168	2.0
Toyo Tire & Rubber	Tyre manufacturer	8,102	2.0
Tokyo Tatemono	Property leasing and development	8,079	2.0
SMC	Pneumatic control equipment	7,990	2.0
Next	Real estate website	7,934	2.0
Yaskawa Electric	Robots and factory automation	7,753	1.9
H.I.S.	Travel agency and theme parks	7,559	1.9
GMO Internet	Internet services	7,492	1.9
		179,764	44.9

* Before deduction of bank loans.

 

Notes to the condensed financial statements (unaudited)

1.	The condensed Financial Statements for the six months to 29 February 2016 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 Company has adapted FRS 102 for its financial year ending 31 August 2016. The application of the new reporting standards and the AIC's Statement of Recommended Practice has had  no impact on the Company's Income Statement, Balance Sheet or Statement of Changes in Equity (previously called the Reconciliation of Movements in Shareholders' Funds) for periods previously reported. The Condensed Cash Flow Statement has been restated to reflect presentational changes required and does not include any other material changes. The Financial Statements for the six months to 29 February 2016 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 2015. Fair Value In accordance with FRS 102 and FRS 104, fair value measurements have been classified using the following fair value hierarchy: Level 1 -  reflects financial instruments quoted in an active market; Level 2 -  reflects financial instruments whose fair value is evidenced by comparison with other observable current market  transactions in the same instrument or based on a valuation technique whose variables includes only data from observable markets; Level 3 -  reflects financial instruments whose fair value is determined in whole or part using a valuation technique based on assumptions that are not supported by prices from observable market transactions in the same instrument and not based on available observable market data.  All of the Company's investments fall into level 1 for the periods reported. The Company has early adopted the amendments to Section 34 of FRS 102 regarding fair value hierarchy disclosures. Going Concern 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 December 2016. The Directors have no reason to believe that the continuation resolution will not be passed at the Annual General Meeting. Accordingly, the Directors considered it appropriate to adopt the going concern basis of accounting in preparing the Interim 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 2015 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) or (3) 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 remaining net assets, calculated and payable quarterly.
4.	No interim dividend will be declared.

 

Notes to the condensed financial statements (unaudited) (continued)

5.	Net return per ordinary share		Six months to 29 February 2016 £'000	Six months to 28 February 2015  £'000
	Revenue return on ordinary activities after taxation		793	105
	Capital return on ordinary activities after taxation		(454)	50,187
	Net return per ordinary share is based on the above totals of revenue and capital and on 76,593,122 ordinary shares (28 February 2015 - 69,482,579), being the weighted average number of ordinary shares in issue during each period. There are no dilutive or potentially dilutive shares in issue.
6.	Bank loans of £64.8 million (¥10.2 billion) have been drawn down under yen loan facilities which are repayable between November 2017 and August 2020 (31 August 2015 - £54.7 million (¥10.2 billion)). The revolving loan facilities are shown under short term creditors as this can be drawn for 1, 2, 3 or 6 months and repaid at the end of each drawdown period without incurring breakage costs.
7.	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, 2,813,175 shares (28 February 2015 - 250,000) were issued at a premium to net asset value raising proceeds of £12,439,000 (28 February 2015 - £929,000).
8.	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 £10,000 (28 February 2015 - £10,000) and transaction costs on sales amounted to £7,000 (28 February 2015 - £6,000).
9.	Principal Risks and Uncertainties The principal risks facing the Company are financial risk, regulatory risk, operational risk, premium/discount volatility and leverage 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 2015 and is available on the Japan Trust page of the Managers' website www.japantrustplc.co.uk†. The principal risks and uncertainties have not changed since the date of that report.
10.	The Interim Financial Report is available at www.japantrustplc.co.uk† and will be posted to shareholders on or around 8 April 2016.
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.

- Ends -

 

END

 

 

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