CC Japan Income & Growth (CCJI) has announced its annual results for the year ended 31 October 2018. During the year, CCJI has provided an NAV total return of 4.1%, while its share price rose by 2.8%. CCJI has therefore outperformed the Topix, which it says fell by 0.4% (all in sterling terms). Richard Aston, the trust’s manager says that, “Performance has been primarily derived from the strong returns of individual companies rather than any overriding factor”
The chairman, Harry Wells, says that CCJI’s revenue account continues to prosper and the Board is recommending a final dividend of 2.50p per share. This, together with an interim payment of 1.25p per share, represents an increase of 8.7% in the full year dividend to 3.75p per share compared to 3.45p per share paid last year.
Extract from the manager’s report
Performance Review
“The portfolio has produced a positive return over the year to 31 October 2018 with the net asset value (NAV) per ordinary share rising from 146.0p per share to 148.6p per share. In addition, the Company paid total dividends of 3.55p per share during the year giving a total return of 4.1%.
Although the mandate is unconstrained by any index, this represents outperformance of the Topix Total Return Index over the reporting timeframe. Performance has been primarily derived from the strong returns of individual companies rather than any overriding factor although we believe that the favourable shareholder return characteristics of companies identified by the strategy have been an important consideration. Selected holdings in the mid and small cap segments of the market have again made positive contributions and it is worth reiterating the qualities of companies positioned in these segments of the market where it is frequently the case that management are shareholders themselves and hence share a more robust understanding of the responsibilities to minority shareholders such as ourselves.
The top contributors to performance are all good examples of opportunities identified outside the large cap. sector and also highlight the diverse range of opportunities that we are able to identify as the environment for shareholder return continues to improve. Katitas, which is the leading supplier of refurbished houses in Japan, was the largest single contributor. This company was relisted after a period in the hands of private equity and returned to the stock market as a considerably more focused and better run business with an attractive shareholder return policy. Hikari Tsushin, a service provider for domestic SMEs, Yamada Consulting, a business succession planning consultancy, Kakaku.com, which operates Japan’s leading online restaurant service, and Shoei, the world’s leading manufacturer of premium motorcycle helmets, all produced significant positive returns. After a period of weakness during 2017, it was pleasing to see the holdings in the real estate investment trusts (“REITs”) make positive contributions again. Most notably, Invesco Office REIT, which has been at the forefront of shareholder engagement and was the first REIT in Japan to announce a share buy back. The performance of Noevir, one of the top contributors in the previous year, was somewhat disappointing and particularly so given the extremely favourable return to shareholders during the year with the company announcing a full dividend increase from Y150 to Y180 per share (+20% year-on-year).
We believe that our investment process allows us to identify the companies that offer the best shareholder return characteristics. In addition to the example of Noevir, Mitsubishi UFJ Holdings paid a substantially higher than anticipated dividend of Y22 instead of Y20. Shoei, Amada, Daiwa House and Hikari Tsushin have also increased their projected payment for the full year. Buybacks announced include NTT (Y150 billion or 1.57% of shares in issue), Daiwa House (Y10 billion or 0.4%), MUFG (Y100 billion, 1.52%), Toyota (Y250 billion or 1.44%) and Amada (Y10 billion or 2.73%). We are extremely pleased with these increased shareholder returns, having identified these opportunities through our analysis and company visit programme.
Current Positioning
While equity markets may be volatile, the investment policy remains consistent. It seeks to identify companies with attractive shareholder return policies that complement the underlying business growth. The long average holding period tends to reflect the stability and progression of shareholder returns expected. However, there are two reasons for selling a position. The first is a fundamental change in the outlook for the company and by implication the projected returns to shareholders. The second is valuation. There are times when a share price exceeds the company’s potential to deliver growth of the dividend, in particular, to an acceptable level in a reasonable time frame.
For instance, one sector where the outlook has changed is telecommunications and in particular for the mobile operators. Early in the year Chief Cabinet Secretary Suga made politically motivated criticisms of the mobile communications industry claiming that mobile phone pricing in Japan is too high. Although this has been a recurring theme of the current administration, it is not a fully regulated industry and the Government has no control over the prices of mobile services. However, leading operator NTT DoCoMo recently announced sweeping price cuts eerily similar to the levels suggested by the Chief Cabinet Secretary. Due to fears that the prospects for earnings growth and dividend growth in the near term are greatly diminished for all companies in the sector, we sold out of the positions in both NTT DoCoMo and KDDI.
The re-rating of small cap stocks in Japan from late 2017 has presented a challenge as valuations of many companies whose fundamentals remained strong became much less attractive after share price appreciation. Holdings such as Solasto (medical industry outsourcing), Katitas (housing refurbishment), Trust Tech and Technopro (both engineering outsourcing) have also been sold.
New positions have been established in Secom (security services), Park24 (parking services), SBI Holdings (financial services), Sho-Bond (highway repair), Avant (financial industry software) and Mitsubishi Corp (a leading trading company). We remain encouraged by the diversity of opportunities that exist as this enhances the stability of the income received by the Company.
Outlook
Aggregate distributions from Japanese companies are set to achieve another all-time high in the fiscal year ending March 2019. Despite this very apparent improvement in recent years, the potential for further positive developments is evident from the steady rise in cash accumulated on corporate balance sheets and the high dividend cover in Japan. We are also encouraged by the flexible approach to share buybacks promoted by many corporate leaders as an important component in their efforts to boost capital efficiency. As a result we believe that these steady improvements are set to continue regardless of the near term economic trends and these positive trends will continue to be more broadly recognised by both domestic and international investors.”
CC Japan Income & Growth outperforms the Topix : CCJI
Click here to subscribe for free equity research on investment trusts, funds and listed companies.