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Corporate tax cut could spark Japanese bid boom

Not only is Japan's stock market good value with a growing dividend culture to boot, but its companies are being encouraged to launch more corporate bids with capital gains tax cuts, says Richard Aston of Coupland Cardiff.

Aston, manager of the CC Japan Income & Growth Trust (CCJI) has been busy raising money for the £150 million investment trust that launched over two years ago.

In this video interview, he reports on growing investor interest in a market that UK investors have avoided in the past. 

Can’t watch now? Read the transcript

Gavin Lumsden: Hello, with me today is Richard Aston, manager of the CC Japan Income & Growth Trust. Richard, thanks very much for coming in.

Richard Aston: Good morning.

GL: It’s a good time to see you because you’ve been very busy for the past couple of weeks, going out trying to raise money for the investment trust that was launched at the end of 2015. It has a market value of £150 million which you want to grow. How’s it going?

RA: We feel it’s been going very well, a combination of political stability, very good earnings prospects and acknowledgement of improving corporate governance has gained wider recognition for the trust.

GL: The performance of the Japanese stock market seems to have improved under prime minster Abe and his ‘Abenomics’. Are you finding that investors have warmed to the story as well?

RA: They have. I think there have been some very notable benefits. We see a very robust domestic economy which is being supported by international trade, which is very, very encouraging at this point.

GL: I keep hearing about how Japan is one of the cheapest markets in the world, of the big markets. How cheap exactly is it?

RA: We feel pretty much on all measures now – price to earnings, price to book and, surprisingly to many, on dividend yields as well – Japanese equities are now very attractive to international investors.

GL: What sort of multiple are you taking about? What multiple would you put on it?

RA: Price to earnings I think we’re looking at below 15 times, price to book about 1.4 times. I say most importantly for us the dividend yield which is now comparable to international markets around about 2%.

GL: So Japanese companies are getting better at paying dividends to shareholders? Not a tradition they’ve got is it?.

RA: No, that’s right. Very, very positive trend in fact the fastest growth of dividends in major markets we’ve seen since the financial crisis has actually come from Japanese equities.

GL: Right and your investment trust was launched to take advantage of this increasing dividend story in Japan.

RA: Yes it was.

GL: OK. I was reading your results last week and they were saying the pay-out ratio, the amount these companies pay out, is 30%.

RA: That’s correct, very much lower than other markets.

GL: Much lower than the UK about half perhaps?

RA: That’s right, yes.

GL: Now the Japanese market has done well but smaller companies – judging from the performance of some of the Japanese smaller companies funds – small caps in Japan have done very well. Are they getting expensive?

RA: I think small caps have done extremely well as you point out but I think in the majority of cases that has been underpinned by corporate earnings so we’re still very optimistic about identifying companies within that segment with which to invest.

GL: OK so larger companies are slightly better value at the moment?

RA: I think there is a lot of interest in large-cap companies that we find. Companies that maybe historically investors have been shunning are beginning to embrace corporate governance which we find very exciting.

GL: Any names you’d like to share with us?

RA: Companies like Bridgestone (5108.T), big, old tyre manufacturer, well-known brand has been accumulating cash for many years and has finally embraced this concept and we see some better returns coming through.

GL: Speaking of returns. It’s a relatively new investment trust you’ve got there, it’s got more of an income focus than some of the existing Japanese investment trusts but the level of borrowing, the level of gearing you have, is 20% is that right?

RA: Yes.

GL: Isn’t that a little on the high side. What would you say to people who say 20% seems quite high?

RA: We see that as a structural position. Over the long term we believe that the companies that we are identifying offer both very good income potential but also capital growth potential and I think 20% structural gearing will benefit investors from both aspects going forward.

GL: Now your results were very interesting because they highlighted something I didn’t know about before which was potential significant tax reform in Japan. We’ve heard a lot about tax reform in the US under Trump but in Japan there are proposals to reform capital gains tax and the way it applies to corporations during takeovers. Could you explain what’s going on and what the significance of this is?

RA: Yes we feel this creates significant potential for companies to restructure and reform their businesses, improve capital efficiency of the business that they operate and importantly gives companies an alternative use for the treasury stock, for the shares they’ve been buying back in recent years.

GL: So they buy back shares, a bit like investment trusts do. Now what can they do? So the government is talking about cutting capital gains tax when they’re restructuring.

RA: That’s right so companies as they restructure incur capital gains tax or can at least defer that capital gains tax to some point in the future, which will encourage companies to make decisions that maybe they’ve put off in the past.

GL: And these treasury shares that they’ve bought back in and are holding in treasury, what are they going to do with them?

RA: Potentially they can use that as acquisition currency. They can use that to buy companies maybe in a way we’re more familiar with in Western markets.

GL: Alright so we could be seeing increased bids and merger and acquisitions.

RA: We certainly feel there is significant potential for that, yes.

GL: It sounds like Japan is getting a lot more exciting. In the past UK investors had a difficult time in Japan and it has a reputation for being very traditional. It seems to be being shaken up. Is that your feeling?

RA: It is yes there are some very exciting changes taking place. Corporate management are beginning to treat shareholders in the way that we are much more familiar with in the UK.

GL: Well we’ll have to see how the dividend story pans out and the tax and the takeover one sound very interesting. Richard, thanks very much for telling us about it.

RA: Thank you.

 

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