Results analysis from Kepler Trust Intelligence

Schroder Japan Trust PLC

22 April 2024

 

Schroder Japan Growth (SJG)

22/04/2024

Results analysis from Kepler Trust Intelligence

Schroder Japan Trust (SJG) has published its half year results covering six months to the end of January 2024. Over the period, the trust delivered NAV total returns of 10.3% and a share price total return of 5.8%, which compares to a 9.1% total return from the TOPIX Index.

The board has committed to a tender offer over a four-year period starting from 01/08/2020. These results mean the trust is well ahead of this mark on an annualised basis.

A mid-cap automotive component manufacturer topped the performance table driven by strong earnings growth, buoyed by the recovery in Japanese automotive production. Hitachi also performed well, driven by management shifting focus to improve shareholder returns.

Gearing averaged 9.5% over the period and helped returns, and has increased slightly post-results.

SJG's discount widened to 11.1%, in line with its own five-year average and the AIC Japan sector, prompting the board to buy-back shares. SJG's discount has since come in slightly.

Chairman Philip Kay commented, "The Japanese equity market has enjoyed a strong start to 2024." He also noted: "The board remains very positive on the long-term equity market outlook because corporate Japan is in the middle of a major transformation which is already resulting in improved shareholder returns. This transformation has been a long time in the making".

Kepler View

As the chairman notes, there have been many false dawns with the Japanese equity market. While some scepticism remains, we think this time is different, with the index finally exceeded the bubble-era high, boosted by Japan's corporate transformation and governance reform push.

The manager employs a differentiated strategy, targeting high-quality, undervalued companies across the market-cap spectrum, which have attractive growth characteristics. This focus brings a strong valuation sensitivity, meaning the portfolio tends to tilt to value, very different from the most peers.

He believes the current opportunity set is vast and there is a considerable divergence between larger companies and smaller companies, which Masaki currently finds more appealing. He has therefore added a number of stocks to the portfolio from this part of the market, examples of which are beneficiaries of long-term structural tailwinds, but their shares have recently been sold down meaning there is significant upside potential.

Masaki also initiated a new position in Nippon Steel. He reports being impressed with management's efforts to improve the stability and growth profile of its earnings, particularly the increased focus on profitability.

Overall, these are good results for SJG with NAV total returns ahead of the TOPIX Index, keeping it on track to outperform its tender performance target. The continued outperformance of value stocks, as well as the manager's use of gearing, have been strong contributors to returns.

We think SJG offers differentiated exposure to Japanese equities through a portfolio of undervalued businesses with strong growth prospects. Masaki's approach further down the market cap scale could make SJG an appealing proposition for investors looking to play Japan in a differentiated way. The current double-digit discount could still be an attractive entry point for investors should strong performance lead to it narrowing.

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