Monthly Update

RNS Number : 3544J

AVI Global Trust PLC

20 August 2021

 

AVI GLOBAL TRUST PLC

Monthly Update

AVI Global Trust plc (the "Company") presents its Update, reporting performance figures for the month ended 31 July 2021.

This Monthly Newsletter is available on the Company's website at:

https://www.aviglobal.co.uk/content/uploads/2021/08/AGT-JUL-2021.pdf  

Performance Total Return

This investment management report relates to performance figures to 31 July 2021.

	Month	Financial Yr * to date	Calendar Yr to date
AGT NAV1	-1.4%	30.2%	10.8%
MSCI ACWI Ex US3	-2.3%	16.8%	5.6%
MSCI ACWI1	0.0%	20.6%	11.2%

* AVI Global Trust financial year commences on the 1^st October. All figures published before the fiscal results announcement are AVI estimates and subject to change.

1 Source: Morningstar. All NAV figures are cum-fair values.

2 Source: Morningstar. Share price total return is on a mid-to-mid basis, with net income re-invested.

3 From 1st October 2013 the lead benchmark was changed to the MSCI ACWI ex US (£) Index. The investment management fee was changed to 0.7% of net assets and the performance related fee eliminated.

Manager's Comment

AVI Global Trust (AGT)'s NAV declined -1.4% in May. Contributors included KKR, JPEL Private Equity, and Sony Group. Detractors included Nintendo, Pershing Square Tontine Holdings, and SoftBank.

JPEL Private Equity

Share Price: +21%

NAV: +7%

Discount: -16%

JPEL Private Equity (JPEL) announced the sale of its single-largest holding, Swania, to Henkel for $78 million, representing 70% of JPEL's market cap. The sale came at a +19% uplift to carrying value. Following the sale of Swania, JPEL announced that it would return $85 million to shareholders via a mandatory redemption, equivalent to 52% of NAV.

AGT first invested in JPEL in September 2014, engaging with the Board and Manager to implement the optimal structure for the company's planned realisation opportunity. In late 2016, the company announced that it would begin the process of winding down its portfolio and returning capital to shareholders. Since then, JPEL has returned almost $500 million to shareholders (including Swania), equating to 104% and 131% of the NAV and market price prevailing at the time. Over the seven-year lifetime of the investment, AGT has earned a 1.79x multiple on investment cost and a 16% IRR in USD terms (1.98x and 20% in GBP).

Nintendo

Share Price: -13%

NAV: 0%

Discount: -49%

Nintendo was the single-largest detractor for the month of July. At the time of writing, its share price has declined -19% over the past five weeks.

The culprit, we believe, lies in the recent announcement of the Nintendo Switch Pro - where the market had been expecting a new, more powerful "Switch 2" to be announced - and the recent quarterly earnings release, which may have stoked fears of a cyclical peak in earnings.

Turning to the first, Nintendo announced on 6th July that it would be releasing a Nintendo Switch Pro, an upgraded version of the Switch which will be fully backwards compatible. The new console sold out within minutes on pre-orders. Some market participants had been calling for a "Switch 2" style console with a much more powerful chip, instead of the more modest upgrade that Nintendo has opted for with the Switch Pro. We had maintained that this would be a mistake, as such a console would not have been backwards compatible with existing Switch games, effectively making it much harder for Nintendo to build a sustainable ecosystem around the Switch. While we see why avid gamers might be disappointed with this outcome, we think that the announcement of the Switch Pro confirms our initial investment thesis: Nintendo is moving away from the cyclical business model dependent on successful new console releases, and focusing instead on building an environment in which digital and recurring revenues - stickier and higher-margin - play a larger role.

The recent quarterly earnings release revealed that net sales were down-10% year-on-year, while operating profits and margins declined, and digital sales fell as a proportion of overall revenue. At first glance, these figures are discouraging, suggesting that Nintendo may still be exposed to cyclical swings in earnings. However, it is important to remember that the quarter one year ago was a tough one comparatively, as during the COVID-induced lockdowns many subscribers increased their levels of gaming (and, necessarily, digital downloads) in the absence of regular socialising. Furthermore, due to the pandemic, the Switch has suffered from delays to the production of major new titles which were tipped for release this year. If we take 2019 as a baseline, we see much more encouraging figures: sales of the Switch have doubled, revenue is up +87%, and digital sales have grown +148%.

Overall, while the share price reaction to date has been disappointing, we see no contradictory evidence that would shake confidence in our thesis. At the current share price, Nintendo trades at 8x forward operating profits and 14x forward earnings, a valuation which we believe does not adequately reflect the quality of Nintendo's business. Nor does it reflect the importance of the switch (apologies) from a console-driven business model to one focused on digital and recurring revenues and increased monetisation of existing IP.

SoftBank Group

 Share Price: -12%

NAV: -14%

Discount: -56%

SoftBank's NAV fell -14% over the month, driven in the main by a fall in Alibaba's share price, which has been affected by the Chinese government's crackdown on consumer technology companies.

During the month, we fully exited the last of the position, having previously trimmed it in January and February of this year. Over the relatively short holding period (18 months from the first purchase), AGT earned a multiple on investment cost of 1.43x and an IRR of 51% in JPY terms (1.40x and 48% in GBP). Three-quarters of these returns came from discount tightening, as we added to the holding at discounts in excess of 75% during the height of the March 2020 sell-off.

Contributors / Detractors (in GBP)

Largest Contributors	1 month contribution bps	Percent of NAV
KKR	34	5.3
JPEL Private Equity	27	1.6
Sony	27	5.2
Symphony International Holdings	23	2.2
Investor AB 'B'	21	3.3

Largest Detractors	1 month contribution bps	Percent of NAV
Nintendo	-44	3.2
Pershing Square Tontine	-40	3.5
SoftBank	-29	0.0
Third Point Investors	-24	5.8
Swire Pacific Ltd 'B'	-22	2.1

Link Company Matters Limited

Corporate Secretary

20 August 2021

LEI: 213800QUODCLWWRVI968

The content of the Company's web-pages and the content of any website or pages which may be accessed through hyperlinks on the Company's web-pages, other than the content of the Newsletter referred to above, is neither incorporated into nor forms part of the above announcement.

 

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