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Japan: The Investment Opportunity Starting To Win Attention

Amanda Cheesley

24 July 2023

Rupert Kimber, portfolio manager at the Geneva-based asset management company , talks about Japan as an investment opportunity, and the ideas that he has included in the Quaero Capital Funds (Lux) – Taiko Japan, Quaero Capital.

His objective is to achieve long-term capital growth by investing in listed Japanese companies.

“Our next three to five-year investment horizons should capture the industry consolidation opportunity across a number of industries,” he told this news service last week. He believes that this opportunity will generate very strong real returns as the main beneficiaries become larger, more profitable entities that will generate enhanced cashflow which will feed through to shareholders.

“Current valuations remain very low as the stock market remains focused on short-term earnings trends, hence the investment opportunity,” Kimber continued.  In many domestic sectors the market is highly fragmented, and he expects many struggling SMEs to exit in the coming years whilst there will be some acquisition activity. “Important characteristics, such as survivor product pricing premiums have started to emerge which will prove highly accretive to margin, raising  leading to higher valuations. The domestic regulator is also encouraging mergers and trade sales between companies whilst the ongoing changes to the tax code are also favouring spinouts,” he said.

Kimber highlighted a couple of examples where he is a shareholder.

Niterra (TSE 5334)
“The global leader in auto spark plugs and oxygen sensors has in recent years benefitted from the partial withdrawal from competitors such as Bosch as the auto industry repositioned towards EV and the supposed 2030 ICE deadlines. With almost 50 per cent of the global spark plug market, the company has announced plans to potentially buy out the plug and sensor operations from their only major Japanese competitor, Denso,” he said.

“Given the competitor withdrawals, product pricing has improved significantly whilst the company has migrated towards precious metal spark plugs that generate higher margins compared to conventional nickel plugs,” he continued. The aftermarket spark plug sales represent the real cashflow generator for the company and he expects their global market share to settle between 60 and 70 per cent.

“Even allowing for heavy investment in new fuel cell stack technology which could long-term replace the spark plugs as the major profit driver, profits over the next 10 years should reach 3 to 4x the current market capitalisation without significant yen appreciation. Valuations are low for this 15 per cent OPM business, excluding the potential Denso acquisition, PER 7x, EV/EBITDA 4x, dividend yield 4.6 per cent and a 15 per cent operating cashflow yield with a net cash balance sheet,” he added. “The value of legacy businesses in a multi-year runoff are often overlooked and, in this case, place no value on the fuel cell stack business.”

As the electric vehicle thesis is progressively challenged, especially the 2030 ICE deadlines that are already being pushed back to 2035 in some countries, Kimber believes that the scope for a major valuation rerating appears high, especially as shareholder returns should improve in the coming few years. 

Seven Bank (TSE 8410)
“Over the last 25 years the domestic convenience store market has consolidated around the three leading players with a collective market share of over 80 per cent. The parent company, Seven & i Holdings, has taken the leading market position with about 28 million 7iD members and a daily store customer footfall of over 22 million prior to Covid across the 28.000 store network,” he said.

“After discussions within the group over potential further customer monetisation and a broader financial services strategy, Seven Bank acquired Seven Card Financial Services from the parent company earlier in 2023. The challenge now is to convert many of the 7iD members to Seven Bank account holders and to monetise these customers through a financial services product offering, including external alliance providers,” he continued.

“The core domestic ATM network is perceived as a low growth utility business. However regional banks, in a move to lower costs, are progressively outsourcing ATM management to Seven Bank and the current installation of the fourth generation ATM, exclusive to Seven Bank, will lead to greater outsourcing following new banknote introductions that can only be processed in these fourth generation machines,” he said.

“Overseas in both the US and Asia there are further ATM growth possibilities, both within the 7&I group and externally, and in some countries, management will pursue an acquisition strategy,” he said. “The current low valuations reflect the perceived utility type returns and the transition to cashless payments, but both are exaggerated and fail to reflect the future earnings growth potential from the integration of the convenience store customers and the bank. Management has a strong technology expertise which will be critical for the success of these integration initiatives,” Kimber said. 

The existing ATM business is highly cash generative, and Kimber expects the broader final services model to significantly raise cash flow and result in higher shareholder returns, principally dividends.