It has to be said that investing in the Japanese stock market has not been an unalloyed success in recent years. The Nikkei 225 hit almost 40,000 in late 1989. In late 2008 it bottomed out at little more than 7,000; it stands at just shy of 19,000 today.
Japanese companies have suffered from poor standards of corporate governance. There is not much of a culture of shareholder returns, while there have been scandals such as those at Olympus and more recently Toshiba hitting the headlines.
Still, there have been times when overseas investors have weighed in, such as just after the US election last autumn, cycling out of American stocks for whatever reason. Yesterday’s Bank of Japan Tankan survey showed some grounds for optimism, with manufacturers experiencing some recovery in exports and production. The next question is when, as hoped, there will be some upwards pressure on wage inflation.
There are several specialist investment trusts that give exposure to Japan. Schroder Japan Growth Fund operates on a decent discount to net asset value. The last published NAV figure was 210p (the shares were off 2p at 197p last night). The fund has been managed since 2007 by Andrew Rose at Schroders in London and uses an in-house team of analysts in Tokyo.
The lack of income from Japanese stocks is such that the fund has been paying a dividend for only the past three years and the yield is not exactly stellar. The fund gives a useful way of investing in some of Japan’s biggest companies, with a negative exposure to banks but a higher one to manufacturers that should do well if that export-led recovery continues.
About half of the biggest holdings will be unfamiliar to British investors. They include KDDI, Japan’s second largest mobile phone operator, and Sompo, an insurer. Toyota will do well from the rise of electric and hybrid vehicles, while Hi-Lex is an automotive component maker and an interesting punt.
Japanese companies traditionally have hoarded cash and have refused to hand it to investors, but there are signs that this is changing. The market is on a relative low, 14 times this year’s earnings. It looks a good time to get on board, though some caution is advised.
Net asset value per share 210p | Dividend yield 1.5%
My advice Buy
Why For investors seeking exposure to Japanese stocks, Schroder Japan comes in at a decent discount to the net asset value
Ashtead Group
Fcst revenue £3.16bn | Pre-tax profit £687m | Divi yield 1.6%
As with Wolseley last week, Ashtead is an American company in all but name that just happens to be quoted in London and, like Wolseley, it is doing rather well out of the US building boom.
The nine-month numbers last month showed a 13 per cent rise in revenues at constant currency rates. Now the company is placing a further bet on the growth of American construction by buying Pride Equipment Corporation, which dominates the equipment rental market in New York. The price, at $279 million for this family-run business, is high and is a bit more than half the amount Ashtead has spent over the past nine months on infill acquisitions.
The company has indicated that capital spending on its plant fleet will be at the top end of the forecast range this financial year at £1.2 billion. This does not leave much over for share buybacks; indeed, these were suspended in November in preparation for the latest deal. Pride, though, boasts margins in the mid-thirties, ahead of those for Ashtead as a whole, and the company is being bought on a reasonable nine to ten times earnings, bringing in revenues of about $100 million a year. It is the sort of transaction that does not come along often and brings with it about 4,500 new customers, who can be sold Ashtead’s existing fleet.
The shares, off 11p at £16.42, have been tipped regularly in this column and have doubled over the past year, selling on 16 times earnings. Investors might think about taking some money off the table, then.
My advice Hold
Why Outperformance seems built into share price
Luceco
Revenue £134m | Pre-tax profit £12.2m | Dividend yield 0.9%
Luceco was one of the few floats to get away at the tail end of last year. Investors have done well enough, the shares having been floated in October at 130p and gaining 20¾p to 215¾p on the back of some expectedly good full-year numbers and a confident trading statement. The company makes LED lighting and other electrical goods, such as USB sockets.
In 2007 Luceco, which had been backed in a management buyout by Epic Private Equity two years before, started to build its own manufacturing facility outside Shanghai. This now produces about 70 per cent of the company’s output, with most of the rest also made by Chinese manufacturers.
The main standout from the 2016 figures was an improvement in gross margins from 32.8 per cent to 35.7 per cent, the result of an improving product mix. The interest in the shares is the potential for acquisitions in a fairly diverse market and further expansion overseas; at present 86 per cent of sales are in the UK. The shares now sell on a hefty 21 times this year’s earnings and anyone fortunate enough to have bought in at the float should think about taking some profits.
My advice Take profits
Why Shares have performed strongly since float
And finally...
Spirax-Sarco has made its biggest acquisition to date. The specialist engineer, which makes controls that manage steam and other industrial fluids and is the market leader in its field, is paying €186 million for Gestra, a German business that makes industrial boiler control systems. This is exactly in Spirax-Sarco’s field of expertise and is a competitor in the German market. Spirax-Sarco’s shares have motored ahead since the start of last year and were up another 2.6 per cent yesterday.
