Monthly update

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting performance figures for the month ended 31 May 2019.

 

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

 

https://www.aviglobal.co.uk/content/uploads/2019/06/AVI-Global-Trust-2019-MAY.pdf

 

 

Performance Total Return

 

This investment management report relates to performance figures to 31 May 2019.

 

	Month	Financial Yr * to date	Calendar Yr to date
AGT NAV1	-0.4%	-1.2%	10.5%
MSCI ACWI Ex US2	-2.0%	-1.5%	8.6%
MSCI ACWI Ex US Value1	-2.2%	-3.1%	5.9%
MSCI ACWI1	-2.6%	-1.2%	10.5%
Morningstar Global Growth1	-3.4%	-3.6%	10.0%

 

* 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 From 1^st 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

 

AGT's NAV fell by -0.4% during May, driven by both declining NAVs and widening discounts as the portfolio discount moved from 32.1% to 33.4%. Currencies were a positive contributor over the month, with GBP being particularly weak against JPY, EUR and USD. Good performance was generated from the Japan Special Situations Basket, Fondul Proprietatea, and Cosan Ltd. Detractors included Riverstone Energy and Tokyo Broadcasting.

 

The Japan Special Situations Basket contributed 50 basis points (bps) to returns over the month, making it the largest contributor to AGT in May. Four stocks, out of a total of eighteen in the basket, generated the majority of the returns. Fujitec (share price +5% in JPY) appointed another new director to its Board, leading to a Board of Directors that is now majority independent; another strong contributor, SK Kaken (+4%), abolished its poison pill. For the other two major contributors (Kanaden, Digital Garage), there was little major news over the month, although Kanaden bought back 4% of its outstanding shares in February. Since we initiated the Japan basket in June 2017, we have observed a continuation of the trend towards increasing levels of dividends, buybacks and shareholder proposals, which we interpret as confirmatory evidence of our initial thesis - that corporate Japan is undergoing a secular change in its attitude to governance and capital allocation. We believe that the potential risk-adjusted returns from such a shift in attitudes will be highly attractive.

 

Fondul Proprietatea (FP) was one of the largest contributors for the second month running, adding 45bps to returns. The NAV rose +1% over the month which, together with a +4% increase in the share price, led to a tightening of the discount from 33% to 31%. The recent European elections saw a good performance from the pro-business, pro-EU, reform-minded USR (Union to Save Romania) party, indicating that Romania is not veering towards a Hungary- or Poland-style drift from the EU and, furthermore, that the potential for USR to take seats in the upcoming local and general elections will goad the dominant political parties to adopt more pro-business and anti-corruption policies. The Bucharest Stock Exchange Index rose +6% from its May lows on the back of these developments. The potential for an IPO of key assets such as Hidroelectrica (40% of NAV) and Bucharest Airport (9% of NAV) is arguably now more likely than before, which we believe would lead to a large amount of value being unlocked for shareholders. With a high dividend yield comprised of recurring ordinary and special dividends, attractive valuations for the unlisted assets, a steep discount, and a policy of distributing realisation proceeds, we continue to believe that FP offers considerable value.

 

Cosan Ltd (CZZ) was the third-largest contributor over the month, adding 26bps to AGT's returns. Cosan's NAV rose by +5% in May, although this was tempered somewhat by a 1% widening of the discount, with an overall share price gain of +3%. Cosan SA (71% of NAV) posted consensus-beating EBITDA growth of +11%, although sugar prices continue to weigh on the company's results. Comgás posted EBITDA growth of +14% and the fuel distribution business continues to grow volumes strongly and outperform peers. On a lookthrough basis (i.e. valuing the holding companies underneath CZZ at NAV rather than market price, as these companies too attract discounts), CZZ trades on a 49% discount to NAV. We view this as extraordinary given the quality of the underlying businesses and management's ongoing attempts to tackle the discount. Examples of management's adept capital allocation include share buybacks, cancelling a large proportion of treasury shares, and the recent tender offer by Cosan SA for the portion of Comgás that it does not own. Over the medium-term, we estimate that the returns from de-complexifying CZZ's holding structure would be in the order of 49% which, together with NAV growth from the underlying holdings, would result in compelling returns for shareholders.

 

The oil price (WTI) declined -16% over the month, hitting Riverstone Energy (RSE) which was the largest detractor from returns over the month, reducing AGT's NAV by 52bps. RSE released a quarterly NAV at the end of April, which contained write-downs that were somewhat unexpected given the recovery of oil prices from December lows. Sole listed holding Centennial Resource Development (CDEV; 9% of NAV) continued to perform poorly, down -25% over the month. We commented previously that negative/confused production guidance from CDEV's management was poorly received by the market, and recent oil price declines have evidently compounded negative sentiment against the company.

 

Tokyo Broadcasting System (TBS) detracted 37bps from returns over the month, in a month where Japanese equities performed particularly poorly (TOPIX down -9%). Overall, the share price fell by -14% in May driven by a -6% decline in the NAV and a widening of the discount from 35% to 40%. TBS' underlying holdings - Tokyo Electron (20% of NAV) and Recruit Holdings (21% of NAV) - had mixed months, being down - 16% and up +4% respectively. In addition to the weak background and poor performance of its holdings, TBS also reported a negative outlook for next year's profitability. The headline dividend payout ratio of 23%, below the stated policy of 30%, also appears to have caused some consternation despite its decline being solely the result of a distortion from one-off gains and being previously flagged by the company. While the recent performance has been underwhelming, it is important not to lose focus of the fact that TBS' balance sheet is replete with cash (13% of NAV), listed securities (54%), and prime Tokyo real estate (29%). While TBS has to date been distinctly ambiguous about what it plans to do with these assets, we firmly believe that were it to announce a definite strategic policy to reduce its massively over-capitalised balance sheet, the market would reward the company with a much higher share price. To that end, we remain in constant dialogue with TBS' Board of Directors to produce a desirable outcome for all stakeholders.

 

Trading activity was limited over the month, with profit-taking in some positions.

 

 

Contributors / Detractors (in GBP)

 

Largest Contributors	1 month contribution bps	Percent of NAV
JAPAN SPECIAL SITUATIONS ***	50	18.7
FONDUL PROPRIETATEA	45	6.1

 

Largest Detractors	1 month contribution bps	Percent of NAV
RIVERSTONE ENERGY LTD	-52	3.7
TOKYO BROADCASTING SYSTEM	-37	3.8

 

*** A basket of 18 stocks: Fujitec Co, Kato Sangyo, Tachi-S, Nishimatsuya Chain, Pasona Group, Daiwa Industries, SK Kaken Co, Kanaden Corp, Toshiba Plant, Nissan Shatai, Teikoku Sen-I, Nakano, Mitsuboshi Belting, Sekisui Jushi Corp, Nuflare, Toagosei, Konishi, Digital Garage.

 

 

Link Company Matters Limited

Corporate Secretary

 

14 June 2019

 

LEI: 213800QUODCLWWRVI968

 

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