Friday 20th May 2016
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While questions continue to abound about when the Bank of Japan will push the button on further stimulus, one thing is abundantly clear, the move to negative interest rates has squashed the appeal for the Japanese public to hold cash in the bank. This seems logical, as does anecdotal reports that hardware stores in Japan have run out of safes.
Charging people to have their money on deposit has also not surprisingly bolstered the appeal of assets which do offer a yield (as well as a capital return). It certainly has been a boost for the property market, with rising rents adding to the allure.
Given this backdrop, it is perhaps also no surprise that capital has been flowing into Japanese real estate companies at a decent clip. In fact, the net purchase of Japanese real estate by overseas investors has climbed to its highest level in almost a decade.
The scramble for Japanese property plays has also reached Australia, with portfolio constituent Galileo Japan Trust (which we covered last week as a sell half) in the midst of being taken over. This now elevates the larger Astro Japan Property Trust to the main Japan real estate property play on the ASX.
The question to be asked now is, could Astro Japan come into the sights of a predator? There are some differences versus Galileo, not least of which being size, but never say never. Particularly, if the A$ weakens versus the yen (or at least keeps pace with any decline in the latter) over the medium-term.
The company boasts a high quality property portfolio, focussed on Tokyo, where we see prices rising further not just due to the ‘hunt for yield’ but also over the longer term, as the economy gets a reboot from further inevitable stimulus, and reform measures.
Moreover, the earnings picture looking ahead is solid with management expecting underlying profit after tax for FY16 to grow by 20-25 percent from FY15, lifting earnings per security to between 53 cents and 55 cents.
We would also not rule out full year earnings forecasts surprising on the upside in the coming years. Much has been made of the plight of Japan, with a high yen having an adverse impact on the exporters. However, the reality is that Japan Domestic Inc is performing well, with confidence and investment increasing on the back of lower lending costs, and the promise of further stimulus. This confidence is also rubbing off on the general populous.
Astro Japan’s latest property deal suggests to us that there are likely to be upward revisions to the trust’s reported book value when it releases its next results in August. Given that Astro Japan’s shares are currently trading at a 10 percent discount to book value, this further underscores the investment case, along with a 5.4 percent yield.
The technical set up for Astro Japan is also positive, with the current trend in place remaining firmly to the upside. However, we are mindful of the consolidation at hand below the all-time high of $6.98, which is also just shy of the psychologically significant $7.00. A decisive break above this technically important level will likely spark a strong boost of longer term upward momentum.
We continue to see Astro Japan Property Trust as one of our favoured plays on an improving Japanese economy and property market. We expect demand for Japanese property to continue to grow in a negative interest rate environment, with a big second kick coming from (Abenomics is not done yet) further stimulus, reforms, growing confidence, and improving economy prosperity.
Greg Smith is Head of Research at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE
Disclosure: Astro Japan Property is held in the Fat Prophets Australian Share Income and Small & Mid-Cap models.
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