Fat Prophets Hot Stock: Astro Japan

Thursday 23rd March 2017

Takeover interest adds to fundamental appeal

What’s new?

By virtue of being an unhedged Japanese property trust that is listed on the Australian Stock Exchange, foreign exchange rate movements add an additional layer of risk to the investment case. This was certainly evident in Astro Japan’s latest interim results, with adverse exchange rate movements during the period more than offsetting the underlying gains from operations. Ironically a key driver of this was the weaker Yen, which makes Japanese property more attractive to offshore investors.

For the six months ending 31 December 2016, Astro Japan reported a statutory loss of $22.4 million and an underlying net profit of $18.3 million in 1H17, with the key driver of the variance being the $42.1 million reduction in the fair value of the Trust’s property interests through its various SPCs. Excluding this foreign currency translation impact, the Trust’s underlying net profit increased by 6.4 percent in 1H17.

Somewhat confusingly, due to the use of accrual accounting (as opposed to cash or mark-to-market accounting used elsewhere), the key driver of the increase in Astro Japan’s underlying net profit was the circa 9 percent increase in the Yen against the Australian dollar through 1H17.Importantly, this more than offset the earnings impact from lower net property income that resulted from several small property divestments and a modest reduction in occupancy across the portfolio.

The good news for shareholders is that Astro Japan delivered an interim distribution in line with expectations at 21 cents per share, with this representing a 16.6 percent increase in the previous corresponding period. While this rate of growth is arguably not sustainable in the absence of further positive property revaluations and asset sales, it does in our view reflect positively on both the quality of Astro Japan’s property portfolio and the broader sector thematic.

Outlook

Management seem confident that Astro Japan’s underlying momentum can continue in 2H17 and beyond. This is based on a number of factors, including (i) positive lead indicators for the Japanese economy, (ii) the expectation that Donald Trump’s expansionary approach will increase the US dollar, thereby making Japanese property more attractive to overseas investors, and (iii) Astro Japan’s ability to use its surplus cash to optimise its property portfolio.

Accordingly, management is guiding towards a FY17 (i) underlying profit after tax of between 56 cents per share and 58 cents per share (i.e. based on net profit of A$34-35 million, compared to A$31.5 million in FY16), and (ii) distribution of 42 cents per share, with this representing an increase of 16.7 percent on the previous corresponding period. Significantly, management’s guidance is based on a ¥85:A$1 exchange rate and no material performance fees or acquisitions/divestments.

Price

While the discount between Astro Japan’s price and book value did narrow to circa 20 percent 1H17, this was due largely to the impact that adverse currency movements had on the Trust’s book value. With the prospective ratio sitting at 0.84 in FY17, we view the potential catalysts for a further narrowing of the discount as being (i) renewed takeover interest in the stock, and (ii) acquisitions. These should ensure that the stock’s dominant longer-term technical uptrend remains firmly intact. Worth buying? With exchange rates likely to remain volatile, we continue to adopt a swings and roundabouts approach. While its impact on Astro Japan’s 1H17 results and share price highlights how significant this factor is, we prefer to focus primarily on the Trust’s underlying performance (and fundamentals). As evidenced by Astro Japan’s recent takeover offers, there is inherent value in the business that is currently not being adequately reflected in the stock’s price to book value ratio.

James Lennon is a senior analyst 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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