Wednesday, 11 June 2014

Japan Sun to Rise Again - Croesus Retail Trust Outlook positive

Recently I read several articles on Japan better than expected outlook, expecting to sustain into the long term period. My portfolio Croesus Retail Trust should stand to benefit from it.

Croesus Retail Trust

Croesus Retail Trust (CRT) is a SGX listed Japan Suburban Retail Malls Trust with 4 Freehold + 2 Leasehold malls with almost full occupancy. It is sponsored by relative unknown Croesus Group, an independent Asian-based private investment firm but backed by its strategic partners Daiwa House and Marubeni both listed in Japan with market cap > US$10b owning 6.4% of total share during IPO. Recently it was also voted best small cap company by Finance Asia – Market Cap S$415mil as of today.

I invested in CRT some time ago at S$0.89c. Current NAV is S$88c. At that time gearing is 42%. Its recent two additional leasehold malls has increased its gearing to 54%, but malls were acquired at 4.7% discount. IPO price last May is S$0.93c and was trading at high of S$1.14 before a price fall. Forecast FY DPU yield at 7.4c i.e. 8.3% at my cost and 7.7% at current price of 0.965. CRT has pledge 100% distribution till June 2015.


Most of CRT leases are fixed term allowing for adjustment of income and tenant composition. This should underpin more income growth. Strong organic growth will come from its recent two added malls. Acquisition in the pipelines visible with two more malls on the card. Gearing should declines when trust revalues at end FY14 meaning more debt headroom for potential acquisition – business trust debt limit is 60%. Risk of high gearing should be mitigated by favorable economic outlook in Japan.  

Japan GDP – Grow Faster than Expected

Japan economy grew much faster in the 1Q14 than initially estimated. GDP rose at annualized rate of 6.7% compare to estimated 5.9% earlier.  Surge is mainly due to private capital spending which jumped by 7.6% rather than 4.9% estimated. Japanese economy will continue to grow above its potential rate as trends of exports turn up and domestic demand remains firm.

Nikkei Index – more Upside to come

Nikkei index up 56% last year, one of the world’s best performing markets. Albeit the spectacular performance, Japan stocks are still substantially undervalued with a PE 13x. Any decline which is unlikely in current situation should be justified in the range within 10%. Nomura raised forecast of Nikkei to 18k pts from current 15k pts – a 20% upside over next 7 months.

Corporate earnings are likely to grow 10% and at least 8% next year, after a 68% earnings growth. Main reason is Yen weakening more than 25% from 78 to 102 against USD since Abe took reins, making export cheaper. It is expected that yen not likely to further weaken dramatically, implying a more decent return on corporate earnings.

Another reason is improvement of return of equity (ROE) from 5% three years ago to 8-9% now. Economic fundamentals are stronger this time. Consumer confidence about the future is high.

Consumption Tax Hike – Long Term Positive

Increase of consumption tax from 5% to 8% on Apr 1, has clear short term negative impact over next few months, but over the longer term, sales tax will help to improve Japan’s fiscal situation.

Auto sales increase 16.7% ahead of consumption tax, but fell only by 5.1% in Apr. Department store sales up 25.4% in March, fell only by 7.2% in April. This is much better performance than 1997 when there is a consumption tax hike and decline in sales is much more substantial.

Also private capital spending jumped by 7.6% rather than 4.9% estimated. This is unexpected good news. Normally companies do not intend to ramp up spending given the fears of sales slump after tax hiked.


Abenomics – Flying so Far

Abe’s five areas to help restructure economy are very positive so far. They are:
  • Trans-Pacific Partnership (TPP) – an accord with other Pacific Basin economies
  • Setting up of strategic special economic zones
  • Overhaul of government pension schemes
  • Corporate tax breaks
  • Labour market reforms, including greater workforce participation by women
One of the biggest positive changes is to increase the allocation of Government pension investment fund investing in stocks from current 12% to 20%.

However structural reforms take more time compare to monetary easing and fiscal stimulus. 

Therefore need to be patient.

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