Galileo Japan Trust

High five GJT holders

GJT has worked out very well for me and I’m particularly pleased with the result. I’m happy not only because the share price is up but more so because the opportunity to close the discount to book value was clear to me when I invested. That has finally occurred with the masterstroke by management to list the portfolio in Japan.

Management has done a great job in delivering shareholder returns post the 2013 recapitalisation. I’ve calculated the IRR post recapitalisation below to be in excess of 30% using last Friday’s closing share price of $2.44.


Shareholders have already passed the resolution for the IPO to proceed and management has advised that the expected capital return to investors would be $2.65 due in August/ September 2016. So should I sell my shares at Friday’s closing share price of $2.44 or wait for the capital return? The risks being that the IPO may not proceed and/ or the Yen falling against the Australian dollar (shrinking the Yen sale proceeds).

The IPO risks

Let me first say I do not have any information on the progress of the IPO process. So I’ve tried to assess the likelihood of the IPO’s appeal to the Japanese investor by analysing the potential dividend yield that an investor in the new Japanese entity (Newco) could achieve based on historical data. REITS are essentially yield plays and figuring out the potential yield relative to existing Japanese REITS would give a sense of the attractiveness of the IPO.

This analysis was done by assuming a geared and ungeared structure for Newco based on past proceeds received by GJT from the TK business in Japan and assuming that the portfolio value is ¥57.8 billion as indicated by management. No details on Newco structure was provided so I’m assuming the cost will be similar to the existing TK business.

IPO div yield

As shown above, the potential dividend yield range is 3.8% to 6.4% depending on the level of gearing.  My sense is that Newco’s ultimate gearing would be a bit lower than the current 59% D/EV gearing to enable the dividend yield to be around 5%. I’ve selected a handful of Japanese office focus REITS trading on the Tokyo Stock Exchange to get a sense of the dividend yields, these are shown below.


Compared to Australian REITS, the dividend yields on the Japanese REITS are quite low and this is probably driven by the current negative interest rate environment in Japan. Even on an ungeared basis, Newco’s dividend yield has the potential to surpass the above average dividend yield. Therefore, from a dividend yield perspective, I believe Newco has the ability to make an attractive IPO proposition to Japanese investors.

Exchange rate risks

In the event the IPO proceeds, management has forecast a capital return of $2.65 based an exchange rate of A$1:¥82. I have charted the AUD:JPY movement from January 2014 to present.


Some observations I would like to make on the exchange rate:

  • In my original post, I calculated the average 20 year rate (to Jan 2015) to be A$1: ¥81
  • The A$:¥ rate appears to be in a downtrend (Australian dollar falling) since November 2014
  • Based on the above period, there appears to be some support at the A$1: ¥80 level and the current rate of A$1:¥82 is close to that support level

Currency movements are terribly hard to predict. However, to get some understanding of the extreme scenarios, I have analysed the above trading data to work out the maximum depreciation and appreciation over a 100 day trading cycle. I choose 100 days to be representative of the trading period from now to the receipt of the IPO proceeds. Barring any “black swan” events, this trading period which covers 471 observations of 100 day trading should provide some clues to the potential extreme outcomes.

100 day AUDJPY

Over this period the maximum A$:¥ depreciation and appreciation over 100 days was -12.7% and 7.4% respectively. Applying the maximum depreciation and appreciation to the current rate of A$1:¥82 gives us a potential IPO proceeds range of $2.46 to $3.03 per share.

scenario - cap return

The shares last traded at $2.44 (8 August) and management has announced a 8.7 cents dividend payment in August so the theoretically undiscounted ex-dividend price is $2.35. This share price factors in a probability of an IPO success so we can take a further step in our analysis by including this assumption.

scenario - cap return2

Based on the pre-IPO announcement share price, I have worked out the potential uplift based on the base, high and low cases and assuming 80% probability of success and a pre-IPO announcement share price of $2. Basically if the IPO does not proceed, the share price falls back to $2. I believe 80% probability is reasonable given 1) Newco dividend yield will be attractive and 2) the current MD and CEO (Neil Werrett) will have an interest in the asset manager for Newco and this is an incentive for ensuring the IPO goes through.

In addition, I’ve calculated that the implied IPO probability based on current share price (and base case) is 55% which is too conservative in my view.

I’m not advocating a buy at current share price but as an existing holder of GJT, the share price is too low to consider selling now. I may consider selling  if the share price gets closer to $2.60 (pre-dividend) with the exchange rate still sitting around A$1:¥82.



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