Newsletters

Aside from trimming a handful of positions on share price strength, our largest sale was the exit of Digital Garage (4819). After publishing a press release in November, at the end of the year, defiant to the trend of reducing crossshareholdings, Digital Garage issued 5.3% of its treasury shares to Resona HD, with Resona HD committed to purchasing an additional 4.8% in the market. With a consistently underperforming and mismanaged business, along with the senseless issuance of undervalued shares, we have more promising opportunities to allocate our capital toward. After we sold, Digital Garage’s share price limped -8% lower, underperforming a strong market.

Digital Garage was the largest detractor, with a -20% fall in its share price reducing performance by 130bps following a hugely disappointing mid-term plan. We have been engaging with Digital Garage extensively and ahead of the mid-term plan sent a letter to the Board calling for all strategic options to be considered to address the inefficient holding structure.

Instead of listening to our concerns and those raised publicly by another shareholder, a Hong-Kong based activist fund, management released an uninspiring mid-term plan. The plan failed to address the holding structure nor justify why Digital Garage needed a 20% stake in Kakaku.com, and neither did it make a convincing case as to how, without change, the performance of the payment business will improve. The negative share price reaction shows we are not alone in our disappointment with the mid-term plan, and we are exploring next steps.

Digital Garage (DG)’s meteoric +32% share price increase in Q4 2022 reversed this quarter, with a share price decline of -5%, reducing returns by 51bps. Frustratingly, all of the weakness was driven by its 20% stake in listed Kakaku.com, which fell -14%.

DG is a holding company whose key assets are its stake in Kakaku.com and DG Fin Tech, one of Japan’s largest payment settlement businesses. The stake in Kakaku.com is non-core, and despite management’s assertations, it has failed to generate meaningful synergies with the payments business. Kakaku.com’s share price has been remarkably weak, failing to capture COVID-rebound demand in its restaurant reservation business and sell-side analysts questioning the validity of its price comparison website business model. Kakaku.com is trading on a P/E on just under 20x, the bottom end of its range and at the same level as during the COVID-lows.

We have been engaging with DG intensively since February 2021 when we sent a detailed presentation outlining several issues that we believed were contributing to DG’s undervaluation. We called for a review of the confusing holding company structure and greater focus on the payments business. Management responded favourably to our suggestions outlining a clearer strategy, improving shareholder communications, and concentrating on the payments business through a new initiative called “DG FinTech Shift”.

However, the holding structure and stake in Kakaku.com has not been addressed, and this was crux of Oasis’ public presentation released in December calling on Digital Garage to split its businesses. We have been conveying the same message to the Board of Directors in private, and over the quarter sent a letter explaining our views. Following our letter, management announced that they will release a mid-term plan on the 11^th May which will review “each business and strategy of management resources”.

We will wait and see what actions management will announce, but remain confident in the upside potential, with a lowly valued Kakaku.com and a potential for the eradication of the discount in a restructuring event.

Digital Garage (DG) saw a meteoric +32% increase in its share price over the quarter adding 145bps to returns. This was driven exclusively by discount narrowing from 36% to 13%, with DG’s NAV falling over the period, as the share price of its 20% stake in listed Kakaku.com, accounting for 45% of its market cap at the start of the period, fell -14%.

DG is a holding company whose key assets are its stake in Kakaku.com and DG Fin Tech, one of Japan’s largest payment settlement businesses. We have been engaging with DG intensively since February 2021 when we sent a detailed presentation outlining several issues that we believed were contributing to DG’s undervaluation. We called for a review of the confusing holding company structure and greater focus on the payments business. Management responded favourably to our suggestions outlining a clearer strategy, improving shareholder communications, and concentrating on the payments business through a new initiative called “DG FinTech Shift”.

What management had so far been reluctant to address was DG’s overexposure to a non-core stake in Kakaku.com. Over the quarter management finally starting to act, selling a modest 3% of their holding and deploying the proceeds into a 3.4% share buyback. Proving Kakaku.com was not a sacred cow buoyed the share price. Then in December the share price took a further jump after an activist investor launched a public campaign calling on DG to sell its stake in Kakaku.com and restructure into two entities, in keeping with the suggestions we made in private.

While DG’s discount has narrowed, in a scenario where DG splits into two entities, a more likely event with two shareholders engaging on the same topic, we believe the upside could be over +50%.

Digital Garage (DG) saw a +14% increase in its share price over the month (+20% in GBP) in what was a difficult market environment. This was driven entirely by discount narrowing from 28% to 13%, as DG’s 20% stake in listed Kakaku.com, accounting for 39% of its market cap at the start of the period, fell by -13%.

DG is a holding company whose key assets are its stake in Kakaku.com and DG Fin Tech, Japan’s third largest payment service provider. We have been engaging with DG intensively since February 2021 when we sent a detailed presentation outlining several issues that we believed were contributing to DG’s undervaluation. We called for a review of the confusing holding structure and greater focus on the payments business. Management responded favourably to our suggestions outlining a clearer strategy, improving shareholder communications, and concentrating on the payments business through a new initiative called “DG FinTech Shift”.

While the share price had already reacted favourably to management’s improvements, it was buoyed further over the month when a Hong-Kong based activist investor launched a public campaign calling on DG to sell its stake in Kakaku.com and restructure into two entities, in keeping with the suggestions we made in private.

While DG’s discount has narrowed, we believe the upside could be over 50% in a scenario where DG splits into two entities (a more likely event with two shareholders engaging on the same topic).

Digital Garage continued to be a laggard, as its share price fell -5% over the quarter, taking this year’s return to -29%. The decline over the quarter came from discount widening, as its 20% stake in listed Kakaku.com saw its share price increase +11%, while GMO Payment’s share price, a proxy for Digital Garage’s payment business, increased by +5%. Digital Garage is a holding company whose key assets are a listed 20% stake in Kakaku.com and DG Fin Tech, one of Japan’s largest payment settlement businesses. We estimate that these two assets, along with stakes in venture start-ups, are worth 77% more than the current share price. We attribute the undervaluation partially to the holding structure but also to an incoherent strategy poorly communicated to investors. We sent two lengthy presentations to management last year which led to a new strategic direction entitled “DG FINTECH SHIFT”. After we sent a letter detailing why we voted against President Hayashi at the June 2022 AGM, Digital Garage further improved disclosure in its first quarter results presentation. While these actions are encouraging, Digital Garage has failed to address the elephant in the room – the Y105bn stake in Kakaku.com that accounts for 64% of Digital Garage’s market cap. We have argued that either Digital Garage needs to generate sufficient synergies to produce an ROIC above its cost of capital or should reduce the stake and return it to Digital Garage shareholders. We know we aren’t the only shareholder requesting this and we suspect that the Company will come under further pressure unless the share price performance improves. Clearly, the upside is significant, and we are evaluating possible next steps ahead of the AGM.

Suffering from a continued sell-off of growth-related companies, Digital Garage was the largest detractor reducing returns by 126bps. The -20.2% share price decline was driven by a widening of its discount from 35% to 37% and weakness in Kakaku.com whose share price fell -19.9%. Digital Garage is a holding company whose key assets are a listed 20% stake in Kakaku.com and one of Japan’s largest payment settlement businesses. We estimate that these two assets, along with small stakes in venture start-ups and a digital marketing business, are worth 59% more than the current share price. We attribute the undervaluation partially to the holding structure but also to an incoherent strategy that has been poorly communicated to investors. We sent two presentations to management last year, 72 pages and 23 pages long, which led to a new strategic direction entitled “DG FINTECH SHIFT” – a step in the right direction. Frustratingly, however, Digital Garage continues to include previous strategy slides in its presentations, confusing investors. We sent the Board a letter during the quarter, detailing our concerns and our intention to vote against President Kaoru Hayashi at the AGM.  We hope to continue working with management to ensure Digital Garage can achieve its full potential, and remain optimistic about unlocking the undervaluation

Driven by a decline in the share price of listed price comparison website Kakaku.com (-6.8%) coupled with a widening of the discount from 37% to 40%, Digital Garage was the largest detractor, reducing returns by 55bps. Digital Garage is a holding company whose key assets are a listed 20% stake in Kakaku.com and one of Japan’s largest payment settlement businesses. We estimate that these two assets, along with small stakes in venture start-ups and a digital marketing business, are worth 67% more than the current share price. We attribute the undervaluation partially to the holding structure but also to an incoherent strategy that has been poorly communicated to investors. We sent two presentations to management last year, 72 pages and 23 pages long, which led to a new strategic direction entitled “DG FINTECH SHIFT” – a step in the right direction. Frustratingly, however, Digital Garage continues to include slides on its previous strategy in its investor presentations, confusing investors. At our last meeting, we told management to throw these slides into the virtual trashcan and to focus on creating a clearer, simpler strategy. They seemed to take on board the feedback, and we plan to continue working with management to rectify the undervaluation.

The second-largest detractor was Digital Garage, whose share price fell -18%. Although perceived as a growth stock, Digital Garage’s valuation was not stretched at the start of the month with an implied 11.7x EV/EBIT multiple on its core payment business (stripping out the stake in VC assets and Kakaku.com) versus GMO Payment Gateway’s 61.3x. The weak share price has left Digital Garage’s payment business trading on an implied 9.9x EV/EBIT multiple, which we think is cheap for a business that we expect to achieve annual profit growth in the region of 20%.

Over the month AJOT’s NAV fell slightly (-1.4%), driven by Digital Garage and SoftBank Group which detracted 60bps and 31bps respectively. Digital Garage suffered as its 20% stake in listed kakaku.com fell -11% on continued social restrictions and concerns regarding lower restaurant consumption. While the stake in kakuku.com accounts for 48% of NAV, it is Digital Garage’s payment settlement business (40% of NAV) that is the real driver for growth. We have been encouraged by strategic initiatives that management are taking in the payment business, following behind the scenes engagement, specifically a focus to orientate Digital Garage’s holding structure around the payments business. The Company announced a “DG FinTech Shift”, merging its two payment businesses with the aim to accelerate growth and create synergies with other business areas. Over the next four years management are aiming to grow profits at an annual compound rate of 25% – which is not reflected in Digital Garage’s 12x EV/EBIT multiple.

Finally, Digital Garage has been a position in AVI’s funds since 2016 (before the launch of AJOT) so we are familiar with management and their business. We have a firm view about what management should be doing to improve Digital Garage’s valuation, which relates to strategic initiatives surrounding its payments business. We have been encouraged by the response and conversations with senior management who have shown a deep awareness of the issues stifling their valuation. Digital Garage’s share price is undervalued and its business misunderstood, and we believe management will take steps to remedy that in the coming months.

Digital Garage has yet to report results, and its -16% share price fall was remarkable considering its closet peer, GMO Payment, saw its share price increase by +8% while the share price of Kakaku.com, which accounts for 43% of Digital Garage’s NAV, rose +7%. Digital Garage suffers from poor disclosure and a complex holding structure, which masks the true underlying quality of its fastgrowing payments business, and we believe the weakness over the month was simply driven by a lack of investor interest, rather than a fundamental issue.

Our third largest contributor over the period was Digital Garage, whose share price increased by +19%, recovering from a period of weak performance. Digital Garage holds assets that should be huge beneficiaries from the increased adoption of digital services, including a portfolio of tech start-ups, a digital advertising business and an ecommerce payment settlement business. Over 2020 Digital Garage’s share price fell -6%, compared to the MSCI Japan Small Cap return of +2%, and more importantly, an +86% return from Digital Garage’s closet payments peer, GMO Payment Gateway. Given its lagging performance looks increasingly divorced from the positive fundamentals, we believe Digital Garage’s share price is poised for a strong 2021.

Digital Garage reported lacklustre earnings over the month caused by a slowdown in real estate advertising and lower than anticipated growth in ecommerce financial payment sales, which was disappointing considering that we had hoped it would be a beneficiary of increased adoption of digital services. It was the weakest performer, detracting -49bps from performance. However, Digital Garage are optimistic about their outlook and are aiming for a 20% compound growth rate in earnings over the next 5 years.

Digital Garage’s NAV increased by 4% and its discount narrowed from 15%
to 9% over March. We first purchased shares in Digital Garage in early-
2016, with our investment returning +74% since then against the TOPIX
return of +37%. Our investment thesis was predicated on the market’s
undervaluation of Digital Garage’s unlisted assets (payments and online
marketing businesses, and other venture capital investments), with investors
seemingly only focussed on its stake in listed Kakaku (Japan’s largest online
price comparison and restaurant-review company). Given the growth rates
of Digital Garage’s unlisted assets, we believed the valuation anomaly was
unlikely to persist and, indeed, the discount has narrowed from 33% since
our first purchase while the earnings of the two major unlisted assets have
grown by +58%. Given the inadequate prospective returns from the current
valuation level, we continued to sell our position into this strength and exited
the last of our holding in early April.

Digital Garage’s shares climbed +22%. Aside from its stake in publiclyquoted
online comparison site Kakaku.com which accounts for 44% of NAV,
Digital Garage also owns several unlisted technology investments across the
payments and online advertising sub-sectors. The fervour around blockchain
has now reached Digital Garage which has some small investments in
this area, and this speculation saw the 22% discount on which it began the
month shrink to just 4%. We reduced our position at these tighter discount
levels.

Digital Garage, the Japanese technology-focused holding company, saw its
share price rise by +19% benefitting from strong growth (+14%) in the share
price of its largest asset Kakaku.com. An additional tailwind came from
Digital Garage’s unlisted marketing business which reported an increase in
operating profits of +72% year-over-year in Q3-17. On top of a rising NAV,
the discount contracted by 560bps. We still view Digital Garage’s shares as
attractively valued given the high quality of their fast-growing unlisted
payments and marketing businesses, and we expect growing recognition of
these to result in a structurally narrower discount as the market changes its
misperception of Digital Garage being simply a passive mono-holding
company for Kakaku.com.

Not far behind was Digital Garage which fell 16% over the month. This was
driven entirely by discount widening for which we can find little justification.
The market seems to view Digital Garage as simply a holding company for
listed internet business Kakaku, and as such its shares are traded heavily by
arbitrageurs and hedge funds. Digital Garage’s results, released during the
month, reaffirmed our confidence in the quality of their two largest unlisted
businesses (epayments and marketing) with operating profits growing by
25% and 12% year-on-year. In addition, Digital Garage gave a new midterm
plan where they guided for 15% compound annual growth in earnings
over the next three years for each of these businesses. We expect that Digital Garage will either list one of these assets, or they will become too
large a part of NAV for the market to continue ignoring, and that the result
will be a materially narrower discount and higher NAV.

The recent share price weakness in Digital Garage allowed us to add to
our relatively small position following substantial widening of
the discount (from 17% to 35% over the month). We think this was
likely caused by arbitrage traders exiting their positions following the
changing of listing from the JASDAQ to the First Section of the Tokyo
Stock Exchange. In these situations, we are invariably happy to acquire
additional stock at what we believe to be attractive levels from non-fundamentally-orientated sellers