Newsletters

AGT

Digital Garage • Newsletter December 2022

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).

AGT

Digital Garage • Newsletter March 2018

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.

AGT

Digital Garage • Newsletter January 2018

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.

AGT

Digital Garage • Newsletter November 2017

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.

AGT

Digital Garage • Newsletter May 2017

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.

AGT

Digital Garage • Newsletter July 2016

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