During the quarter, the Small-Cap Investment Committee initiated a position in Japanese Fuji Media Holdings (TSE:4676, Financial).
Fuji Media is among Japan’s top four for-profit, free-to-air television broadcasters in terms of number of viewers. Once the number-one broadcaster, Fuji Media has seen its ratings decline continuously for the past decade. The market appears concerned that the rating decline will continue, especially if the Japanese economy weakens further, potentially triggering a downturn in the domestic television advertising, a major revenue source for Fuji Media.
We believe the market’s short-term view ignores the significant asset value of the company, as reflected by the large discount to book value at which Fuji Media traded as of June 30, 2016, and considering that Fuji Media has a diversified business mix via its Urban Development Group, which develops and operates commercial and residential properties. Moreover, despite the TV rating decline, the company’s media franchise has earned decent returns on capital and benefited from an industry with high barriers to entry. In our opinion, Fuji Media is well equipped to improve its ratings through recent initiatives but the market appears to give no credit for this potential positive development.
At the buy price, which incorporated the market’s negative view on its legacy media business, we see a TV rating rebound as a free upside optionality and a property portfolio that is under recognized. Given the combination of these factors, we believe the risk/reward tradeoff warrants an investment in the company.
From Brandes International Small Cap second quarter 2016 commentary.
