The fund first invested in TBS in January 2017. Our analysis concluded that TBS’s operating business is dwarfed by their securities portfolio and real estate. The shares of TBS were trading at a 36% discount to our calculated net asset value (NAV). We determined that there were several corporate governance issues and balance sheet inefficiency that could be addressed.
TBS has a low ROE of between 2.8% to 3.3% over the last five years. The ISS ROE recommendation is 5.0% and our recommended minimum ROE target is 8.0%. The Board of TBS is composed of 13 TBS employees and 4 non-employee Directors. However, the 4 non-employee Directors represent companies with cross-shareholdings. This type of board composition results in a lack of accountability and supervision.
TBS’ balance sheet illustrates poor capital allocation. 66% of the balance sheet consists of investment securities, non-core real estate and cash.
TBS’s two largest holdings, Tokyo Electron and Recruit Holdings, accounts for 50% of TBS’s market cap. However, TBS’s share price has significantly underperformed the share price of its two largest holdings.
Over the year, AVI has sought to instigate changes in the corporate governance at TBS. We have actively engaged with the Board of TBS to discuss various actions to enhance corporate governance and balance sheet efficiency. Subsequently, TBS cancelled the entirety of the treasury shares which amounted to 8.3% of the share capital.
British Empire Trust focuses on a diverse universe of investment opportunities often ignored by mainstream investors: family controlled holding companies, closed end funds and other asset backed companies.
* As at 31 March 2019
** Source: Morningstar, performance period 30 June 1985 to 31 January 2019, TR net of fees, GBP
*** As at 30 September 2017, includes: management fee 0.70%, marketing and administration costs
British Empire Securities and General Trust p.l.c is referred to as ‘British Empire’ throughout the website. British Empire’s investment managers, Asset Value Investors are referred to as ‘AVI’