GMO Internet: Listed Holdings Preferred

Applying a deconsolidated book value for the unlisted operations, I see GMO Internet (9449 JP) at a ~30% discount to NAV, a reasonable level for an active holding company structure with eight listed subsidiaries.

It is the complexity of the holdings, both listed and unlisted, and the inability to look through into the financials of the key operating segments, that suggest the 54% gain in the past twelve months is overdone.

Gaining traction on the merits of the unlisted ops at the Holdco have proven to be fleeting, as seen with GMO-i's cryptocurrency frenzy in 2018. The division remains profitable, however, the top-line revenue in the most recent quarter of ¥1.57bn is the second-lowest since the 2018 June-end quarter peak. Shares bottomed out on the 25 December 2018 at ¥1,325 - its lowest level since Aug 2017 and down 56% from its June 2018 high - the same day GMO-i announced a cryptocurrency-related impairment of ¥35.5bn.

Returns from the incubation segment are lumpy with limited visibility; the internet advertising segment recently recorded its second-lowest quarterly operating profit in the last thirteen years; leaving the core competitiveness and inaugural internet infrastructure businesses, which continue to eke out new highs, and the internet finance business.

Given current levels, the opaqueness within the Holdco structure, and perhaps ambitious thinking value can be unlocked via ongoing activism; the recommendation is to be directly invested with the listed subsidiaries in place of the parent.