Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<div><p>S&amp;P Dow Jones Indices will announce changes to the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.</p></div><div>We are almost three quarters of the way through the review period. There are 3 potential inclusions at the review - <a href="https://www.smartkarma.com/entities/centuria-capital-group" target="_blank" data-smartkarma-citation="entities:15546:1" rel="noopener">Centuria Capital (CNI AU)</a>, <a href="https://www.smartkarma.com/entities/pinnacle-investment-manageme" target="_blank" data-smartkarma-citation="entities:20624:1" rel="noopener">Wilson (PNI AU)</a> and <a href="https://www.smartkarma.com/entities/sealink-travel-group-ltd" target="_blank" data-smartkarma-citation="entities:6400:1" rel="noopener">Sealink Travel (SLK AU)</a> while the potential deletions are <a href="https://www.smartkarma.com/entities/nuix-limited" target="_blank" data-smartkarma-citation="entities:31040:1" rel="noopener">Nuix Limited (NXL AU)</a>, <a href="https://www.smartkarma.com/entities/nrw-holdings-ltd" target="_blank" data-smartkarma-citation="entities:9271:1" rel="noopener">NRW Holdings (NWH AU)</a> and <a href="https://www.smartkarma.com/entities/g8-education-ltd" target="_blank" data-smartkarma-citation="entities:581:1" rel="noopener">G8 Education (GEM AU)</a>.</div><div></div><div>
<a href="https://www.smartkarma.com/entities/galaxy-resources-ltd" target="_blank" data-smartkarma-citation="entities:13914:1" rel="noopener">Galaxy Resources (GXY AU)</a> is placed in the inclusion zone but is unlikely to be added to the index given its pending merger with <a href="https://www.smartkarma.com/entities/orocobre-ltd" target="_blank" data-smartkarma-citation="entities:3572:1" rel="noopener">Orocobre Ltd (ORE AU)</a>.</div><div></div><div>
<a href="https://www.smartkarma.com/entities/de-grey-mining-ltd" target="_blank" data-smartkarma-citation="entities:6192:1" rel="noopener">De Grey Mining (DEG AU)</a> is a close add and the corresponding deletion is <a href="https://www.smartkarma.com/entities/westgold-resources-ltd" target="_blank" data-smartkarma-citation="entities:24269:1" rel="noopener">Westgold Resources (WGX AU)</a>.</div><div></div><div>There is a large impact expected on the inclusions while the impact on the deletions is lower.</div><div></div><div>For <a href="https://www.smartkarma.com/entities/g8-education-ltd" target="_blank" data-smartkarma-citation="entities:581:1" rel="noopener">G8 Education (GEM AU)</a>, the short interest is close to the estimated passive selling. For the other two deletes, short interest is a lot smaller than the estimated passive selling and there will be more shorts created from now to rebalance implementation day.</div>

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 200 (AS51 INDEX) as part of the September index review on 3 September and the changes will be effective after the close of trading on 17 September.We are almost three quarters of the way through the review period. There are 3 potential inclusions at the review - Centuria Capital (CNI AU), Wilson (PNI AU) and Sealink Travel (SLK AU) while the potential deletions are Nuix Limited (NXL AU), NRW Holdings (NWH AU) and G8 Education (GEM AU).
Galaxy Resources (GXY AU) is placed in the inclusion zone but is unlikely to be added to the index given its pending merger with Orocobre Ltd (ORE AU).
De Grey Mining (DEG AU) is a close add and the corresponding deletion is Westgold Resources (WGX AU).There is a large impact expected on the inclusions while the impact on the deletions is lower.For G8 Education (GEM AU), the short interest is close to the estimated passive selling. For the other two deletes, short interest is a lot smaller than the estimated passive selling and there will be more shorts created from now to rebalance implementation day.

ASX200 Sep21 Index Rebalance Preview: Large Impact Names

<div><p>S&amp;P Dow Jones Indices will announce changes to the <a href="https://www.smartkarma.com/entities/s-p-asx-200" target="_blank" data-smartkarma-citation="entities:22901:1" rel="noopener">S&amp;P/ASX 200 (AS51 INDEX)</a> as part of the March index review on 12 March and the changes will be effective after the close of trading on 19 March.</p></div><div>
<p>The data cutoff for the March review was 26 February.</p>
<p>We see <a href="https://www.smartkarma.com/entities/nuix-limited" target="_blank" data-smartkarma-citation="entities:31040:1" rel="noopener">Nuix Limited (NXL AU)</a>, <a href="https://www.smartkarma.com/entities/codan-ltd-australia" target="_blank" data-smartkarma-citation="entities:6189:1" rel="noopener">Codan Ltd (CDA AU)</a> and <a href="https://www.smartkarma.com/entities/pilbara-minerals-ltd" target="_blank" data-smartkarma-citation="entities:7460:1" rel="noopener">Pilbara Minerals (PLS AU)</a> as potential inclusions to the index, while we see <a href="https://www.smartkarma.com/entities/service-stream-ltd" target="_blank" data-smartkarma-citation="entities:18493:1" rel="noopener">Service Stream (SSM AU)</a>, <a href="https://www.smartkarma.com/entities/tassal-group-ltd" target="_blank" data-smartkarma-citation="entities:16234:1" rel="noopener">Tassal (TGR AU)</a> and <a href="https://www.smartkarma.com/entities/bravura-solutions-ltd" target="_blank" data-smartkarma-citation="entities:23648:1" rel="noopener">Bravura Solutions (BVS AU)</a> as potential exclusions from the index.</p>
<p><a href="https://www.smartkarma.com/entities/champion-iron-ltd" target="_blank" data-smartkarma-citation="entities:19734:1" rel="noopener">Champion Iron (CIA AU)</a> and <a href="https://www.smartkarma.com/entities/de-grey-mining-ltd" target="_blank" data-smartkarma-citation="entities:6192:1" rel="noopener">De Grey Mining (DEG AU)</a> are close adds while <a href="https://www.smartkarma.com/entities/gwa-group-ltd" target="_blank" data-smartkarma-citation="entities:663:1" rel="noopener">Gwa Group Ltd (GWA AU)</a> and <a href="https://www.smartkarma.com/entities/smartgroup-corp-ltd" target="_blank" data-smartkarma-citation="entities:19954:1" rel="noopener">Smartgroup Corp (SIQ AU)</a> are close deletes.</p>
<p>Short interest on the potential inclusions has been decreasing and is currently near the lows while short interest on the potential deletions has been steadily increasing and is at the highs.</p>
<p>Since the last index review in December, <a href="https://www.smartkarma.com/entities/pointsbet-holdings-pty-ltd" target="_blank" data-smartkarma-citation="entities:29102:1" rel="noopener">PointsBet Holdings Pty Ltd (PBH AU)</a> was included in the index replacing <a href="https://www.smartkarma.com/entities/saracen-mineral-holdings-limited" target="_blank" data-smartkarma-citation="entities:2415:1" rel="noopener">Saracen Mineral Holdings (SAR AU)</a> following its merger of equals with <a href="https://www.smartkarma.com/entities/northern-star-resources-ltd" target="_blank" data-smartkarma-citation="entities:4243:1" rel="noopener">Northern Star Resources (NST AU)</a>.</p>
</div>

S&amp;P Dow Jones Indices will announce changes to the S&amp;P/ASX 200 (AS51 INDEX) as part of the March index review on 12 March and the changes will be effective after the close of trading on 19 March.
The data cutoff for the March review was 26 February.
We see Nuix Limited (NXL AU), Codan Ltd (CDA AU) and Pilbara Minerals (PLS AU) as potential inclusions to the index, while we see Service Stream (SSM AU), Tassal (TGR AU) and Bravura Solutions (BVS AU) as potential exclusions from the index.
Champion Iron (CIA AU) and De Grey Mining (DEG AU) are close adds while Gwa Group Ltd (GWA AU) and Smartgroup Corp (SIQ AU) are close deletes.
Short interest on the potential inclusions has been decreasing and is currently near the lows while short interest on the potential deletions has been steadily increasing and is at the highs.
Since the last index review in December, PointsBet Holdings Pty Ltd (PBH AU) was included in the index replacing Saracen Mineral Holdings (SAR AU) following its merger of equals with Northern Star Resources (NST AU).


ASX200 Index Rebalance Preview: Three Potential Changes & Some Close Names

Director, RaaS Advisory, Research as a Service (RaaS)

Research as a Service (RaaS)

Director, RaaS Advisory

Insightful Financial Models and Research Analysis

Connect to the right investors through smart and insightful financial models and research analysis.

Equity Bottom-Up

<p>DXN Ltd (ASX:DXN) is a vertically integrated prefabricated modular data centre business with manufacturing facilities in Perth and its own data centre, SYD01, at Sydney Olympic Park in Sydney. &nbsp;In response to the recent market volatility, DXN has restruck its non-renounceable entitlement offer. The company is now offering a 13 for 10 non-renounceable share issue at $0.01/share to raise $5.92m, with an attached $0.02/share option expiring in three years’ time. Proceeds from the offer will fund the acquisition of TasmaNet’s Data Centre 3 revenues and assets ($2.43m), $0.89m in general working capital, $2.0m for product manufacturing working capital for DXN Modules and $0.09m for data centre marketing. The offer is fully underwritten by lead manager Pinnacle Corporate Finance with institutional shareholder SG Hiscock sub-underwriting approximately $556,000 and DXN executives $95,000 of the offer. The company has also secured a six-month principal and interest repayment holiday from its $5m secured chattel finance facility with ANZ Bank, saving around $140,000 per month. The financing restructure follows the announcement last week of a two-phased $2.3m contract with Speedcast International (ASX:SDA) to design, build and install a prefabricated modular cable station at its Mozambique operations. This underscores our forecasts for sales of $7.8m (total revenues of $8.8m) in FY20. &nbsp;We have updated our DCF valuation for the new entitlement offer, which will see more shares and listed options issued than previously forecast. Our base case DCF valuation is $0.08/share fully diluted, implying a forward 12 months EV/Sales multiple<a target="_blank"></a> of 6.9x. </p>

DXN Ltd (ASX:DXN) is a vertically integrated prefabricated modular data centre business with manufacturing facilities in Perth and its own data centre, SYD01, at Sydney Olympic Park in Sydney. &nbsp;In response to the recent market volatility, DXN has restruck its non-renounceable entitlement offer. The company is now offering a 13 for 10 non-renounceable share issue at $0.01/share to raise $5.92m, with an attached $0.02/share option expiring in three years’ time. Proceeds from the offer will fund the acquisition of TasmaNet’s Data Centre 3 revenues and assets ($2.43m), $0.89m in general working capital, $2.0m for product manufacturing working capital for DXN Modules and $0.09m for data centre marketing. The offer is fully underwritten by lead manager Pinnacle Corporate Finance with institutional shareholder SG Hiscock sub-underwriting approximately $556,000 and DXN executives $95,000 of the offer. The company has also secured a six-month principal and interest repayment holiday from its $5m secured chattel finance facility with ANZ Bank, saving around $140,000 per month. The financing restructure follows the announcement last week of a two-phased $2.3m contract with Speedcast International (ASX:SDA) to design, build and install a prefabricated modular cable station at its Mozambique operations. This underscores our forecasts for sales of $7.8m (total revenues of $8.8m) in FY20. &nbsp;We have updated our DCF valuation for the new entitlement offer, which will see more shares and listed options issued than previously forecast. Our base case DCF valuation is $0.08/share fully diluted, implying a forward 12 months EV/Sales multiple of 6.9x. 

DXN Ltd Fully Underwritten Entitlements Offer to Acquire Hobart DC

Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

Thematic (Sector/Industry)

<p><strong>The risk remains apparent - but list reduced in number over Q2</strong></p><ul>
<li>
<strong>Q1-2019 Small-Mid Cap High-Risk list of stocks</strong> ( <a href="https://www.smartkarma.com/insights/screening-the-silkroad-small-mid-cap-possible-high-risk-names-q1-2019" target="_blank" data-smartkarma-citation="insights:27812">Screening the Silkroad: Small-Mid Cap - Possible High-Risk Names: Q1 2019</a> ) delivered a market cap average price increase of 6%. In comparison, the MSCI Asia Pacific Index appreciated 5% over the same period.</li>
<li>O<strong>ur screen looks for high valuation multiples</strong> presented by candidates with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress.</li>
<li>
<strong>The Risk to this screen:</strong> The Financial and Utility sectors are not covered in this screen. Moreover, <em>“risk is not a number, it is a concept or notion”</em>, as cited by James Mortiner during his time at Société Genéralé. Hence, some stocks may appear on this screen due to their business model being realigned to a more profitable approach. They may also be a member of more positive value or quality screens, as a result of this realignment.</li>
<li>
<strong>17-stocks appear in our Q2 2019 screen, down from 26 in Q1 2019</strong>. Of which 8 are new to the list. India has increased its presence in the list, whilst Korea and Taiwan have reduced theirs. Singapore remains absent from the screen for the fourth quarter running, whilst New Zealand has no presence this quarter.</li>
<li>
<strong>Our screen continues to highlight that risk remains within the small-mid cap universe,</strong> as measured by the Altman Z score. Moreover, our average stock in the list has a ranking of 65.7, compared to 42.3 in Q1 2019, which is still highlighting mid-field ranking. These stocks traditionally perform in-line with the market at best.</li>
</ul>

The risk remains apparent - but list reduced in number over Q2

Q1-2019 Small-Mid Cap High-Risk list of stocks ( Screening the Silkroad: Small-Mid Cap - Possible High-Risk Names: Q1 2019 ) delivered a market cap average price increase of 6%. In comparison, the MSCI Asia Pacific Index appreciated 5% over the same period.
Our screen looks for high valuation multiples presented by candidates with significant earnings growth forecasts, as well as financial indicators that suggest balance sheet distress.

The Risk to this screen: The Financial and Utility sectors are not covered in this screen. Moreover, “risk is not a number, it is a concept or notion”, as cited by James Mortiner during his time at Société Genéralé. Hence, some stocks may appear on this screen due to their business model being realigned to a more profitable approach. They may also be a member of more positive value or quality screens, as a result of this realignment.

17-stocks appear in our Q2 2019 screen, down from 26 in Q1 2019. Of which 8 are new to the list. India has increased its presence in the list, whilst Korea and Taiwan have reduced theirs. Singapore remains absent from the screen for the fourth quarter running, whilst New Zealand has no presence this quarter.

Our screen continues to highlight that risk remains within the small-mid cap universe, as measured by the Altman Z score. Moreover, our average stock in the list has a ranking of 65.7, compared to 42.3 in Q1 2019, which is still highlighting mid-field ranking. These stocks traditionally perform in-line with the market at best.


Screening the Silkroad: Small-Mid Cap High-Risk Names to Avoid: Q2 2019

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
<strong>Despite relatively sluggish price performance, the ASX 200 has provided global investors with strong returns that have seen it outperform both Japan and Europe over the past few years</strong>. The market also performs well late in the global cycle when global volatility is rising because a relatively large component of returns are generated by dividends and many stocks in the ASX 200 are dominant players in their markets or they operate in small markets making earnings more defendable under late cycle cost pressures. </li>
<li>
<strong>When looking at Australia as a late-cycle opportunity, earnings quality is an important screen to consider. </strong>Stocks with good earnings quality attract the highest PE multiples and the strongest Buy recommendations.  However, in this note, we screen the ASX 200 universe for both longer-term and short-term movements in earnings quality and analyse how these movements translate into returns. </li>
<li>
<strong>FMG, WTC, XRO, WHC, LYC, MQG, S32, NHC, SAR, WEB have the distinction of making the top 50 stocks with the strongest earnings quality improvement and the list of top 50 stocks with the largest outperformance during the past 3 years. </strong>In contrast, <strong>TAH, SDA, NCM, </strong>and<strong> NHF</strong> have all seen large declines in earnings quality and have underperformed during this period. </li>
<li>
<strong>During the most recent half-year results period, NHC, SOL, BXB, VOC, SAR, BVS, IRE, IPH, and QBE made the list of stocks with the largest improvement in earnings quality and the list of top 50 stocks with the best performance. AGL, BSL, </strong>and <strong>ASL</strong> saw the largest decline in earnings quality and this coupled with underperformance.  In contrast, <strong>STO</strong> performed well, despite having declining earnings quality suggesting some underperformance could be expected. </li>
<li>
<strong>QBE is unique in that it has seen not only a strong lift in earnings quality during the half, but it has also seen its EPS growth upgraded. LNK </strong>saw a large decline in earnings quality but saw a large number of upgrades that put it in the list of top 50 most upgraded stocks during the period. </li>
<li>
<strong>WTC and S32 are in our model portfolio in our recent shift to realign it towards Resources and Growth stocks after the Q4 18 sell-off. </strong>Our work quality shows they have been good earnings quality stocks and this supports our decision to include these stocks in our portfolio.</li>
</ul>



Despite relatively sluggish price performance, the ASX 200 has provided global investors with strong returns that have seen it outperform both Japan and Europe over the past few years. The market also performs well late in the global cycle when global volatility is rising because a relatively large component of returns are generated by dividends and many stocks in the ASX 200 are dominant players in their markets or they operate in small markets making earnings more defendable under late cycle cost pressures. 

When looking at Australia as a late-cycle opportunity, earnings quality is an important screen to consider. Stocks with good earnings quality attract the highest PE multiples and the strongest Buy recommendations.  However, in this note, we screen the ASX 200 universe for both longer-term and short-term movements in earnings quality and analyse how these movements translate into returns. 

FMG, WTC, XRO, WHC, LYC, MQG, S32, NHC, SAR, WEB have the distinction of making the top 50 stocks with the strongest earnings quality improvement and the list of top 50 stocks with the largest outperformance during the past 3 years. In contrast, TAH, SDA, NCM, and NHF have all seen large declines in earnings quality and have underperformed during this period. 

During the most recent half-year results period, NHC, SOL, BXB, VOC, SAR, BVS, IRE, IPH, and QBE made the list of stocks with the largest improvement in earnings quality and the list of top 50 stocks with the best performance. AGL, BSL, and ASL saw the largest decline in earnings quality and this coupled with underperformance.  In contrast, STO performed well, despite having declining earnings quality suggesting some underperformance could be expected. 

QBE is unique in that it has seen not only a strong lift in earnings quality during the half, but it has also seen its EPS growth upgraded. LNK saw a large decline in earnings quality but saw a large number of upgrades that put it in the list of top 50 most upgraded stocks during the period. 

WTC and S32 are in our model portfolio in our recent shift to realign it towards Resources and Growth stocks after the Q4 18 sell-off. Our work quality shows they have been good earnings quality stocks and this supports our decision to include these stocks in our portfolio.


Quality Counts: A Screen of ASX 200 Earnings Quality

Australia

SpeedCast International Ltd is a provider of satellite-based communication networks and services in the Asia Pacific region and to the global maritime industry. The Company designs, implements, integrates, operates and maintains communications networks. I

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Speedcast International (SDA AU)

ASX200 Sep21 Index Rebalance Preview: Large Impact Names

We see 3 potential changes to the ASX200 at the Sep rebalance with CNI, PNI and SLK being included and NXL, NRW and GEM being deleted. Passive...

Brian Freitas

ASX200 Index Rebalance Preview: Three Potential Changes & Some Close Names

We see three potential changes to the ASX200 in the March review while there are another two close adds/deletes. High short interest on the...

Brian Freitas

DXN Ltd Fully Underwritten Entitlements Offer to Acquire Hobart DC

DXN Ltd (ASX:DXN) is a vertically integrated prefabricated modular data centre business with manufacturing facilities in Perth and its own data...

Research as a Service (RaaS)

Screening the Silkroad: Small-Mid Cap High-Risk Names to Avoid: Q2 2019

The risk remains apparent - but list reduced in number over Q2 Q1-2019 Small-Mid Cap High-Risk list of stocks ( Screening the Silkroad: Small-Mid...

David Lepper

Quality Counts: A Screen of ASX 200 Earnings Quality

Despite relatively sluggish price performance, the ASX 200 has provided global investors with strong returns that have seen it outperform both...

Shane Lee

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