Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>Back on 29th June 2001, BHP and Billiton merged by way of a dual-headed structure.  Shareholders continued to hold their pre-merger shares in BHP or Billiton, but with the same economic interest in the entire group, and dividends and capital distributions were equalised in accordance with a 1:1 equalisation ratio.</p>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/287/original/image?1629186949" class="editor-image img-responsive" data-smartkarma-image-id="224287"></figure>
</div>
<div>
<ul style="list-style-type: disc;">
<li>This unique structure has faced investor criticism over the years.  Most recently, on the 10 April 2017,  <a href="http://www.elliottadvisors.hk/" target="_blank" rel="noopener">Elliott Advisors (HK) Limited</a> issued a number of proposals via an <a href="https://fixingbhp.com/wp-content/uploads/2017/07/BHP-Letter-to-the-Directors.pdf" target="_blank" rel="noopener">open letter</a> to the board of <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Billiton Limited (BHP AU)</a>. This was discussed in greater detail in <em><a href="https://skr.ma/RYqo" target="_blank" rel="noopener">Elliott's Proposals Test BHP's Metal</a></em>.</li>
<li>Elliott argued the DLC structure was obsolete, hinders the ability of BHP to reach its full potential, and creates a long-term trading mismatch between Limited and PLC shares. </li>
<li>A key tenet from the Elliott side was providing greater access to BHP’s franking credits. Elliott proposed under the unified BHP, attaching franking credits to any dividends it makes, enabling all shareholders to participate via fungibility. A similar argument was made for buybacks.</li>
<li>BHP <a href="http://www.bhpbilliton.com/-/media/documents/media/reports-and-presentations/2017/170412_bhpbillitonreviewofelliottproposalpresentation.pdf" target="_blank" rel="noopener">argued</a> the proposal would result in a wastage of franking credits, that unification is not required for off-market buybacks - indeed it would make off-market buybacks less attractive.</li>
<li>Elliott submitted a second letter on the <a href="https://fixingbhp.com/wp-content/uploads/2017/07/BHP-Press-Release-inc.-Letter-May-2017.pdf" target="_blank" rel="noopener">16 May 2017</a>, reiterating its proposals, and notably singling out BHP's "flawed" unification costs. This letter went unanswered by BHP.</li>
<li>A third letter was issued on the <a href="https://live-fixing-bhp.pantheonsite.io/wp-content/uploads/2017/07/Letter-to-Chairman-05.02.18.pdf" target="_blank" rel="noopener">5 February 2018</a>. Using analysis from FTI Consulting, it considered the unification would deliver in excess of US$22bn, with unification costs of US$391mn - against the US$1.3bn estimate from BHP.</li>
<li>Elliott also noted that following the 2015 demerger of South32, Plc no longer generates sufficient income to fund dividends. This resulted in the DLC Dividend share proposal, which was designed to support the matching-dividend policy.  When BHP merged with Billiton, one of the fundamental requirements of the structure was that cash dividends would be equal for both the British and Australian lines, under the matching-dividend policy.</li>
<li>Elliott has not issued a follow-up letter in the past three and a half years - there is a website called <a href="https://fixingbhp.com/" target="_blank" rel="noopener">Fixing BHP</a>. No doubt Elliott were somewhat mollified by BHP selling its US shale oil &amp; gas assets to BP in 2018 - a proposal advocated by Elliott - then announcing on <a href="https://www.asx.com.au/asxpdf/20181101/pdf/43zxbpdqnm2ltl.pdf" target="_blank" rel="noopener">1 November 2018</a> a US$10.4bn (A$14.7bn) return to shareholders through a special dividend (fully franked) and <a href="https://www.asx.com.au/asxpdf/20181108/pdf/440368k1w0qd6n.pdf" target="_blank" rel="noopener">share buyback</a>. </li>
</ul>
</div>
<div>
<h3>But There ARE Fundamental Reasons for BHP’s Premium</h3>
</div>
<div>
<ul>
<li>There exist strong tax arguments supporting a premium in the Australian line relating to dividends and off-market share buyback. The current premium (pre-announcement) is 19.4% (reflected in the ADRs) against a long-term average of 12.5%. </li>
</ul>
</div>
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<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/291/original/image_62648945021629187712421.png?1629187713" class="editor-image img-responsive" data-smartkarma-image-id="224291"></figure>
</div>
<div>
<div style="text-align: left;" class="content-caption">Source: CapIQ</div>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<strong>42% Dividend Tax Advantage</strong>. Australian investors have a highly tax-advantaged position when investing in the Australian line which provides them with a material advantage over other investors.
<ul style="list-style-type: circle;">
<li>Australian dividends are generally paid with a franking credit attached which can be used to offset the income tax liabilities of an Australian recipient.</li>
<li>The franking credit is equivalent to the corporate tax rate (currently 30%) which has been paid. In general, this means that a dollar received by a domestic investor in the Australian line is worth 42% (1/(1-30%)) more to them than an equivalent holding of the London line.</li>
</ul>
</li>
</ul>
</div>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/302/original/image_96891655851629189775822.png?1629189776" class="editor-image img-responsive" data-smartkarma-image-id="224302"></figure>
<p>Source: <a href="https://live-fixing-bhp.pantheonsite.io/wp-content/uploads/2018/03/FTI-Value-Release-from-Unification-at-BHP-Final.pdf" target="_blank" rel="noopener">Elliott</a> </p>
</div>
<div>
<ul>
<li>Theoretically, there is no reason for the BHP/BLT spread to stop widening until it reaches the level of 42% where the most tax-advantaged investors exhaust the excess return - provided sufficient corporate tax has been paid in Australia to cover the franking element on the dividend.</li>
<li>
<strong>The Buyback tax advantage</strong>.  The Australian franking credit system also confers a capital gains tax benefit when BHP carries out off-market tender offers. This is because for tax purposes the transaction is partially treated as a dividend which means some recipients may receive more than the market value of their holding when the franking credits are taken into account.
<ul>
<li>For this reason, BHP can initiate tender offers in Australia struck at large discounts to the market price. In the last tender offer in <a href="https://www.asx.com.au/asxpdf/20181108/pdf/440368k1w0qd6n.pdf" target="_blank" rel="noopener">2018</a>, the discount was capped at the legal maximum level (by the ATO) of 14%.</li>
<li>When the spread blows out to such a level (over 16% premium) as it has now, it compromises the ability to announce further buybacks in Australia as the spread exceeds the maximum legal tender discount level (of 14%). Meaning any Australian buyback would have to be at a premium to the London price. Therefore future buyback proposals will be forced to focus on the London line, in which the franking credits cannot be used.</li>
</ul>
</li>
</ul>
<h3>Unilever's DLC Unification</h3>
<ul>
<li>Back on the 11 June 2020, <a href="https://www.smartkarma.com/entities/unilever-nv" target="_blank" data-smartkarma-citation="entities:21141:1" rel="noopener">Unilever NV (UNA NA)</a> / <a href="https://www.smartkarma.com/entities/unilever-plc" target="_blank" data-smartkarma-citation="entities:22197:1" rel="noopener">Unilever PLC (ULVR LN)</a> <a href="https://www.unilever.com/news/press-releases/2020/unification-of-unilever-legal-structure.html" target="_blank" rel="noopener">announced</a> it would (finally) unify its dual Anglo-Dutch corporate structure under a single parent company based in London, in an about-face to the 2018 unification attempt with a Dutch-headquartered holding company. This deal was discussed in <em><a href="https://skr.ma/PyquN" target="_blank" rel="noopener">Unilever: When Two Heads Are Not Better Than One. What About BHP's DLC?</a></em>.</li>
<li>This unification again renewed interest in BHP's structure.</li>
</ul>
<h3>The New News</h3>
<ul>
<li>BHP has now <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02407981-3A572982?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">announced</a> the unification of its corporate structure to make BHP "<em>simpler and more agile</em>", thus removing the complexity of managing the DLC.</li>
<li>BHP considers now is the appropriate time to unify as there has been a significant reduction in cost indications - US$400-500mn compared to ~US$1.6-1.7bn previously.</li>
<li>More importantly, the unification means no change to the dividend policy and the ability of the company to frank dividends.</li>
<li>BHP Plc shareholders would be entitled to receive one Ltd share for each Plc share they own.</li>
<li>As night follows day, expect the spread between the two lines to narrow.</li>
</ul>
<p>More below the fold.</p>
<p></p>
<p></p>
</div>

Back on 29th June 2001, BHP and Billiton merged by way of a dual-headed structure.  Shareholders continued to hold their pre-merger shares in BHP or Billiton, but with the same economic interest in the entire group, and dividends and capital distributions were equalised in accordance with a 1:1 equalisation ratio.





This unique structure has faced investor criticism over the years.  Most recently, on the 10 April 2017,  Elliott Advisors (HK) Limited issued a number of proposals via an open letter to the board of BHP Billiton Limited (BHP AU). This was discussed in greater detail in Elliott's Proposals Test BHP's Metal.
Elliott argued the DLC structure was obsolete, hinders the ability of BHP to reach its full potential, and creates a long-term trading mismatch between Limited and PLC shares. 
A key tenet from the Elliott side was providing greater access to BHP’s franking credits. Elliott proposed under the unified BHP, attaching franking credits to any dividends it makes, enabling all shareholders to participate via fungibility. A similar argument was made for buybacks.
BHP argued the proposal would result in a wastage of franking credits, that unification is not required for off-market buybacks - indeed it would make off-market buybacks less attractive.
Elliott submitted a second letter on the 16 May 2017, reiterating its proposals, and notably singling out BHP's "flawed" unification costs. This letter went unanswered by BHP.
A third letter was issued on the 5 February 2018. Using analysis from FTI Consulting, it considered the unification would deliver in excess of US$22bn, with unification costs of US$391mn - against the US$1.3bn estimate from BHP.
Elliott also noted that following the 2015 demerger of South32, Plc no longer generates sufficient income to fund dividends. This resulted in the DLC Dividend share proposal, which was designed to support the matching-dividend policy.  When BHP merged with Billiton, one of the fundamental requirements of the structure was that cash dividends would be equal for both the British and Australian lines, under the matching-dividend policy.
Elliott has not issued a follow-up letter in the past three and a half years - there is a website called Fixing BHP. No doubt Elliott were somewhat mollified by BHP selling its US shale oil &amp; gas assets to BP in 2018 - a proposal advocated by Elliott - then announcing on 1 November 2018 a US$10.4bn (A$14.7bn) return to shareholders through a special dividend (fully franked) and share buyback. 



But There ARE Fundamental Reasons for BHP’s Premium



There exist strong tax arguments supporting a premium in the Australian line relating to dividends and off-market share buyback. The current premium (pre-announcement) is 19.4% (reflected in the ADRs) against a long-term average of 12.5%. 






Source: CapIQ




42% Dividend Tax Advantage. Australian investors have a highly tax-advantaged position when investing in the Australian line which provides them with a material advantage over other investors.

Australian dividends are generally paid with a franking credit attached which can be used to offset the income tax liabilities of an Australian recipient.
The franking credit is equivalent to the corporate tax rate (currently 30%) which has been paid. In general, this means that a dollar received by a domestic investor in the Australian line is worth 42% (1/(1-30%)) more to them than an equivalent holding of the London line.






Source: Elliott 



Theoretically, there is no reason for the BHP/BLT spread to stop widening until it reaches the level of 42% where the most tax-advantaged investors exhaust the excess return - provided sufficient corporate tax has been paid in Australia to cover the franking element on the dividend.

The Buyback tax advantage.  The Australian franking credit system also confers a capital gains tax benefit when BHP carries out off-market tender offers. This is because for tax purposes the transaction is partially treated as a dividend which means some recipients may receive more than the market value of their holding when the franking credits are taken into account.

For this reason, BHP can initiate tender offers in Australia struck at large discounts to the market price. In the last tender offer in 2018, the discount was capped at the legal maximum level (by the ATO) of 14%.
When the spread blows out to such a level (over 16% premium) as it has now, it compromises the ability to announce further buybacks in Australia as the spread exceeds the maximum legal tender discount level (of 14%). Meaning any Australian buyback would have to be at a premium to the London price. Therefore future buyback proposals will be forced to focus on the London line, in which the franking credits cannot be used.



Unilever's DLC Unification

Back on the 11 June 2020, Unilever NV (UNA NA) / Unilever PLC (ULVR LN) announced it would (finally) unify its dual Anglo-Dutch corporate structure under a single parent company based in London, in an about-face to the 2018 unification attempt with a Dutch-headquartered holding company. This deal was discussed in Unilever: When Two Heads Are Not Better Than One. What About BHP's DLC?.
This unification again renewed interest in BHP's structure.

The New News

BHP has now announced the unification of its corporate structure to make BHP "simpler and more agile", thus removing the complexity of managing the DLC.
BHP considers now is the appropriate time to unify as there has been a significant reduction in cost indications - US$400-500mn compared to ~US$1.6-1.7bn previously.
More importantly, the unification means no change to the dividend policy and the ability of the company to frank dividends.
BHP Plc shareholders would be entitled to receive one Ltd share for each Plc share they own.
As night follows day, expect the spread between the two lines to narrow.

More below the fold.




Travis Lundy

<p><a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> has been reasonably widely thought to be interested in selling its global oil &amp; gas assets business as CEO Mike Henry looks to "future-facing" commodities businesses. Over the weekend, it came out that BHP global O&amp;G head Geraldine Slattery <a href="https://www.theaustralian.com.au/business/mining-energy/bhps-geraldine-slattery-arrival-sparks-woodside-deal-talk/news-story/d654f29deab29380c23abb6ca2ce261a" target="_blank" rel="noopener">had flown to Perth</a>, where <a href="https://www.smartkarma.com/entities/woodside-petroleum-ltd" target="_blank" data-smartkarma-citation="entities:177:1" rel="noopener">Woodside Petroleum (WPL AU)</a> is headquartered. </p><p>Australian Financial Review's Street Talk column on Sunday confirmed that <a href="https://www.smartkarma.com/entities/woodside-petroleum-ltd" target="_blank" data-smartkarma-citation="entities:177:1" rel="noopener">Woodside Petroleum (WPL AU)</a> and <a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> were in talks to do a deal on BHP's oil and gas assets whereby Woodside would issue BHP $20bn of shares in return for the assets, and then BHP would distribute most of the shares to shareholders so as to make sure it did not turn into a change-of-control transaction. There simply is no way this would be done as a cash transaction.</p><p>I note that Woodside itself is looking for a permanent CEO after longtime CEO Peter Coleman exited in June. Meg O’Neill in charge of Woodside’s development and marketing arm, is acting CEO. Getting a new CEO in the process of buying assets to make it bigger - especially increasing its presence in the Scarborough project and in the Gulf of Mexico, might be just the ticket. </p><p>The discussion being mooted suggests a change of control situation might be or have been in the offing. Based on revenues and operating profits that may be reasonable. Based on total assets, it would suggest a strong premium for BHP's producing and development assets. </p><p>BHP reports earnings on Tuesday after market close, and Woodside reports pre-open on Wednesday.</p><p>BHP has been distributing proceeds of its shrinkage to its investors for the last while. One should not expect that to change. What "price" BHP "gets" in such a deal is almost irrelevant - A$18bn? A$20bn? A$18bn? If they get an extra A$1bn it will be a nice cherry on top for the owners of A$250bn market cap company but there are questions about upfront vs ongoing liability and one does not know if they would retain a 15-20% stake, as is apparently being <a href="https://www.theaustralian.com.au/business/mining-energy/bhps-geraldine-slattery-arrival-sparks-woodside-deal-talk/news-story/d654f29deab29380c23abb6ca2ce261a" target="_blank" rel="noopener">mooted</a>.</p><p>However, the deal structure itself creates some interesting issues which will mean some very big changes.</p><p>More below.</p>

BHP Group (BHP AU) has been reasonably widely thought to be interested in selling its global oil &amp; gas assets business as CEO Mike Henry looks to "future-facing" commodities businesses. Over the weekend, it came out that BHP global O&amp;G head Geraldine Slattery had flown to Perth, where Woodside Petroleum (WPL AU) is headquartered. Australian Financial Review's Street Talk column on Sunday confirmed that Woodside Petroleum (WPL AU) and BHP Group (BHP AU) were in talks to do a deal on BHP's oil and gas assets whereby Woodside would issue BHP $20bn of shares in return for the assets, and then BHP would distribute most of the shares to shareholders so as to make sure it did not turn into a change-of-control transaction. There simply is no way this would be done as a cash transaction.I note that Woodside itself is looking for a permanent CEO after longtime CEO Peter Coleman exited in June. Meg O’Neill in charge of Woodside’s development and marketing arm, is acting CEO. Getting a new CEO in the process of buying assets to make it bigger - especially increasing its presence in the Scarborough project and in the Gulf of Mexico, might be just the ticket. The discussion being mooted suggests a change of control situation might be or have been in the offing. Based on revenues and operating profits that may be reasonable. Based on total assets, it would suggest a strong premium for BHP's producing and development assets. BHP reports earnings on Tuesday after market close, and Woodside reports pre-open on Wednesday.BHP has been distributing proceeds of its shrinkage to its investors for the last while. One should not expect that to change. What "price" BHP "gets" in such a deal is almost irrelevant - A$18bn? A$20bn? A$18bn? If they get an extra A$1bn it will be a nice cherry on top for the owners of A$250bn market cap company but there are questions about upfront vs ongoing liability and one does not know if they would retain a 15-20% stake, as is apparently being mooted.However, the deal structure itself creates some interesting issues which will mean some very big changes.More below.

If Woodside Buys BHP Petroleum for Scrip, There Will Be Flowback

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Shanghai Stock Exchange Composite Index / Technical Analysis

<p>Cracks are beginning to show, particularly in EM/China where the MSCI EM index (<strong>EEM-US</strong>) is breaking below major $52 base support, the <strong>Shanghai Composite </strong>is breaking below 3500, the <strong>CSI 300 </strong>is breaking below 4885, and Hong Kong's <strong>Hang Seng </strong>is breaking below 27,000 support. Thankfully we have stayed away from areas hardest hit since EM/China has had poor relative performance for quite some time. Despite this being largely self-induced and very China-specific due to China's regulatory crackdown, the overhang could linger as additional Sectors/industries could be targeted. Moreover, it certainly does not help our already cautious and neutral outlook, but rather reinforces it.</p>

Cracks are beginning to show, particularly in EM/China where the MSCI EM index (EEM-US) is breaking below major $52 base support, the Shanghai Composite is breaking below 3500, the CSI 300 is breaking below 4885, and Hong Kong's Hang Seng is breaking below 27,000 support. Thankfully we have stayed away from areas hardest hit since EM/China has had poor relative performance for quite some time. Despite this being largely self-induced and very China-specific due to China's regulatory crackdown, the overhang could linger as additional Sectors/industries could be targeted. Moreover, it certainly does not help our already cautious and neutral outlook, but rather reinforces it.

Weakness Contained To EM & China Thus Far; Actionable Themes: Tech, Utilities, Financials, Materials

European Event-Driven Analyst

Jesus Rodriguez Aguilar

<div>
<p>Discounts to NAV for our selected European holdcos and DLCs have not shown a clear trend in June.</p>
</div>
<div>
<p>The report incorporates several SOTP valuations.</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<p>The current premium of <a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> vs.  <a href="https://www.smartkarma.com/entities/bhp-billiton-plc" target="_blank" data-smartkarma-citation="entities:21840:1" rel="noopener">Bhp Billiton (BLT LN)</a> at close of June was 23.8% (vs. 21.8% at the end of April), against a 10-year average of 14.7%. I would rather be long the UK plc and short the Aussie Ltd through the US listings.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/corp-financiera-alba-sa" target="_blank" data-smartkarma-citation="entities:21245:1" rel="noopener">Corp Financiera Alba Sa (ALB SM)</a> is trading at a 42.3% discount to NAV  (down from 47.9% at the end of February). The discount does not seem to be arbitraged lately. <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a>, one of its portfolio main assets, is the object of a partial takeover bid; <a href="https://www.smartkarma.com/entities/euskaltel-sa" target="_blank" data-smartkarma-citation="entities:21263:1" rel="noopener">Euskaltel SA (EKT SM)</a> is the object of a full takeover bid, as it has been previously flagged here. Alba has some quality assets and is fundamentally cheap, in my view.</p>
</li>
<li>
<p>The <strong>discount to NAV</strong> of <a href="https://www.smartkarma.com/entities/groupe-bruxelles-lambert-sa" target="_blank" data-smartkarma-citation="entities:21332:1" rel="noopener">Groupe Bruxelles Lambert Sa (GBLB BB)</a> has tightened slightly to <strong>32.7%</strong>. There are no catalysts in sight and the discount stubbornly keeps above 30%.</p>
</li>
<li>
<p>The <strong>discount in Heineken Holdings relative to Heineken has widened to 16.4%</strong> (vs. 14.4% at the end of April) vs. an average of 10.5% for the last 15 years, and 7.9% for the last five years. Recommendation is long Heineken Holdings, short Heineken, and close as soon as it tightens a 2-3%. The upwards trends seems clear by now, and it is not easy to call the top.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/industrivarden-ab" target="_blank" data-smartkarma-citation="entities:22395:1" rel="noopener">Industrivarden AB (INDUA SS)</a> C shares are trading at a 1.1% premium to NAV. The average discount for the last five years for the C shares has been 11.5%.</p>
</li>
<li>
<p>The discount to NAV of <a href="https://www.smartkarma.com/entities/investor-ab" target="_blank" data-smartkarma-citation="entities:22397:1" rel="noopener">Investor AB (INVEB SS)</a> B shares has remained at the same level as end of May, 8.8% (vs. 17.1% at the end of February).</p>
</li>
<li>
<p>From my SOTP valuation, <a href="https://www.smartkarma.com/entities/kinnevik-ab" target="_blank" data-smartkarma-citation="entities:22407:1" rel="noopener">Investment Ab Kinnevik (KINVB SS)</a> From my SOTP valuation, <a href="https://www.smartkarma.com/entities/kinnevik-ab" target="_blank" data-smartkarma-citation="entities:22407:1" rel="noopener">Investment Ab Kinnevik (KINVB SS)</a> <strong>B shares traded at an 14.9% premium to NAV</strong> at the end of June (vs a 1.6% discount at the end of February). A shares are trading at a c. 40.1% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. The discount of B shares to A shares began to increase my mid January, now it is c. 29.5%; voting rights count again at Kinnevik. Post the Zalando distribution (together with the Millicom distribution), Kinnevik will transform itself in a listed VC, investing mainly in tech. I find it difficult to justify the current premium to NAV.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/royal-dutch-shell-plc-98de2c77-62f2-46da-88eb-af269fb53d42" target="_blank" data-smartkarma-citation="entities:28510:1" rel="noopener">Royal Dutch Shell PLC (RDS/B US)</a> “B” shares closed in June in New York at a discount of 3.9% (tightened vs. 5.9% as of end of May) with respect to the <a href="https://www.smartkarma.com/entities/royal-dutch-shell-plc-adr" target="_blank" data-smartkarma-citation="entities:792:1" rel="noopener">Royal Dutch Shell Plc (Adr) (RDS/A US)</a> “A” shares. Trade: LONG RDSB ADR/SHORT RDSA ADR. Target: 2% premium.</p>
</li>
</ul>
</div>


Discounts to NAV for our selected European holdcos and DLCs have not shown a clear trend in June.


The report incorporates several SOTP valuations.




The current premium of BHP Group (BHP AU) vs.  Bhp Billiton (BLT LN) at close of June was 23.8% (vs. 21.8% at the end of April), against a 10-year average of 14.7%. I would rather be long the UK plc and short the Aussie Ltd through the US listings.


Corp Financiera Alba Sa (ALB SM) is trading at a 42.3% discount to NAV  (down from 47.9% at the end of February). The discount does not seem to be arbitraged lately. Naturgy Energy Group SA (NTGY SM), one of its portfolio main assets, is the object of a partial takeover bid; Euskaltel SA (EKT SM) is the object of a full takeover bid, as it has been previously flagged here. Alba has some quality assets and is fundamentally cheap, in my view.


The discount to NAV of Groupe Bruxelles Lambert Sa (GBLB BB) has tightened slightly to 32.7%. There are no catalysts in sight and the discount stubbornly keeps above 30%.


The discount in Heineken Holdings relative to Heineken has widened to 16.4% (vs. 14.4% at the end of April) vs. an average of 10.5% for the last 15 years, and 7.9% for the last five years. Recommendation is long Heineken Holdings, short Heineken, and close as soon as it tightens a 2-3%. The upwards trends seems clear by now, and it is not easy to call the top.


Industrivarden AB (INDUA SS) C shares are trading at a 1.1% premium to NAV. The average discount for the last five years for the C shares has been 11.5%.


The discount to NAV of Investor AB (INVEB SS) B shares has remained at the same level as end of May, 8.8% (vs. 17.1% at the end of February).


From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) B shares traded at an 14.9% premium to NAV at the end of June (vs a 1.6% discount at the end of February). A shares are trading at a c. 40.1% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. The discount of B shares to A shares began to increase my mid January, now it is c. 29.5%; voting rights count again at Kinnevik. Post the Zalando distribution (together with the Millicom distribution), Kinnevik will transform itself in a listed VC, investing mainly in tech. I find it difficult to justify the current premium to NAV.


Royal Dutch Shell PLC (RDS/B US) “B” shares closed in June in New York at a discount of 3.9% (tightened vs. 5.9% as of end of May) with respect to the Royal Dutch Shell Plc (Adr) (RDS/A US) “A” shares. Trade: LONG RDSB ADR/SHORT RDSA ADR. Target: 2% premium.




Selected European Holdcos and DLCs: June Report

Asset Allocation & Fund Positioning, Copley Fund Research

Steven Holden

Asset Allocation & Fund Positioning

Copley Fund Research

Copley Fund Research provide research and data on asset allocation among Global and Emerging Market equity funds.  The analysis details absolute and relative positioning across countries, sectors and industries together with highly granular data on single stock and single fund allocations.  The data is updated monthly with time series going back to January 2011.

Global Research - Analysis of 165 prominent Global equity funds, combined AUM $335bn
GEM Research - Analysis of 127 prominent global EM equity funds, combined AUM $250bn

Asset Allocation - Global and GEM Equity

Thematic (Sector/Industry)

<p>Metals and Mining stock exposure among active Global funds is at a 7-year high, but only just.  In an almost reluctant move higher, average weights hit a new multi-year peak of 1.64%, with cash flows moderately higher and funds invested moving off the lows of August last year.</p><p>The cyclical nature of investment among Global managers has mirrored that of Metals and Mining sector performance over the last decade.   The massive sector underperformance between 2011-2015 correlated to an exodus from the sector among active global managers.  Over that 4-year period, the percentage of funds with investment in Metals and Mining stocks fell from 87.5% to 53.6%.  For the MSCI AC Metals and Mining index to make up the massive performance deficit of the last decade, it has to win back many of the funds that remain uninvested, for now.</p><div>
<p>We highlight <a href="https://www.smartkarma.com/entities/anglo-american-plc" target="_blank" data-smartkarma-citation="entities:21798:1" rel="noopener">Anglo American (AAL LN)</a>, <a href="https://www.smartkarma.com/entities/fortescue-metals-group-ltd" target="_blank" data-smartkarma-citation="entities:41:1" rel="noopener">Fortescue Metals (FMG AU)</a>, <a href="https://www.smartkarma.com/entities/rio-tinto-ltd" target="_blank" data-smartkarma-citation="entities:13:1" rel="noopener">Rio Tinto Ltd (RIO AU)</a>, <a href="https://www.smartkarma.com/entities/reliance-steel-aluminum" target="_blank" data-smartkarma-citation="entities:8080:1" rel="noopener">Reliance Steel &amp; Aluminum (RS US)</a> and <a href="https://www.smartkarma.com/entities/vale-sa" target="_blank" data-smartkarma-citation="entities:23731:1" rel="noopener">Vale SA (VALE US)</a><a href="https://www.smartkarma.com/entities/baoshan-iron-steel-co-a" target="_blank" data-smartkarma-citation="entities:3891:1" rel="noopener"></a> as stocks towards the higher end of their ownership ranges whilst also seeing ownership levels increase among active Global investors.  </p>
<p>Previously well held Stocks such as <a href="https://www.smartkarma.com/entities/bhp-billiton-ltd-adr" target="_blank" data-smartkarma-citation="entities:5424:1" rel="noopener">BHP Billiton (ADR) (BHP US)</a>, <a href="https://www.smartkarma.com/entities/freeport-mcmoran-inc" target="_blank" data-smartkarma-citation="entities:12491:1" rel="noopener">Freeport Mcmoran (FCX US)</a>, <a href="https://www.smartkarma.com/entities/voestalpine-ag" target="_blank" data-smartkarma-citation="entities:22565:1" rel="noopener">voestalpine AG (VOE AV)</a> and <a href="https://www.smartkarma.com/entities/norsk-hydro-asa" target="_blank" data-smartkarma-citation="entities:22240:1" rel="noopener">Norsk Hydro ASA (NHY NO)</a><a href="https://www.smartkarma.com/entities/hyundai-steel-company" target="_blank" data-smartkarma-citation="entities:963:1" rel="noopener"></a> are starting to attract growing interest from Global active managers.</p>
<p><em>Analysis taken from our Global fund research, covering 383 active Global strategies with combined AUM of $1.05tr</em></p>
</div>

Metals and Mining stock exposure among active Global funds is at a 7-year high, but only just.  In an almost reluctant move higher, average weights hit a new multi-year peak of 1.64%, with cash flows moderately higher and funds invested moving off the lows of August last year.The cyclical nature of investment among Global managers has mirrored that of Metals and Mining sector performance over the last decade.   The massive sector underperformance between 2011-2015 correlated to an exodus from the sector among active global managers.  Over that 4-year period, the percentage of funds with investment in Metals and Mining stocks fell from 87.5% to 53.6%.  For the MSCI AC Metals and Mining index to make up the massive performance deficit of the last decade, it has to win back many of the funds that remain uninvested, for now.
We highlight Anglo American (AAL LN), Fortescue Metals (FMG AU), Rio Tinto Ltd (RIO AU), Reliance Steel &amp; Aluminum (RS US) and Vale SA (VALE US) as stocks towards the higher end of their ownership ranges whilst also seeing ownership levels increase among active Global investors.  
Previously well held Stocks such as BHP Billiton (ADR) (BHP US), Freeport Mcmoran (FCX US), voestalpine AG (VOE AV) and Norsk Hydro ASA (NHY NO) are starting to attract growing interest from Global active managers.
Analysis taken from our Global fund research, covering 383 active Global strategies with combined AUM of $1.05tr


Global Metals and Mining:  Reluctantly Grinding Higher

Australia

BHP Group Limited operates as a mining company.  The Companyengages in the exploration, development, production and processing of iron ore, metallurgical coal, and copper. BHP Group serves customers worldwide.

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BHP Group Ltd (BHP LN)

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Global Metals and Mining: Reluctantly Grinding Higher

Metals and Mining stock exposure among active Global funds is at a 7-year high. Average weights hit a new multi-year peak of 1.64%, with cash...

Steven Holden

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