Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Last Week in Event SPACE: Tokyo Dome, ESR/Sabana, NTT Docomo, Evergrande, LG Corp, China Resources

Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

Previously, on 16 November, Australia-based Childcare company <a href="https://www.smartkarma.com/entities/think-childcare-ltd" target="_blank" data-smartkarma-citation="entities:18899:1" rel="noopener">Think Childcare (TNK AU)</a> ("TNK") announced they had received a <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02308970-3A555430?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">Non-binding Indicative Proposal</a> from the PE arm of Australian investments firm <a href="https://www.alceon.com.au/" target="_blank" rel="noopener">Alceon Group</a>. The Offer Price was A$1.35/share and the form of consideration was expected to be either cash or a combination of cash and shares in an unlisted newly-formed entity. In my insight <a href="https://www.smartkarma.com/insights/think-childcare-tnk-au-takeover-proposal-from-alceon-group-seems-light" target="_blank" data-smartkarma-citation="insights:45429" rel="noopener">Think Childcare (TNK AU) : Takeover Proposal From Alceon Group Seems Light</a>, I concluded the Offer Price of A$1.35 seemed light on a growth-adjusted basis and when compared against the valuations of other local and global peers.  Today, before the market opened, <a href="https://www.smartkarma.com/entities/think-childcare-ltd" target="_blank" data-smartkarma-citation="entities:18899:1" rel="noopener">Think Childcare (TNK AU)</a> announced that they had received an "unsolicited, conditional, non-binding all cash proposal" from unlisted peer Busy Bees Early Learning Australia Pty Ltd at an Offer Price of A$1.75/share, which is ~30% higher than Alceon's proposal.<div>More below the fold. </div><hr><div><div class="content-remarks">For more information about M&amp;A rules, regulations, and practices in Australia, please refer to <a href="https://www.smartkarma.com/insights/quiddity-australia-m-a-guide-2019" target="_blank" data-smartkarma-citation="insights:30118" rel="noopener">Quiddity Australia M&amp;A Guide 2019</a> and <a href="https://www.smartkarma.com/insights/quiddity-m-a-australia-foreign-investment-reforms" target="_blank" data-smartkarma-citation="insights:40210" rel="noopener">Quiddity M&amp;A: Australia Foreign Investment Reforms</a> </div></div>

Previously, on 16 November, Australia-based Childcare company Think Childcare (TNK AU) ("TNK") announced they had received a Non-binding Indicative Proposal from the PE arm of Australian investments firm Alceon Group. The Offer Price was A$1.35/share and the form of consideration was expected to be either cash or a combination of cash and shares in an unlisted newly-formed entity. In my insight Think Childcare (TNK AU) : Takeover Proposal From Alceon Group Seems Light, I concluded the Offer Price of A$1.35 seemed light on a growth-adjusted basis and when compared against the valuations of other local and global peers.  Today, before the market opened, Think Childcare (TNK AU) announced that they had received an "unsolicited, conditional, non-binding all cash proposal" from unlisted peer Busy Bees Early Learning Australia Pty Ltd at an Offer Price of A$1.75/share, which is ~30% higher than Alceon's proposal.More below the fold. For more information about M&amp;A rules, regulations, and practices in Australia, please refer to Quiddity Australia M&amp;A Guide 2019 and Quiddity M&amp;A: Australia Foreign Investment Reforms 

Think Childcare (TNK AU): Competitive Bid by Busy Bees

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
Growth stocks have again out-performed Value since the start of the year supported by declining bond yields and solid EPS growth. In our March portfolio update, we added BIN and BAL to a list of Growth names that included WTC, TNE, COH, RMD, CSL and ALL.  We remain positive on Growth while bond yields remain low and anchored.  However, valuations are stretched and the market doesn’t seem satisfied with EPS growth tracking at the upper end of company guidance.  Indeed, outright beats or lifts in earnings guidance need to be delivered otherwise these stocks are susceptible to a PE derate.</li>
<li>
In this note, we cast our eye over a selection of 55 Growth stocks constrained by a 12-month forward PE multiple of 18 and long-term consensus EPS growth of 7.5%. Forty stocks exceed both the valuation and EPS growth benchmarks.  The remaining 15 stocks exceed either one benchmark or the other, but not both.</li>
<li>
We then compare each stock using their cash conversion, asset turnover, reinvestment rate, net debt, EBITDA margin and Good Will. We find Growth stocks are more likely to see a PE rerate provided Reinvestment, net debt, Asset Turnover and Cash Conversion are increasing.  EBITDA margins in this group of stocks generally decrease during the PE rerate.  Stocks can still maintain a high PE even with a relatively weak EPS growth outlook.  However, they generally have strong reinvestment and low debt.</li>
<li>
Within the group of stocks with a high PE and strong earnings growth, WEB, EHL and PNI are more attractive based on their PE: long-term EPS growth ratio. In the group of stocks with relatively low PE's and strong long-term EPS growth, GEM seems to offer the best value.  CPU has the lowest PE, but best Reinvestment and Cash Conversion in this group of stocks.</li>
<li>In the group of stocks trading on high PE ratios with relatively weak longer-term EPS growth, VOC and ALX look susceptible and WBD, EHL, and PNI appear more attractive.</li>
<li>
We will update our model portfolio in a few weeks and will reassess its Growth names.
</li>
</ul>



Growth stocks have again out-performed Value since the start of the year supported by declining bond yields and solid EPS growth. In our March portfolio update, we added BIN and BAL to a list of Growth names that included WTC, TNE, COH, RMD, CSL and ALL.  We remain positive on Growth while bond yields remain low and anchored.  However, valuations are stretched and the market doesn’t seem satisfied with EPS growth tracking at the upper end of company guidance.  Indeed, outright beats or lifts in earnings guidance need to be delivered otherwise these stocks are susceptible to a PE derate.

In this note, we cast our eye over a selection of 55 Growth stocks constrained by a 12-month forward PE multiple of 18 and long-term consensus EPS growth of 7.5%. Forty stocks exceed both the valuation and EPS growth benchmarks.  The remaining 15 stocks exceed either one benchmark or the other, but not both.

We then compare each stock using their cash conversion, asset turnover, reinvestment rate, net debt, EBITDA margin and Good Will. We find Growth stocks are more likely to see a PE rerate provided Reinvestment, net debt, Asset Turnover and Cash Conversion are increasing.  EBITDA margins in this group of stocks generally decrease during the PE rerate.  Stocks can still maintain a high PE even with a relatively weak EPS growth outlook.  However, they generally have strong reinvestment and low debt.

Within the group of stocks with a high PE and strong earnings growth, WEB, EHL and PNI are more attractive based on their PE: long-term EPS growth ratio. In the group of stocks with relatively low PE's and strong long-term EPS growth, GEM seems to offer the best value.  CPU has the lowest PE, but best Reinvestment and Cash Conversion in this group of stocks.
In the group of stocks trading on high PE ratios with relatively weak longer-term EPS growth, VOC and ALX look susceptible and WBD, EHL, and PNI appear more attractive.

We will update our model portfolio in a few weeks and will reassess its Growth names.



Travis Lundy

After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company <a href="https://www.smartkarma.com/entities/1099" target="_blank" data-smartkarma-citation="entities:1099:1">Navitas Ltd (NVT AU)</a> has now signed a Board-recommended Scheme Implementation Deed with a consortium led by Australian Private Equity firm BGH Capital consortium which includes Navitas Founder Rod Jones (also the largest holder at 13%) and AustralianSuper.The agreed Scheme Price of A$5.825 is a 6% uplift from the original A$5.50 offered in the preliminary, indicative, non-binding offer announced on 10 October 2018 and a 34% premium to the undisturbed price of 9 October 2018 of A$4.35/share.This history is that the consortium came in at A$5.50 (plus another cash+RollCo scrip offer), a month or so later the company effectively rejected it by not allowing the consortium to do due diligence after management lifted earnings guidance. This upset a number of shareholders. In November the share price ranged from A$4.95-5.25 or so and Chairman Tracey Horton got only 51% support at the AGM that month. The shares fell briefly below A$4.70 in early January this year before BGH came back in mid-January with a "revised indicative <a href="https://www.asx.com.au/asxpdf/20190115/pdf/441vygmxd30ws7.pdf" target="_blank">offer</a>" of A$5.825 whereupon the shares bounced from about A$4.90 to about A$5.50 then climbed to A$5.60+ on 10mm shares volume in 3 days. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/082/780/original/Screenshot%202019-03-21%20at%2011.23.32%20PM.png?1553181826" class="editor-image img-responsive" data-smartkarma-image-id="82780"></figure>The shares hovered around A$5.58-5.62 for 6-7 weeks until the beginning of March, briefly traded into the A$5.70s, and then traded back down the last few days this week to the A$5.59-5.63 area.On Thursday 21 March the shares were halted for the day, StreetTalk had an article about the deal being imminent, and late in the afternoon, the BGH SID was announced. Now we start the official process. The Scheme document is expected to be dispatched in May 2019 with a deal completed by end-June or early July. I expect this deal gets up.

After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company Navitas Ltd (NVT AU) has now signed a Board-recommended Scheme Implementation Deed with a consortium led by Australian Private Equity firm BGH Capital consortium which includes Navitas Founder Rod Jones (also the largest holder at 13%) and AustralianSuper.The agreed Scheme Price of A$5.825 is a 6% uplift from the original A$5.50 offered in the preliminary, indicative, non-binding offer announced on 10 October 2018 and a 34% premium to the undisturbed price of 9 October 2018 of A$4.35/share.This history is that the consortium came in at A$5.50 (plus another cash+RollCo scrip offer), a month or so later the company effectively rejected it by not allowing the consortium to do due diligence after management lifted earnings guidance. This upset a number of shareholders. In November the share price ranged from A$4.95-5.25 or so and Chairman Tracey Horton got only 51% support at the AGM that month. The shares fell briefly below A$4.70 in early January this year before BGH came back in mid-January with a "revised indicative offer" of A$5.825 whereupon the shares bounced from about A$4.90 to about A$5.50 then climbed to A$5.60+ on 10mm shares volume in 3 days. The shares hovered around A$5.58-5.62 for 6-7 weeks until the beginning of March, briefly traded into the A$5.70s, and then traded back down the last few days this week to the A$5.59-5.63 area.On Thursday 21 March the shares were halted for the day, StreetTalk had an article about the deal being imminent, and late in the afternoon, the BGH SID was announced. Now we start the official process. The Scheme document is expected to be dispatched in May 2019 with a deal completed by end-June or early July. I expect this deal gets up.

Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

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Thematic (Sector/Industry)

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering nearly 1,500 companies, we’re able to provide a wide variety of what we believe are attractively priced securities looking across sectors, industries, and geographies. Best Ideas are nominated by analysts and approved by managers in addition to the normal due diligence processes that precede our published research and ratings.The list may include a broad mix of quality and risk characteristics to meet varying investor needs, including no-, narrow-, and wide-moat companies as well as the full spectrum of uncertainty ratings from low to very high. Most or all of the highlighted stocks will be trading at a discount to our estimate of intrinsic value, indicating improved odds of capital appreciation.

Australia

G8 Education Limited provides community-focused child care for families to foster their child's development.  The Company also conducts a range of child care services that includes child care centers acquisition, child care centers management, and industry-related project management, services and consultancy.

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G8 Education (GEM AU)

Last Week in Event SPACE: Tokyo Dome, ESR/Sabana, NTT Docomo, Evergrande, LG Corp, China Resources

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

Think Childcare (TNK AU): Competitive Bid by Busy Bees

Busy Bees Early Learning Australia (backed by OTPP) came over the top of Alceon's bid for Think Child Care by a whopping 30%. Alceon has 5 days to...

Janaghan Jeyakumar, CFA

Time to Dissect Aussie Growth Stocks

Growth stocks have again out-performed Value since the start of the year supported by declining bond yields and solid EPS growth. In our March...

Shane Lee

Navitas Gets An Agreed Deal with BGH

After 6 months of haggling and due diligence, debt negotiation, and structuring, global education company Navitas Ltd (NVT AU) has now signed a...

Travis Lundy

Best Ideas List for January 2019

The Best Ideas list is a compilation of stock ideas sourced from Morningstar’s global equity research team. With more than 100 analysts covering...

Morningstar, Inc.

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