Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

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Hulic plans to raise ~US$700 through issuance of new shares. We would be inclined to take the deal given:-<ul><li>The deal scores borderline on our framework owing to its lack of a very favorable track record, on the other hand its recent strong earnings and pricing momentum help it to achieve a borderline score</li><li>We are hearing that the deal is well subscribed both in the international and domestic institutional tranches and thus, the company shouldn't have any problems in seeing the deal through</li><li>Earnings outlook remains strong with the company guiding towards 16.5% operating profit growth in FY2015. The company is targeting operating profit of JPY42bn in FY2015, which would mean its running one year ahead of its medium-term business plan.&nbsp;</li><li>Hulic&nbsp;had earlier highlighted plans to make JPY90bn worth of investments, in FY2015, and said that debt was likely to rise by over JPY100bn, while the management remained committed to keeping d/e below 3x. Thus,&nbsp;one could argue that equity raising was expected even though management doesn't seem to have hinted about the same.</li><li>The company plans to use the proceeds&nbsp;to increase rent revenue and expand its portfolio to increase scale and diversity. Management believes these measures will enable Hulic to further accelerate growth.</li></ul>Key Risks:-<ul><li>The deal will cause a 10% dilution without any immediate EPS accretion as the company plans to use the proceeds of the deal for investment purposes. With the average analyst target price implying just a 3.5% upside from the deal price, overall upside for the stock might be limited in the near term.</li><li>Hulic merged with the much larger Shoei in 2011-12, after the latter had problems refinancing its large amount of debt. Even currently the merged entity's leverage levels remain high at 220% vs. 150% for other listed peers, with debt to ebidta ration of over 10x.</li><li>The stock lacks a strong shareholder registry, in our view, we don't see many long only funds holding a sizeable position, which increases the risk of there being more short-term investors in the deal rather than stable long only holders. Thus, heightening the risk of a hurried exit from the stock should the deal not do well.</li></ul>

Hulic plans to raise ~US$700 through issuance of new shares. We would be inclined to take the deal given:-The deal scores borderline on our framework owing to its lack of a very favorable track record, on the other hand its recent strong earnings and pricing momentum help it to achieve a borderline scoreWe are hearing that the deal is well subscribed both in the international and domestic institutional tranches and thus, the company shouldn't have any problems in seeing the deal throughEarnings outlook remains strong with the company guiding towards 16.5% operating profit growth in FY2015. The company is targeting operating profit of JPY42bn in FY2015, which would mean its running one year ahead of its medium-term business plan.&nbsp;Hulic&nbsp;had earlier highlighted plans to make JPY90bn worth of investments, in FY2015, and said that debt was likely to rise by over JPY100bn, while the management remained committed to keeping d/e below 3x. Thus,&nbsp;one could argue that equity raising was expected even though management doesn't seem to have hinted about the same.The company plans to use the proceeds&nbsp;to increase rent revenue and expand its portfolio to increase scale and diversity. Management believes these measures will enable Hulic to further accelerate growth.Key Risks:-The deal will cause a 10% dilution without any immediate EPS accretion as the company plans to use the proceeds of the deal for investment purposes. With the average analyst target price implying just a 3.5% upside from the deal price, overall upside for the stock might be limited in the near term.Hulic merged with the much larger Shoei in 2011-12, after the latter had problems refinancing its large amount of debt. Even currently the merged entity's leverage levels remain high at 220% vs. 150% for other listed peers, with debt to ebidta ration of over 10x.The stock lacks a strong shareholder registry, in our view, we don't see many long only funds holding a sizeable position, which increases the risk of there being more short-term investors in the deal rather than stable long only holders. Thus, heightening the risk of a hurried exit from the stock should the deal not do well.

Hulic (3003 JP) - Borderline score but strong earnings and pricing momentum could see it through

Japan

Hulic Company, Limited. operates real estate business and marketable securities investment business.  The Company also conducts environment related businesses.

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Hulic Co Ltd (3003 JP)

Hulic (3003 JP) - Borderline score but strong earnings and pricing momentum could see it through

Hulic plans to raise ~US$700 through issuance of new shares. We would be inclined to take the deal given:- The deal scores borderline on our...

Sumeet Singh

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