IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Event-Driven

<a href="https://www.smartkarma.com/entities/link-administration-holdings-ltd" target="_blank" data-smartkarma-citation="entities:970:1" rel="noopener">Link Administration Holdings (LNK AU)</a> announced that it received a non-binding indicative proposal from <a href="https://www.smartkarma.com/entities/carlyle-group-inc" target="_blank" data-smartkarma-citation="entities:33402:1" rel="noopener">Carlyle Group Inc (CG US)</a>. Carlyle will offer A$3.00 cash per share plus a pro-rata distribution of Link’s 42.8% shareholding in <a href="https://www.smartkarma.com/entities/pexa-group-ltd" target="_blank" data-smartkarma-citation="entities:34716:1" rel="noopener">PEXA Group (PXA AU)</a> (worth A$2.38 per Link share at PEXA’s share price of A$16.23 on 4 November). The total consideration of A$5.38 per share is a 24.2% premium to the unaffected price of A$4.33 (on 4 November). Carlyle’s core Link (excluding PEXA stake) value of A$3.00 per share is a 53.8% premium to the implied core Link share price of A$1.95 per share (on 4 November). Link is no stranger to bids and received several bids in the recent past, including from Carlyle. Carlyle and Pacific Equity Partners made an indicative A$5.20 per share offer on 12 October 2020, which was later raised to A$5.40 on 26 October but withdrawn on 28 April 2021. <a href="https://www.smartkarma.com/entities/ss-c-technologies-holdings" target="_blank" data-smartkarma-citation="entities:3464:1" rel="noopener">SS&amp;C Technologies (SSNC US)</a> lobbed an A$5.65 per share offer on 7 December 2020 but withdrew the offer on 3 January 2021. Also, <a href="https://www.smartkarma.com/entities/kkr-co-inc" target="_blank" data-smartkarma-citation="entities:27333:1" rel="noopener">KKR &amp; Co Inc (KKR US)</a> and <a href="https://www.smartkarma.com/entities/domain-holdings-australia-ltd" target="_blank" data-smartkarma-citation="entities:26033:1" rel="noopener">Domain Holdings Australia (DHG AU)</a> proposed to acquire PEXA for A$3.1 billion on 27 May 2021 which was declined in favour of a separate listing for PEXA.  Link’s Board has argued that the previous bids did not represent compelling value and sought to generate shareholder returns through the PEXA IPO and outlining ambitious FY26 targets in a November investor day. However, PEXA’s market cap of A$2.8 billion at last close is below KKR’s bid of A$3.1 billion. The lukewarm share price response (shares down -2% on the following day) to the investor day points to low confidence that the targets can be reached. Carlyle’s latest offer is subject to due diligence, execution of transaction documents and securing debt financing. Due diligence should be short due to Carlyle’s access to the due diligence materials through its previous bid.  <div class="content-highlight">The Board’s previous track record of knocking back bids has resulted in Link’s last close price of A$4.70 trading at a wide 14.5% gross spread to the indicative offer of A$5.38 per share. However, due to the Board’s failure to generate shareholder value and there no longer being a debate on PEXA valuation (as PEXA is now listed), the Board will face pressure to engage with Carlyle. We also think that Carlyle has room to sweeten its bid as its latest bid values core Link at A$3.00 per share, which is 21% below its previous offer which valued core Link at A$3.80 per share. </div>

Link Administration Holdings (LNK AU) announced that it received a non-binding indicative proposal from Carlyle Group Inc (CG US). Carlyle will offer A$3.00 cash per share plus a pro-rata distribution of Link’s 42.8% shareholding in PEXA Group (PXA AU) (worth A$2.38 per Link share at PEXA’s share price of A$16.23 on 4 November). The total consideration of A$5.38 per share is a 24.2% premium to the unaffected price of A$4.33 (on 4 November). Carlyle’s core Link (excluding PEXA stake) value of A$3.00 per share is a 53.8% premium to the implied core Link share price of A$1.95 per share (on 4 November). Link is no stranger to bids and received several bids in the recent past, including from Carlyle. Carlyle and Pacific Equity Partners made an indicative A$5.20 per share offer on 12 October 2020, which was later raised to A$5.40 on 26 October but withdrawn on 28 April 2021. SS&amp;C Technologies (SSNC US) lobbed an A$5.65 per share offer on 7 December 2020 but withdrew the offer on 3 January 2021. Also, KKR &amp; Co Inc (KKR US) and Domain Holdings Australia (DHG AU) proposed to acquire PEXA for A$3.1 billion on 27 May 2021 which was declined in favour of a separate listing for PEXA.  Link’s Board has argued that the previous bids did not represent compelling value and sought to generate shareholder returns through the PEXA IPO and outlining ambitious FY26 targets in a November investor day. However, PEXA’s market cap of A$2.8 billion at last close is below KKR’s bid of A$3.1 billion. The lukewarm share price response (shares down -2% on the following day) to the investor day points to low confidence that the targets can be reached. Carlyle’s latest offer is subject to due diligence, execution of transaction documents and securing debt financing. Due diligence should be short due to Carlyle’s access to the due diligence materials through its previous bid.  The Board’s previous track record of knocking back bids has resulted in Link’s last close price of A$4.70 trading at a wide 14.5% gross spread to the indicative offer of A$5.38 per share. However, due to the Board’s failure to generate shareholder value and there no longer being a debate on PEXA valuation (as PEXA is now listed), the Board will face pressure to engage with Carlyle. We also think that Carlyle has room to sweeten its bid as its latest bid values core Link at A$3.00 per share, which is 21% below its previous offer which valued core Link at A$3.80 per share. 

APAC IPOs & Placements

Zhen Zhou, Toh

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

Insignia Financial / Equity Capital Markets

<a href="https://www.smartkarma.com/entities/ioof-holdings-ltd" target="_blank" data-smartkarma-citation="entities:12349:1" rel="noopener">Ioof Holdings (IFL AU)</a> is looking to raise about A$1,040m in its placement and accelerated non-renounceable entitlement offer to partially fund the purchase of NAB's MLC.We have covered the company's acquisition of ANZ's P&amp;I business in 2017 in:<ul><li>
<a href="https://www.smartkarma.com/insights/ioof-placement-company-s-good-track-record-means-fy2019-eps-accretion-will-likely-be-achieved" target="_blank" data-smartkarma-citation="insights:14479" rel="noopener">IOOF Placement - Company's Good Track Record Means FY2019 EPS Accretion Will Likely Be Achieved</a> </li></ul>In this note, we take a look at the impact of the acquisition, deal dynamics and run the deal through our framework.

Ioof Holdings (IFL AU) is looking to raise about A$1,040m in its placement and accelerated non-renounceable entitlement offer to partially fund the purchase of NAB's MLC.We have covered the company's acquisition of ANZ's P&amp;I business in 2017 in:
IOOF Placement - Company's Good Track Record Means FY2019 EPS Accretion Will Likely Be Achieved In this note, we take a look at the impact of the acquisition, deal dynamics and run the deal through our framework.

IOOF Placement - A Big Deal but Will Take Some Time to Complete

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
The Global rotation away from Defensive stocks to cyclical Growth and Value over the past few weeks has not been impressive enough to convince us it will continue. The trade has been underpinned by the sell-off in global bonds on the back of token gestures between US and Chinese trade officials, while global earnings growth continues to track down.  An adjustment higher in the term-premium from the lowest level on record seems to be at the heart of the adjustment in yields.</li>
<li>
Our scepticism about the sustainability of the bounced back in Value is supported by the fact that even as Value has rallied, Growth has managed to rally too – it has just underperformed. The underperformance of Growth has been more striking in the US than in other markets such as Australia.  Indeed, in Australia Growth valuations actually rose during its period of underperformance.</li>
<li>
The Growth underperformance was driven by predominantly by Software and Healthcare Equipment &amp; Services names. The top 6 underperformers were PME, APX, CUV, IEL, NAN, and BVS.  All of these stocks apart from NAN have strong earnings quality and free cash flow growth.  But they also trade on large PE premiums that make them susceptible to higher bond yields.</li>
<li>
The Value outperformance was dominated by Resources and Diversified Financials. Recent stability in the price of iron ore at $US90/t and the rally in the price of Copper and oil seem to have encouraged Value hunters in these stocks.  The trade-in Diversified Financials seems to be underpinned by hopes of stability in earnings of the wealth managers (AMP and IFL) and rising bond yields (CGF). </li>
<li>
Our model portfolio has a late-cycle Growth bias via COH, CSL, and RMD, which remain underpinned by a strong earnings outlook.  The defensive barbell is also propped up by overweight positions in Real Estate as protection for late-cycle volatility.  WTC and TNE are included shore up our preference to Growth over Value.  We also have overweights in Energy, the diversified miners and Consumer Discretionary names such as ALL, WES and BAP, which should benefit from any marginal improvement from rate cuts and tax credits. </li>
<li>
We think it’s too early to move more defensive and we are reluctant to go Value hunting until we are convinced the end of the cycle is approaching.  Earnings durability is important late-cycle especially given there has already been a large decline in bond yields meaning interest rate sensitives are unlikely to run significantly further.</li>
</ul>



The Global rotation away from Defensive stocks to cyclical Growth and Value over the past few weeks has not been impressive enough to convince us it will continue. The trade has been underpinned by the sell-off in global bonds on the back of token gestures between US and Chinese trade officials, while global earnings growth continues to track down.  An adjustment higher in the term-premium from the lowest level on record seems to be at the heart of the adjustment in yields.

Our scepticism about the sustainability of the bounced back in Value is supported by the fact that even as Value has rallied, Growth has managed to rally too – it has just underperformed. The underperformance of Growth has been more striking in the US than in other markets such as Australia.  Indeed, in Australia Growth valuations actually rose during its period of underperformance.

The Growth underperformance was driven by predominantly by Software and Healthcare Equipment &amp; Services names. The top 6 underperformers were PME, APX, CUV, IEL, NAN, and BVS.  All of these stocks apart from NAN have strong earnings quality and free cash flow growth.  But they also trade on large PE premiums that make them susceptible to higher bond yields.

The Value outperformance was dominated by Resources and Diversified Financials. Recent stability in the price of iron ore at $US90/t and the rally in the price of Copper and oil seem to have encouraged Value hunters in these stocks.  The trade-in Diversified Financials seems to be underpinned by hopes of stability in earnings of the wealth managers (AMP and IFL) and rising bond yields (CGF). 

Our model portfolio has a late-cycle Growth bias via COH, CSL, and RMD, which remain underpinned by a strong earnings outlook.  The defensive barbell is also propped up by overweight positions in Real Estate as protection for late-cycle volatility.  WTC and TNE are included shore up our preference to Growth over Value.  We also have overweights in Energy, the diversified miners and Consumer Discretionary names such as ALL, WES and BAP, which should benefit from any marginal improvement from rate cuts and tax credits. 

We think it’s too early to move more defensive and we are reluctant to go Value hunting until we are convinced the end of the cycle is approaching.  Earnings durability is important late-cycle especially given there has already been a large decline in bond yields meaning interest rate sensitives are unlikely to run significantly further.


Thematic (Sector/Industry)

<ul>
<li>
Reporting Season should prove relatively good. The ASX200 underperformed global equities during the month but remains one of the best performing stock markets this year.  Reporting season is about to begin and we should see another strong showing from the local market.  There is a wider-than-usual range of EPS forecasts for stocks in only the Telco, Consumer Staples and Healthcare sectors.  Furthermore, downgrades in the May-July period have been well below average, while upgrades have been above average for the same period.</li>
<li>
Changes to Accounting Standards are an uncertainty. Change to Accounting Standards could affect reporting season, particularly for stocks that have lumpy contract revenue streams.  During July, the reports of both CIM and TNE both mentioned the impact of the introduction of AASB 15.  In CIM’s case it had a positive impact on the share price, while TNE rallied on the news that it had little impact.  It’s difficult to say how it will affect each report over the next few weeks – we include a list of stocks we think are most susceptible to impact.</li>
<li>
Global sector rotation hits Australia. The global rotation out of IT into other defensive sectors, saw Telcos, Healthcare, Consumer Discretionary and Financials perform well during the month.  The Energy sector traded lower on the back of a falling oil price following OPEC’s announcement that it would increase production.  However, supply disruptions in Venezuela remain and Iran is once again facing economic sanctions.  We have been overweight Energy and we will keep that tilt for the time being.</li>
<li>
We don’t expect the bounce in Financials to be repeated. We don’t think the solid rebound in Financials (2.0%) will be repeated this month, given the Royal Commission backdrop remains a threat.  We remain underweight the sector.  The business models of the wealth managers and the superannuation industry come under the microscope this month and this could affect the IFL and PPT share prices in particular – both saw a relatively large increase in short-positioning during the month.</li>
<li>
The market is pushing up against a valuation ceiling, but it is fairly concentrated. The market is expensive with the 12-month forward PE for the ASX 200 at 15.7pts vs the long-run average of 14.0pts.  However, valuations are stretched in only a few sectors (Healthcare, Industrials and Consumer Staples).  Energy is cheap following the decline in share prices in the sector during the month.</li>
<li>
Domestic Economy Tracking In-Line with Our Expectations. Our view on the domestic economy hasn’t changed.  Economic growth remains solid, but not strong enough to force down the employment rate to a point where it sparks a pick-up in wages growth.  Housing is being relatively resilient to the tighter lending standards imposed by the Banks as shown by the better-than-expected May housing finance data and the bounce in June building approvals.  In another positive sign, consumer sentiment rose by 3.9% in July to 106pts.</li>
</ul>



Reporting Season should prove relatively good. The ASX200 underperformed global equities during the month but remains one of the best performing stock markets this year.  Reporting season is about to begin and we should see another strong showing from the local market.  There is a wider-than-usual range of EPS forecasts for stocks in only the Telco, Consumer Staples and Healthcare sectors.  Furthermore, downgrades in the May-July period have been well below average, while upgrades have been above average for the same period.

Changes to Accounting Standards are an uncertainty. Change to Accounting Standards could affect reporting season, particularly for stocks that have lumpy contract revenue streams.  During July, the reports of both CIM and TNE both mentioned the impact of the introduction of AASB 15.  In CIM’s case it had a positive impact on the share price, while TNE rallied on the news that it had little impact.  It’s difficult to say how it will affect each report over the next few weeks – we include a list of stocks we think are most susceptible to impact.

Global sector rotation hits Australia. The global rotation out of IT into other defensive sectors, saw Telcos, Healthcare, Consumer Discretionary and Financials perform well during the month.  The Energy sector traded lower on the back of a falling oil price following OPEC’s announcement that it would increase production.  However, supply disruptions in Venezuela remain and Iran is once again facing economic sanctions.  We have been overweight Energy and we will keep that tilt for the time being.

We don’t expect the bounce in Financials to be repeated. We don’t think the solid rebound in Financials (2.0%) will be repeated this month, given the Royal Commission backdrop remains a threat.  We remain underweight the sector.  The business models of the wealth managers and the superannuation industry come under the microscope this month and this could affect the IFL and PPT share prices in particular – both saw a relatively large increase in short-positioning during the month.

The market is pushing up against a valuation ceiling, but it is fairly concentrated. The market is expensive with the 12-month forward PE for the ASX 200 at 15.7pts vs the long-run average of 14.0pts.  However, valuations are stretched in only a few sectors (Healthcare, Industrials and Consumer Staples).  Energy is cheap following the decline in share prices in the sector during the month.

Domestic Economy Tracking In-Line with Our Expectations. Our view on the domestic economy hasn’t changed.  Economic growth remains solid, but not strong enough to force down the employment rate to a point where it sparks a pick-up in wages growth.  Housing is being relatively resilient to the tighter lending standards imposed by the Banks as shown by the better-than-expected May housing finance data and the bounce in June building approvals.  In another positive sign, consumer sentiment rose by 3.9% in July to 106pts.

 

Aussie Equities Month in Review (July 2018)

<ul>
<li>
Stick to Growth. Growth has outperformed Value by 10%pts year-to-date and we expect its outperformance to continue for the remainder of the year, given the limited opportunities for a sustainable upswing in earnings growth and market pricing that is already stretched.  However, we acknowledge Growth’s outperformance is nearing a threshold that normally means it underperforms.  In this note, we put aside our preference for it as an investment style and list our preferred Value stocks.</li>
<li>
Cheap stocks with Mispriced longer-term Earnings. Our top picks are OZL, OSH, SIQ, TWE, AMC, ORA and these stocks are cheap based on the consensus outlook for EPS growth and the book value for equity.  Furthermore, growth in longer-term cashflow embedded in the share prices of these stocks seems too low. </li>
<li>
Value Traps Persist. There are many stocks within the ASX200 universe that look attractive because they are cheap.  However, any Value reward must be coupled with a turnaround in longer-term earnings growth Stocks such as JHG, GEM, JBH, GXL, MFG, BXB, BOQ, SKI, PPT, SWM and AMP appear cheap based on analysts’ EPS and growth of equity estimates.  However, the longer-term cashflow growth embedded into these share prices seem overly optimistic and this questions their Value proposition. Diversified Financials stocks MFG, PTM, IFL, JHG and CPU also seem to have very optimistic longer-term cashflow prospects factored into their share prices.</li>
<li>
Be wary of Junior Miners and Consumer Discretionary stocks. Junior miners such as ORE, SYR, SFR, FMG, WSA and RRL all appear cheap on their 12-mth earnings outlook, but the longer-term cashflow growth embedded into their share prices seems excessive.  The market also appears overly optimistic on the cashflow growth prospects of SUL and HVN.  </li>
<li>
Cheap Banks with a relatively high bar for cashflow growth. The share prices of the Major Banks seem to be supported by cashflow growth that exceeds the current pace of nominal GDP growth (5.6%) by around 2-3%pts.  These stocks look cheap, but we question whether cashflow growth can return to the longer-term average prior to the financial crisis.  The household sector has a large amount of debt and the population continues to age.  WBC is relatively cheap and is more attractive than the other Banks.  BEN is also attractive, but it has more realistic future cashflow prospects.</li>
</ul>



Stick to Growth. Growth has outperformed Value by 10%pts year-to-date and we expect its outperformance to continue for the remainder of the year, given the limited opportunities for a sustainable upswing in earnings growth and market pricing that is already stretched.  However, we acknowledge Growth’s outperformance is nearing a threshold that normally means it underperforms.  In this note, we put aside our preference for it as an investment style and list our preferred Value stocks.

Cheap stocks with Mispriced longer-term Earnings. Our top picks are OZL, OSH, SIQ, TWE, AMC, ORA and these stocks are cheap based on the consensus outlook for EPS growth and the book value for equity.  Furthermore, growth in longer-term cashflow embedded in the share prices of these stocks seems too low. 

Value Traps Persist. There are many stocks within the ASX200 universe that look attractive because they are cheap.  However, any Value reward must be coupled with a turnaround in longer-term earnings growth Stocks such as JHG, GEM, JBH, GXL, MFG, BXB, BOQ, SKI, PPT, SWM and AMP appear cheap based on analysts’ EPS and growth of equity estimates.  However, the longer-term cashflow growth embedded into these share prices seem overly optimistic and this questions their Value proposition. Diversified Financials stocks MFG, PTM, IFL, JHG and CPU also seem to have very optimistic longer-term cashflow prospects factored into their share prices.

Be wary of Junior Miners and Consumer Discretionary stocks. Junior miners such as ORE, SYR, SFR, FMG, WSA and RRL all appear cheap on their 12-mth earnings outlook, but the longer-term cashflow growth embedded into their share prices seems excessive.  The market also appears overly optimistic on the cashflow growth prospects of SUL and HVN.  

Cheap Banks with a relatively high bar for cashflow growth. The share prices of the Major Banks seem to be supported by cashflow growth that exceeds the current pace of nominal GDP growth (5.6%) by around 2-3%pts.  These stocks look cheap, but we question whether cashflow growth can return to the longer-term average prior to the financial crisis.  The household sector has a large amount of debt and the population continues to age.  WBC is relatively cheap and is more attractive than the other Banks.  BEN is also attractive, but it has more realistic future cashflow prospects.


Holding the Reigns on Aussie Value Stocks

Australia

Insignia Financial Ltd operates as a financial services company. The Company provides clients with a range of products and services including financial advisory, investment management, real estate, and trustee services. Insignia Financial serves customers worldwide.

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Insignia Financial (IFL AU)

Link Gets Another Offer from Carlyle

Link received another offer from Carlyle worth A$5.38 per share. Carlyle has room to sweeten its bid as its latest bid values core Link at A$3.00...

Arun George

IOOF Placement - A Big Deal but Will Take Some Time to Complete

Ioof Holdings (IFL AU) is looking to raise about A$1,040m in its placement and accelerated non-renounceable entitlement offer to partially fund the...

Zhen Zhou, Toh

The Deadcat Bounce in Aussie Value

The Global rotation away from Defensive stocks to cyclical Growth and Value over the past few weeks has not been impressive enough to convince us...

Shane Lee

Aussie Equities Month in Review (July 2018)

Reporting Season should prove relatively good. The ASX200 underperformed global equities during the month but remains one of the best performing...

Shane Lee

Holding the Reigns on Aussie Value Stocks

Stick to Growth. Growth has outperformed Value by 10%pts year-to-date and we expect its outperformance to continue for the remainder of the year,...

Shane Lee

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