European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<a href="https://www.smartkarma.com/entities/zardoya-otis-sa" target="_blank" data-smartkarma-citation="entities:21307:1" rel="noopener">Zardoya Otis SA (ZOT SM)</a> , a subsidiary of <a href="https://www.smartkarma.com/entities/otis-worldwide-corp" target="_blank" data-smartkarma-citation="entities:34334:1" rel="noopener">Otis Worldwide Corp (OTIS US)</a>, used to be a classic in the Spanish stock market for income investors. Investing in Zardoya has been synonymous with several dividend payments year after year without interruption for three decades. The lift company never failed in its quarterly dividend payments since 1973, with an average payout of 92% over the last 30 years.
This is about to change. OPAL Spanish Holdings, owned by Otis, made on 23 September an opportunistic €7/share cash offer to acquire the remaining 49.9% of Zardoya Otis it does not own for c. €1.6 bn. Its stated intention is to delist Zardoya Otis, of which Otis has been a shareholder since 1972. The share price gained over 31% to close at €7.03, just above the offer, the highest price hike since listing in 1974.
The offer price will be reduced to €6.93/share as a result of the €0.074 dividend announced by Zardoya Otis, whose payment is scheduled for 11 October. The implied equity value is €3,293 mn. The offer price represents a premium of 30.8% over the prior day's close and 28.9% to the 1-month VWAP, 14x EV/Fwd EBITDA and 22x Fwd P/E (vs. a 10-year average of 23.8x).
The deal makes sense, since, although Otis already consolidated Zardoya Otis globally, the latter, safe from any unsolicited bid, traded at multiples below the parent (16.6x EV/Fwd EBITDA, 27.8x Fwd P/E) and other competitors (<a href="https://www.smartkarma.com/entities/kone-oyj" target="_blank" data-smartkarma-citation="entities:21766:1" rel="noopener">Kone OYJ (KNEBV FH)</a> 18.3x EV/Fwd EBITDA, 30.1x Fwd P/E and <a href="https://www.smartkarma.com/entities/schindler-holding-ag-a63e9700-2075-4f83-952a-d3e71b14974b" target="_blank" data-smartkarma-citation="entities:25024:1" rel="noopener">Schindler Holding AG (SCHN SW)</a> 16x EV/Fwd EBITDA, 29.5x Fwd P/E) despite having higher operating margins. Cheaper financing may have helped Otis to decide launching the takeover.
<div id="cuerpo_noticia" aria-describedby="La opa de Otis a Zardoya borrará de la bolsa un dividendo clásico del 92% del beneficio">
Otis does not need Spanish government approval and will activate the delisting if it comes to own 75% of the share capital. The second largest shareholder is the Zardoya family (11.345% stake) that has not commented on the offer (they would cash over €372 mn at the current offer price). There is also a large number of minority shareholders.
The Zardoya family is in the driving seat, in my view, as Otis needs their shares tendered to initiate the squeeze-out procedure.
True that the offer is in cash and represents a premium of 25% over the average price of 2021 and 3.5% over that average of 2019; moreover, the shares of Zardoya Otis had not reached €7 since 2018. Nevertheless, despite the premium offered, it is a cheap offer, below the multiples of Otis Worldwide Corp, Kone and Schindler (median 16.6x EV/Fwd EBITDA and 29.5x Fwd P/E). Based on the comparables median EV/Fwd EBITDA, the implied equity value for Zardoya Otis would be €8.3/share.
Gross spread is -0.3%. Shares have been liquid since offer announcement. A sweetened offer is likely, as the founding family of Zardoya will ask for a better price (probably around €7.5) to give up on their yearly €15 mn paycheck. I recommend Long ZOT SM. 
The risk would be to stay in what has traditionally been an illiquid stock, in which Otis already has control and which could later be excluded.
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Zardoya Otis SA (ZOT SM) , a subsidiary of Otis Worldwide Corp (OTIS US), used to be a classic in the Spanish stock market for income investors. Investing in Zardoya has been synonymous with several dividend payments year after year without interruption for three decades. The lift company never failed in its quarterly dividend payments since 1973, with an average payout of 92% over the last 30 years.
This is about to change. OPAL Spanish Holdings, owned by Otis, made on 23 September an opportunistic €7/share cash offer to acquire the remaining 49.9% of Zardoya Otis it does not own for c. €1.6 bn. Its stated intention is to delist Zardoya Otis, of which Otis has been a shareholder since 1972. The share price gained over 31% to close at €7.03, just above the offer, the highest price hike since listing in 1974.
The offer price will be reduced to €6.93/share as a result of the €0.074 dividend announced by Zardoya Otis, whose payment is scheduled for 11 October. The implied equity value is €3,293 mn. The offer price represents a premium of 30.8% over the prior day's close and 28.9% to the 1-month VWAP, 14x EV/Fwd EBITDA and 22x Fwd P/E (vs. a 10-year average of 23.8x).
The deal makes sense, since, although Otis already consolidated Zardoya Otis globally, the latter, safe from any unsolicited bid, traded at multiples below the parent (16.6x EV/Fwd EBITDA, 27.8x Fwd P/E) and other competitors (Kone OYJ (KNEBV FH) 18.3x EV/Fwd EBITDA, 30.1x Fwd P/E and Schindler Holding AG (SCHN SW) 16x EV/Fwd EBITDA, 29.5x Fwd P/E) despite having higher operating margins. Cheaper financing may have helped Otis to decide launching the takeover.

Otis does not need Spanish government approval and will activate the delisting if it comes to own 75% of the share capital. The second largest shareholder is the Zardoya family (11.345% stake) that has not commented on the offer (they would cash over €372 mn at the current offer price). There is also a large number of minority shareholders.
The Zardoya family is in the driving seat, in my view, as Otis needs their shares tendered to initiate the squeeze-out procedure.
True that the offer is in cash and represents a premium of 25% over the average price of 2021 and 3.5% over that average of 2019; moreover, the shares of Zardoya Otis had not reached €7 since 2018. Nevertheless, despite the premium offered, it is a cheap offer, below the multiples of Otis Worldwide Corp, Kone and Schindler (median 16.6x EV/Fwd EBITDA and 29.5x Fwd P/E). Based on the comparables median EV/Fwd EBITDA, the implied equity value for Zardoya Otis would be €8.3/share.
Gross spread is -0.3%. Shares have been liquid since offer announcement. A sweetened offer is likely, as the founding family of Zardoya will ask for a better price (probably around €7.5) to give up on their yearly €15 mn paycheck. I recommend Long ZOT SM. 
The risk would be to stay in what has traditionally been an illiquid stock, in which Otis already has control and which could later be excluded.


Otis/Zardoya Otis: Lifting the Minorities

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Last Friday, mid-cap specialist elevator maker (in the top ten globally) <a href="https://www.smartkarma.com/entities/fujitec-co-ltd" target="_blank" data-smartkarma-citation="entities:11686:1" rel="noopener">Fujitec Co Ltd (6406 JP)</a> announced a <a href="https://www.fujitec.com/common/fjhp/doc/top_global/document/irnews/2139/20201204_Fujitec%20Co.,%20Ltd.%20Announces%20Future%20Strategic%20Direction%20Plan.pdf" target="_blank" rel="noopener">Future Strategy Direction Plan</a> which focused on "priority business areas in the medium-and-long-term, the Company's medium- and long-term strategic targets, and measures aimed at strengthening its governance structure. This sounds kind of jargon-y. Some of it certainly is. But there is actually more than that under the cover, and it is designed to mollify activists who have pursued the company for years. The stock has hardly reacted. Some details clearly kick the can but there is a timer set for summer 2022. More below the fold.

Last Friday, mid-cap specialist elevator maker (in the top ten globally) Fujitec Co Ltd (6406 JP) announced a Future Strategy Direction Plan which focused on "priority business areas in the medium-and-long-term, the Company's medium- and long-term strategic targets, and measures aimed at strengthening its governance structure. This sounds kind of jargon-y. Some of it certainly is. But there is actually more than that under the cover, and it is designed to mollify activists who have pursued the company for years. The stock has hardly reacted. Some details clearly kick the can but there is a timer set for summer 2022. More below the fold. 

Activist Pressure FINALLY Works on Fujitec (6406)- Going Up? (Albeit Slowly)

Japan Specialist

Mark Chadwick

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/fujitec-co-ltd" target="_blank" data-smartkarma-citation="entities:11686:1" rel="noopener">Fujitec Co Ltd (6406 JP)</a>  share price has outperformed the broader Japanese machinery sector over the past one year (39% versus 7%). Much of the outperformance was driven by activist interest in the name, with Asset Value Investors (AVI) revealing their aptly titled “Taking Fujitec to the next level” presentation. Another well-known activist, Oasis Investors, took things a step further by adding shareholder proposals to the June AGM agenda. Although shareholders rejected the proposed cancellation of treasury stock, Oasis can feel vindicated by the relatively high 33% of votes in favour of the proposal. Moreover, with a dramatic decrease in support for Fujitec’s CEO, Uchiyama-san, it seems that many minority shareholders are also becoming frustrated with management. With activists publicly calling for change, the stock looks a cheap and low risk play on governance reform.

Fujitec Co Ltd (6406 JP)  share price has outperformed the broader Japanese machinery sector over the past one year (39% versus 7%). Much of the outperformance was driven by activist interest in the name, with Asset Value Investors (AVI) revealing their aptly titled “Taking Fujitec to the next level” presentation. Another well-known activist, Oasis Investors, took things a step further by adding shareholder proposals to the June AGM agenda. Although shareholders rejected the proposed cancellation of treasury stock, Oasis can feel vindicated by the relatively high 33% of votes in favour of the proposal. Moreover, with a dramatic decrease in support for Fujitec’s CEO, Uchiyama-san, it seems that many minority shareholders are also becoming frustrated with management. With activists publicly calling for change, the stock looks a cheap and low risk play on governance reform. 

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

Global indexes including the MSCI ACWI and ACWI ex-US are following in the MSCI EM index’s footsteps by breaking to new highs. This is bullish and signals a new leg higher is underway. Additionally, the US dollar is showing signs of a breakdown, something we view as a positive for global risk sentiment as long as the decline continues to be orderly. Overall our outlook remains bullish and we suggest buying any dips. Growth remains long-term leadership -- remain overweight. Attractive growth Sectors highlighted in today’s report include: Health Care, Services, Technology, and Communications

Global indexes including the MSCI ACWI and ACWI ex-US are following in the MSCI EM index’s footsteps by breaking to new highs. This is bullish and signals a new leg higher is underway. Additionally, the US dollar is showing signs of a breakdown, something we view as a positive for global risk sentiment as long as the decline continues to be orderly. Overall our outlook remains bullish and we suggest buying any dips. Growth remains long-term leadership -- remain overweight. Attractive growth Sectors highlighted in today’s report include: Health Care, Services, Technology, and Communications

U.S. Dollar Breakdown: Bullish For Ex-U.S. Equities

The risk of a pullback remains very real, however at this point the weight of the evidence suggests a meaningful pullback is not imminent. We recap important technical levels across market as well as Actionable Themes within the Consumer Staples, Health Care, and Technology sectors.

The risk of a pullback remains very real, however at this point the weight of the evidence suggests a meaningful pullback is not imminent. We recap important technical levels across market as well as Actionable Themes within the Consumer Staples, Health Care, and Technology sectors.

Finland

Wartsila OYJ Abp provides solutions for power generation and marine propulsion. The Company delivers customized power plant solutions including gas and oil fired power plants.

Valmet OYJ develops and supplies services and technologies. The Company offers its products and services, including new machinery and plants, rebuilds, process controls and other related services, to the pulp, paper, and energy industries.

Cargotec Oyj provides cargo-handling solutions for ships, ports, terminals and local distribution. The Company through its subsidiaries, provides services that include material handling hubs in ships, ports, terminals, and local distribution centers, on-road load-handling solutions, and the design, delivery and servicing of marine cargo flow solutions.

Ponsse Oyj designs, develops, manufactures, and markets forest machines.  The Company's product range includes heavy machinery for harvesting, cutting, and trimming trees and logs, as well as loaders and forwarders for moving and transporting logs.  Ponsse also makes harvest simulators for machine training. The Company sells its products throughout Europe and in North America.

Uponor Oyj manufactures and markets a wide range of plastic pipe systems for portable water and gas distribution, plumbing and heating, telecommunications, and sewage disposal.  The Company's product line includes under-floor heating systems, pipes for utility water systems, frost-free water supply systems, and radiator heating.  Uponor produces in many countries and markets worldwide.

YIT Oyj (YIT) offers construction, installation, and fixed and mobile network services. The Company's services include construction, renovations, and maintenance of commercial and residential buildings, water treatment plants, roads and bridges, pipelines, alarm systems, and telecommunications networks. YIT is primarily active in the Nordic countries, the Baltic rim, and Russia.

Caverion Corporation provides building systems and industrial services in the Nordic countries, Central Europe, Russia and the Baltic countries. The Company provides services that cover all building systems in properties, including HVAC systems, security, fire safety and telecommunications systems as well as the automation that controls them.

Finnair Oyj operates scheduled passenger traffic, technical and ground handling operation, catering, travel agencies, and reservation services. The Company offers domestic flight services, as well as provides scheduled passenger services to many international destinations. Finnair also offers leisure flights to holiday resorts in Mediterranean, the Caribbean, and other places.

Asiakastieto Group Oyj provides business and consumer information services. The Company's products and services are used for risk management, decision-making and sales and marketing purposes. Asiakastieto Group's customers include financial institutions, insurance companies, telecommunication operators and wholesale and retail companies.

Lassila & Tikanoja Oyj offers environmental management and maintenance services. The Company provides waste management and recycling services, property and plant maintenance, and industrial cleaning services, as well as hazardous waste management, damage repair, and sewer services.  L&T sells its services to cities, municipalities, industries, businesses, and private persons in Finland.

CRRC Corporation Limited manufactures rolling stock products. The Company produces locomotives, passenger carriages, freight wagons, vehicles key components, and other products. CRRC also provides vehicle repairing, investment management, and other services.

XCMG Construction Machinery Co., Ltd. manufactures and markets a variety of construction machinery including road construction machinery, scrapers, concrete mixers and other related products.

XCMG Construction Machinery A (000425 CH)

FANUC CORPORATION manufactures factory automation (FA) systems and equipments, and robots. The Company's products include computerized numerically-controlled (CNC) equipment, servo motors, laser systems, industrial robots, wire-cut electric discharge machines, and CNC drill.  Fanuc participates in a joint venture with General Electric in the FA field.

Stanley Black & Decker Inc. is a diversified global provider of hand tools, power tools and related accessories, mechanical access and electronic security solutions, healthcare solutions, engineered fastening systems, and more.

Graco Inc. supplies technology for the management of fluids in both industrial and commercial applications.  The Company designs, manufactures, and markets systems to move, measure, control, dispense, and apply fluid materials.  Graco's products are used for applying paints and coatings, high-pressure cleaning of equipment, and lubricating and maintaining vehicles and other equipment.

China CSSC Holdings Ltd. offers shipbuilding, ship components, ship repairing and diesel engines manufacturing. The Company distributes its products within the domestic market and to overseas markets.

Nordson Corporation designs, manufactures, and markets systems that apply adhesives, sealants, and coatings to consumer and industrial products during manufacturing operations.  The Company's products include customized electronic controls for the precise application and curing of materials to meet customers' requirements.  Nordson operates around the world.

China Shipbuilding Industry Company Limited designs, manufactures, sells and leases ship parts.  The Company's products include engines and parts, auxiliay engines and transportation equipment.

Cummins India Limited manufactures internal combustion engines, including diesel, reciprocating piston, gas turbine and gasoline engines. The Company also manufactures generating sets and public transport-type passenger motor vehicles, including luxury coaches and air-field buses.  In addition, Cummins India Ltd. operates a computerized and fully-equipped research and development facility.

KOMATSU LTD. manufactures and sells construction and mining machinery, including excavators, bulldozers, and wheel loaders.  The Company, operating on a global scale, also produces forklift trucks and engineering equipment such as press system.

Kone Oyj provides solutions for the installation, maintenance, and modernization of elevators and escalators and the maintenance of automatic building doors.

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Kone OYJ (KNEBV FH)

Otis/Zardoya Otis: Lifting the Minorities

A sweetened offer is in my view likely, as the founding family of Zardoya (11.34% stake) will ask for a better price (probably around €7.5) to give...

Jesus Rodriguez Aguilar

Activist Pressure FINALLY Works on Fujitec (6406)- Going Up? (Albeit Slowly)

Fujitec activist pressure finally seems to have shown results as the company buckles, and undertakes to pursue some activist demands. A small win....

Travis Lundy

Fujitec - Love in an Elevator

Fujitec Co Ltd (6406 JP) share price has outperformed the broader Japanese machinery sector over the past one year (39% versus 7%). Much of the...

Mark Chadwick

U.S. Dollar Breakdown: Bullish For Ex-U.S. Equities

Global indexes including the MSCI ACWI and ACWI ex-US are following in the MSCI EM index’s footsteps by breaking to new highs. This is bullish and...

Vermilion Research

Battleground Spot For Global Equities

The risk of a pullback remains very real, however at this point the weight of the evidence suggests a meaningful pullback is not imminent. We recap...

Vermilion Research

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