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New York based activist investor firm Starboard Value has been intricately involved in shaping the fortunes and futures of two high profile technology companies in recent years, Marvell and Mellanox. The firm first to prominence some five years ago when they were the first among their peers to accomplish the extraordinary feat of replacing the CEO and entire board of Fortune 500 restaurant group Darden, while holding less than 10% of the company’s shares.
In the wake of their Darden coup, the firm has gone from strength to strength. To date the firm has taken positions in a total of 105 publicly listed companies, replacing or adding some 211 directors on over 60 corporate boards.
On March 7’th 2019, Starboard Value announced the acquisition of a 4% stake in US comms infrastructure firm Zayo. In the intervening period, Zayo’s share price has risen by 14% as canny investors scramble to partake in the goodness that will surely be extracted by the activist firm that simply doesn’t take no for an answer.
On the 14th March 2019, Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close.
The offer is conditional on due diligence, unanimous approval of VLW’s board of directors and the receipt of FIRB and other regulatory approvals.
AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.
During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.
Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. Its stake in VLW accounts for only 1.5% of its market cap. I would not be surprised if Ho Bee is still buying in the market.
VLW announced a 1H19 NPAT of A$17.6mn ($17.3mn) last month – slightly above its $16mn to $17mn guidance – and declared a A$0.08/share franked dividend. Assuming FY19E profit of $27mn, VLW is trading at a not unreasonable 10x PER and an attractive 7.3% yield, one of the highest yields among its peer group, assuming the high-end of the 50-75% payout ratio policy.
Lower US rates and yields appear to be fuelling broad weakness in the USD and gains in EM assets over the last two weeks. Global risk appetite is on an improving trend, suggesting hopes are high that easier central bank policies, in the US, China and globally, will stabilise global growth. Gold continues to pay more attention to lower bond yields, strengthening despite less demand for safe havens. The AUD has firmed in line with stronger global risk appetite, despite increasing expectations that the RBA will cut rates relatively soon. Never more has the RBA directed the market to pay closer attention to labour market data, raising the stakes around the labour report on Thursday. Both Australia and Canada have experienced weaker housing markets, credit tightening and surprising economic data setbacks in recent months. Canadian long term real bond yields have fallen more abruptly, suggesting downside risk for CAD.
The co-founder of Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00.
The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.
Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions.
The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.
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MYOB Group Ltd (MYO AU)‘s shares are trading A$3.42, marginally above KKR & Co Inc (KKR US)‘s revised lower offer of A$3.40 cash per share, due to the expectation of a bidder trumping KKR. The optimism has also been stoked by the sharp market rally since MYOB agreed to recommend KKR’s revised lower offer on 24 December 2018. The ASX 200 and ASX 300 Information Technology Index has rallied 10% and 20% respectively from 24 December 2018 to 15 February 2019.
While shareholders may feel like KKR is acquiring MYOB at a knockdown price, the market could quickly revert to a downward trend. We believe that shareholders hoping for a white knight to ride to the rescue will be disappointed.
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Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.
Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit.
That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.
This time is different.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.
Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.
Timeline of Events
Date
Data in the Date
End-2005
Mulpha’s stake in Aveo (then called FKP) was acquired after a share swap with Mulpha Norwest
For years semiconductor makers and investors have worried that Moore’s Law will end. Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
On Thursday, MYOB Group Ltd (MYO AU) released its Scheme Booklet in which the Independent Expert, Grant Samuel, valued MYOB between A$3.19 and A$3.69 per share. Consequently, Grant Samuel concluded that KKR & Co Inc (KKR US)‘s revised proposal of A$3.40 cash per share is fair and reasonable. However, Manikay Partners continues to voice concerns about the KKR proposal as it believes MYOB is worth well in excess of A$4.00 per share.
With the shares 4 cents below KKR’s revised proposal, we continue to believe shareholders should cash out as Manikay’s valuation is only justifiable if MYOB’s delivers flawless execution.
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On the 14th March 2019, Australian property developer, Villa World Ltd (VLW AU)announced that it had received an unsolicited proposal, by way of a scheme, from AVID Property Group Australia at an offer price A$2.23, or a 12% premium to last close.
The offer is conditional on due diligence, unanimous approval of VLW’s board of directors and the receipt of FIRB and other regulatory approvals.
AVID’s indicative offer translates to an LTM PER and P/B of 6.4x and 0.9x, with the P/B metric roughly in line peers.
During 2018, VLW’s share price declined by 36% to A$1.76 from A$2.77, with a large chunk of that downward move occurring in December after VLW withdrew its FY19E earnings guidance. That forecast withdrawal was exacerbated by the fact VLW had maintained the 2019 forward guidance at its mid-November AGM.
Ho Bee Land Ltd (HOBEE SP), VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$1.95/share – and a high of A$2.18/share – lifting its stake to 9.41%. Its stake in VLW accounts for only 1.5% of its market cap. I would not be surprised if Ho Bee is still buying in the market.
VLW announced a 1H19 NPAT of A$17.6mn ($17.3mn) last month – slightly above its $16mn to $17mn guidance – and declared a A$0.08/share franked dividend. Assuming FY19E profit of $27mn, VLW is trading at a not unreasonable 10x PER and an attractive 7.3% yield, one of the highest yields among its peer group, assuming the high-end of the 50-75% payout ratio policy.
Lower US rates and yields appear to be fuelling broad weakness in the USD and gains in EM assets over the last two weeks. Global risk appetite is on an improving trend, suggesting hopes are high that easier central bank policies, in the US, China and globally, will stabilise global growth. Gold continues to pay more attention to lower bond yields, strengthening despite less demand for safe havens. The AUD has firmed in line with stronger global risk appetite, despite increasing expectations that the RBA will cut rates relatively soon. Never more has the RBA directed the market to pay closer attention to labour market data, raising the stakes around the labour report on Thursday. Both Australia and Canada have experienced weaker housing markets, credit tightening and surprising economic data setbacks in recent months. Canadian long term real bond yields have fallen more abruptly, suggesting downside risk for CAD.
The co-founder of Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00.
The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.
Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions.
The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.
Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March. Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold. The US yield curve remains positive showing the cycle is not at its end. Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown. But policy is mobilising to reduce the risk of a further sharp slowdown in growth. The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days. Consequently, there seems little upside to low-single-digit EPS growth over the medium-term. Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year. However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data.
Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell. We remove ABC, DLX, IPL, and ORA and include BIN.
Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary. There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth. The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product. The performance of A2M shows the opportunity that is on offer. WES Bunnings business is performing well, despite a weak consumer. K Mart seems to be performing better than its Big W.
Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature. It should continue to provide protection to the portfolio in the event of raised uncertainty.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Lower US rates and yields appear to be fuelling broad weakness in the USD and gains in EM assets over the last two weeks. Global risk appetite is on an improving trend, suggesting hopes are high that easier central bank policies, in the US, China and globally, will stabilise global growth. Gold continues to pay more attention to lower bond yields, strengthening despite less demand for safe havens. The AUD has firmed in line with stronger global risk appetite, despite increasing expectations that the RBA will cut rates relatively soon. Never more has the RBA directed the market to pay closer attention to labour market data, raising the stakes around the labour report on Thursday. Both Australia and Canada have experienced weaker housing markets, credit tightening and surprising economic data setbacks in recent months. Canadian long term real bond yields have fallen more abruptly, suggesting downside risk for CAD.
The co-founder of Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00.
The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.
Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions.
The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.
Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March. Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold. The US yield curve remains positive showing the cycle is not at its end. Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown. But policy is mobilising to reduce the risk of a further sharp slowdown in growth. The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days. Consequently, there seems little upside to low-single-digit EPS growth over the medium-term. Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year. However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data.
Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell. We remove ABC, DLX, IPL, and ORA and include BIN.
Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary. There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth. The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product. The performance of A2M shows the opportunity that is on offer. WES Bunnings business is performing well, despite a weak consumer. K Mart seems to be performing better than its Big W.
Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature. It should continue to provide protection to the portfolio in the event of raised uncertainty.
Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.
Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit.
That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.
This time is different.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.
Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.
Timeline of Events
Date
Data in the Date
End-2005
Mulpha’s stake in Aveo (then called FKP) was acquired after a share swap with Mulpha Norwest
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
The co-founder of Platinum Asset Management (PTM AU), Kerr Neilson, and Judith Neilson are looking to sell 30m shares of the company at a fixed price of A$5.00.
The deal scores poorly on our framework due to its poor track record, large deal size, weak earnings momentum and relatively expensive valuation. The selldown comes after the company weak 1H FY19 results last month which could put pressure on share price in the near term.
Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions.
The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.
Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March. Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold. The US yield curve remains positive showing the cycle is not at its end. Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown. But policy is mobilising to reduce the risk of a further sharp slowdown in growth. The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days. Consequently, there seems little upside to low-single-digit EPS growth over the medium-term. Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year. However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data.
Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell. We remove ABC, DLX, IPL, and ORA and include BIN.
Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary. There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth. The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product. The performance of A2M shows the opportunity that is on offer. WES Bunnings business is performing well, despite a weak consumer. K Mart seems to be performing better than its Big W.
Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature. It should continue to provide protection to the portfolio in the event of raised uncertainty.
Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.
Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit.
That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.
This time is different.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.
Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.
Timeline of Events
Date
Data in the Date
End-2005
Mulpha’s stake in Aveo (then called FKP) was acquired after a share swap with Mulpha Norwest
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Wisetech Global (WTC AU) plans to raise US$177m/AUD250m in order to shore-up its balancesheet for future acquistiions.
The company has done exceedingly well since listing and even its past fund raising delivered good returns. However, the deal scores a mixed score on our framework as valuations appear strecthed with the stock trading above analysts target price. Thus, the deal might warrant a large discount.
Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March. Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold. The US yield curve remains positive showing the cycle is not at its end. Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown. But policy is mobilising to reduce the risk of a further sharp slowdown in growth. The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days. Consequently, there seems little upside to low-single-digit EPS growth over the medium-term. Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year. However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data.
Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell. We remove ABC, DLX, IPL, and ORA and include BIN.
Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary. There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth. The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product. The performance of A2M shows the opportunity that is on offer. WES Bunnings business is performing well, despite a weak consumer. K Mart seems to be performing better than its Big W.
Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature. It should continue to provide protection to the portfolio in the event of raised uncertainty.
Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.
Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit.
That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.
This time is different.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.
Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.
Timeline of Events
Date
Data in the Date
End-2005
Mulpha’s stake in Aveo (then called FKP) was acquired after a share swap with Mulpha Norwest
For years semiconductor makers and investors have worried that Moore’s Law will end. Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Tracking Benchmark during the Correction and Now looking for Alpha. Our model portfolio has performed in line with the benchmark over the past couple of months, with strong outperformance in January giving way to modest underperformance in February and March. Our tilt towards Growth drove the outperformance as the Fed announced it would keep policy on hold. The US yield curve remains positive showing the cycle is not at its end. Value’s rebound in February and March has been unconvincing and driven by beaten up Consumer Discretionary stocks such as HVN and SUL and low PE defensive plays.
We Move Overweight Resources and Pull our Banks Exposure Back to Underweight: Key bulk commodity prices are holding up against the Chinese economic slowdown. But policy is mobilising to reduce the risk of a further sharp slowdown in growth. The prospect of a rate cut by the RBA is providing a timely boost for the sector via a weaker currency that could be in a sweet spot if global growth has bottomed.
Cutting Exposure to the Banks. Some uncertainty has now been removed following the release of the Final Report from the Banking Royal Commission and there is some anecdotal evidence that the Banks are returning to the lending business after withdrawing last year, but it’s early days. Consequently, there seems little upside to low-single-digit EPS growth over the medium-term. Auction clearance rates in both Sydney and Melbourne remain low and consistent with smaller price declines than last year. However, the labour market has remained resilient and provides a more positive assessment of economic conditions than the GDP data.
Trimming Industrials. We are not trimming our exposure to industrials because we are overly bearish on the domestic economy but because we think it’s best to make room in this sector to build up our Resources barbell. We remove ABC, DLX, IPL, and ORA and include BIN.
Opportunities in the Consumer Space. We add BAL in Consumer Staples and WES in Consumer Discretionary. There is a risk including BAL into the portfolio, but we think it is positioning itself for strong longer-term growth. The share price has rallied strongly in the past couple of weeks, but it will need to be supported by approval from China to sell its product. The performance of A2M shows the opportunity that is on offer. WES Bunnings business is performing well, despite a weak consumer. K Mart seems to be performing better than its Big W.
Keeping our raised Property Weighting. Property worked well as bond yields rallied last year and while we don’t expect strong returns to be repeated, it is good practice to have an overweight to the sector, given the global economic cycle is mature. It should continue to provide protection to the portfolio in the event of raised uncertainty.
Back in August, I argued a case for the privatisation of Aveo Group (AOG AU), which at the time was trading at a P/B of 0.6x versus ~2x for peers. Also in late August, Aveo announced a strategic review to examine all options to close the gap between Aveo’s market capitalisation and the value of the underlying retirement properties.
Aveo’s steep discount to peers was/is ostensibly due to the presence of Mulpha International (MIT MK)‘s large stake (22.5%), crowding out institutional ownership; Mulpha and Aveo sharing the same chairman, inferring (yet categorically denied) Aveo’s absence of independence; and the ongoing class action lawsuit.
That was a brutal recommendation, and lacking a hard catalyst, shares declined to $1.55 in January, recovering to $2.05 today, still ~12% shy of the price at the time of my last note.
This time is different.
Aveo announced in early February a number of indicative non-binding bids were received for a “whole of company transaction” with AFR reporting (paywalled) that Lone Star had joined the fray. Other interested parties are believed to include Blackstone and Cerberus Capital Management.
Aveo’s share price is up ~20% since announcing the receipt of the indicative bids, having drifted down from a (recent) closing peak of $2.14 earlier this month.
Aveo is currently trading at an attractive 0.52x P/B vs. 1.8x for its peer group, with the next closest peer valuation at 0.7x P/B. An offer of >0.7x, a level last traded as recently as June 2018, appears reasonable with ~92% of assets in investment property.
Further afield, Mulpha trades at a P/B of 0.25x, while the stake in Aveo accounts for 104% of its market cap, and around 25% of NAV. It’s discount to NAV has significantly narrowed since February, but Mulpha continues to trade at a discount to 76%.
Timeline of Events
Date
Data in the Date
End-2005
Mulpha’s stake in Aveo (then called FKP) was acquired after a share swap with Mulpha Norwest
For years semiconductor makers and investors have worried that Moore’s Law will end. Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
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For years semiconductor makers and investors have worried that Moore’s Law will end. Although it is not difficult to find proponents of this argument today, this Insight provides evidence that the venerable phenomenon not only is still moving forward, but that it has, in some cases, been moving faster than it has in the past.
The last three years have been characterized by significant M&A activity in the upstream oil and gas industry. As the oil cycle recovered from the price bottom in January 2016, lower asset prices and corporate valuations created opportunities for the companies with a stronger balance sheet to grow inorganically while their weaker competitors were forced to downsize their portfolios. 2018, in particular, has seen a surge of corporate M&A which has been driving consolidation in the industry. This insight examines the trends that have shaped the M&A markets since 2016 with a closer view of 2018 and the outlook for 2019.
Exhibit 1: M&A volume compared to the E&P index and the oil price since 2016
Source: Energy Market Square, Capital IQ. Market value weighted index including independent E&P companies with market value greater than $300m as of 19 April 2018. Data as of 7 March 2019. The M&A volume in September 2018 includes the merger of Wintershall and DEA with an estimated value of $10bn.
On Thursday, MYOB Group Ltd (MYO AU) released its Scheme Booklet in which the Independent Expert, Grant Samuel, valued MYOB between A$3.19 and A$3.69 per share. Consequently, Grant Samuel concluded that KKR & Co Inc (KKR US)‘s revised proposal of A$3.40 cash per share is fair and reasonable. However, Manikay Partners continues to voice concerns about the KKR proposal as it believes MYOB is worth well in excess of A$4.00 per share.
With the shares 4 cents below KKR’s revised proposal, we continue to believe shareholders should cash out as Manikay’s valuation is only justifiable if MYOB’s delivers flawless execution.
Brexit fear diminishing boosting GBP and other currencies
Eurozone IP rebounds, the first sign of stabilisation
Pressure increases for a rate cut in Australia
We can see a case for GBP to rise towards 1.40 helping recoveries in EUR and AUD, and weakening the USD more broadly. But the outlook for a more sustained period of low EUR rates, no structural underweight in EUR, and limited demand for Euro assets suggest that its upside may be limited. Rate cut expectations have reached a new peak in Australia, and the AUD should continue to remain heavy. Chinese economic reports (trade, credit, PMIs) have been weak, Jan/Feb activity data are due later today. The overall outlook for the USD remains mixed and cautious trading continues to be advised. Event risk will keep traders playing the short game.
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