Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:
Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade. However, there still is foreign interest in the market.
The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high.
Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs. This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.
The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing. Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency. My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan. Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market. The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.
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There is a certain scenario in which the Indonesian market in 2019 could outperform on relative basis. If global growth slows while the resilient household sector holds up, capital inflows coud prove sufficient to cover the current account and avert yet more depreciation.
An adverse policy framework is depressing key sectors and hampering investment – at a time when the current account deficit (Cad) is jeopardizing stability. The administration of President Joko Widodo, who is cruising to re-election, shows little urgency about rectifying recent declines in Foreign Direct Investment (FDI). These concerns have underpinned our bearish outlook for the market in 2019 (see Indonesia: The Year of Dithering Dangerously). But in the event of a sharp global slowdown this year, Indonesia has potential – on a relative basis – to outperform.
Indonesia’s economy is poorly integrated with the international arena, and this ‘decoupling’ can offer insulation from global turbulence under certain conditions. And the key driver of GDP is household consumption, which has shown resiliency by sustaining a 4.9‑5.1 percent pace of annual growth over the past five years. As global growth deteriorates, Indonesia’s stalwart consumer‑growth engine may stand out and garner attention; if so, this may attract the capital inflows needed to cover the Cad.
However, risks remain high due to a background context that features policy flaws and institutional dysfunctions. Reforms to address the investment climate could bring about a substantial upward re‑rating – but prospects for Widodo to move assertively in this direction seem poor. In the continued absence of meaningful reforms, macro-economic stability will remain fragile, vulnerable to abrupt reversals in short‑term portfolio flows. Given Indonesia’s weak export performance and growing dependence on imported oil, the currency would face renewed pressure in the event of excessive Federal Reserve hikes or global shocks. However, in a scenario of global deceleration without undue turbulence, Indonesia has potential to outperform.
A very normal part of the semiconductor cycle is inventory clearance. DRAM makers are starting to discuss this in their earnings calls. What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves. This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.
INVESTMENT VIEW: The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
We opine that Jokowi (incumbent President) is the best performer/debater in terms of public speaking and argument skills during the first Indo presidential debate.
What stands out to us is the display of stark personality differences between Jokowi (humble, down to earth) and Prabowo (hard-nosed, tough minded).
The debate improves Jokowi’s likelihood of getting re-elected (a positive catalyst to Indo stock market), in our opinion.
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries. Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel. India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
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In our base case, we do not expect the trade war between the US and China to end soon. The next bilateral meeting between Liu He and US Trade Representative Robert Lighthizer is scheduled at the end of this month. If the Chinese side is hoping to placate the US with promises to purchase US commodities, this is unlikely to be sufficient to achieve a lasting improvement in the relationship. We are sceptical that the Chinese leadership will agree to launch structural reforms under pressure from the US.
Elsewhere, we are concerned with growing geopolitical and security risks in Nigeria where both presidential and parliamentary elections are scheduled in February. The relations between Turkey and the US have also soured ahead of the Turkish local elections. In Poland, the assassination of the Gdansk mayor put the polarisation of the society into the spotlight ahead of the parliamentary elections due this autumn. There are signs that the US is about to ramp up pressure on Russia after newly elected Democratic House members filled their seats earlier this month.
On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead.
This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues.
LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does.
Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again.
Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.
On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.
Exhibit 1: LNG Producers Outperform the US Market
Source: Capital IQ. Prices as of 22 of January. Un-weighted indexed composites. Oil Majors: Exxon, Chevron, Shell, BP, Total and ENI. Australia LNG: Woodside Energy, Santos, Oil Search. independent E&Ps: oil and gas upstream companies with market value greater than $300m as of 18 April 2018.
2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008. Here we share some of the key data points on active fund performance for 2018 and over the longer term.
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This week’s offering of Insights across ASEAN@Smartkarmais filled with another eclectic mix of differentiated, substantive and actionable insights from across South East Asia and includes macro, top-down and thematic pieces, as well as actionable equity bottom-up pieces. Please find a brief summary below, with a fuller write up in the detailed section.
This week’s highlights include a focus on Vietnam and its prospects, with two insights from Dr. Jim Walker and one from Frontier specialist Dylan Waller, with another obvious focus being the analysis of the first Presidential debate in Indonesia, with some in-depth commentary from Political specialist Kevin O’Rourke. Former Jakartan Angus Mackintosh revisits Ramayana Lestari Sentosa (RALS IJ) post a company visit and remains positive. Travis Lundy circles back to the Bank Danamon Indonesia (BDMN IJ) given the ongoing M&A situation there and our friends at New Street Research revisit the Indonesian Telecoms sector and data pricing in particular.
Macro Insights
In Vietnam: Economic Prestidigitation, Dr. Jim Walker analyses the GDP growth numbers out of Vietnam and concludes that even if there is some artistic license in the number itself, underlying growth in that country remains strong.
In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in BDMN, five years after DBS’ aborted attempt to obtain a majority in the same bank. Mid-week, local papers announced the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019.
It looks like this is almost completely bedded down. MUFG has a good relationship with Indonesian regulators and it would not have arrived at this Step 3 without pretty clear pre-approval indicated.
The result is an effective Tender Offer Trade at IDR 9,590/share for the float of BDMN. With shares up 8% the day of the announcement, there was another 6+% left for payment in three months and a week which comes out to 25.4% annualized in IDR terms through the close. Travis thought this is an excellent return for the risk here.
Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. The upshot is that if you tender, you will get the Tender Offer consideration. And if EVERY public shareholder tenders, MUFG will have to conduct a selldown of 7.5% within a very short period, and a selldown of 20% within 2 years or up to 5 years (a virtual IPO when it comes), in order to meet the free float requirements.
ESR has now declared its Offer for Propertylink “to be best and final“, and the Offer has been extended until the 28 February (unless further extended). After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash. The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG, together with unanimous PLG board support.
The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) its 19.5% stake in PLG.
Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“.
Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Currently trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.
The company announced a Tender Offer to buy back 26.666mm of its own shares at a roughly 10.5% premium to last trade. That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding. Shinmaywa prepared this well because they rearranged their holding grouping to be all held under corporate entities (in many situations, they hold under personal names). For some of us, that should have been a clue.
The main purpose of this effort is to get rid of Murakami-san, but Travis’ back of the napkin suggests just a 25% gain for Murakami, which is small beer for an investor bullish on the company’s prospects.
The outright long prospects do not impress. There are a lot of companies in the market with 3+% dividend rates and low PERs which are illiquid. The company will go into a net debt situation. That will likely cap future buybacks to the limit of spending this year’s net income. That would be big, but Travis expects with a high dividend, buybacks will be less likely.
Overall the business is OK, but it is unlikely to grow dramatically enough to warrant an ROE and margins which would make a price of 1.3-1.5x book appropriate in the near-term. Travis expects the tender offer to go through, and expects the price to be a bit “sticky” at this level near-term.
Huarong-CMB network [HCN] play New Sports announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close. The Offeror (China Goldjoy (1282 HK) – another HCN play) has entered into an SPA to acquire 37.18% of shares out. Upon successful completion of the SPA, Goldjoy will hold 66.44% and be required to make an unconditional general offer for all remaining shares.
The key condition to the SPA is Goldjoy’s shareholder approval. This should be a simple majority and the major shareholder, Yao Jianhui, has 41.9% in Goldjoy according to HKEx and page 23 of the Offer announcement.
Despite the potential issues faced by New Sports, this is a very real deal, with financing in place for the cash option.
The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” KDDI needs non-telecom revenue channels. KDDI has a bank, and life insurance, and some investment in asset management channels. It needs more, and better. A broker with a bank attached is a pretty good way to get long-term investment and savings products to customers.
Kabu.com is not the best one out there in terms of bang for buck. But KDDI already has a JV with kabu.com majority shareholder MUFG and another with kabu.com. If you could buy an online broker, you might choose to buy Rakuten or SBI, but you can’t. You have to buy the rest of the company with them.
Kabu.com shares were bid limit up all day long after the Nikkei article and closed at ¥462, which is a 10+ year closing high. You have to believe that KDDI is willing to pay a knock-out price to get this trade done. They may, but that is the bet. But Travis sees no impediment to the deal getting done.
Printing and HR services company and funeral parlor operator Kosaido announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement.
While the pretense will be that the deal is designed to grow the funeral parlor business (which, given the demographics, should be a decent business over time), this is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.
It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, Travis expect this gets done. If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.
This is a small deal. It is meaningless in the grand scheme of things. But it is a deal which should not have been done at this price because better governance would have meant the stock traded at better than 0.4x book before the announcement.
Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumour mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene acquisition provided further assurance of BMY’s commitment to the deal.
There was, however, no discussion, in the prepared remarks or the Q&A, of the status of antitrust filings (nor was the question asked in the Q&A). The U.S. Hart-Scott-Rodino antitrust filing should have been made with the FTC/DoJ by January 16th, 2019 according to the terms of the merger agreement, although this has not been publicly confirmed. The EU Competition web site does not show a competition filing having been made, and I would not have expected one so soon after the announcement of the deal.
Closing prices equate to annualised rates of return of ~20% / ~26.5%, respectively, by John DeMasi‘s calcs, which is very attractive.
Travis succinctly summarised the ongoing saga of governance and control that is the Renault/Nissan Alliance and speculates on the next chapter.
Carlos Ghosn is likely in more trouble. The release last Friday by Nissan and Mitsubishi makes clear that Ghosn effectively signed contracts to pay himself a very large sum of money from the funds of the Nissan-Mitsubishi Alliance treasury in ways which contravened the rules established for that Joint Venture.
The other news was that French visitors to Tokyo allegedly informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently, the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. This is, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement.
Nissan CAN react to any Renault breach of Nissan’s governance by purchasing shares to render Renault’s shares voteless. It can, for example, purchase economic exposure to Renault shares in the form of a cash-settled derivative, where it had neither voting rights nor the access to obtain them.It can do so quickly enough to react to anything that Renault can do by surprise, but it would be a clear breach of the Alliance Agreement to do so quickly.
Travis reckons Renault and Nissan will not deliberately blow up their Alliance – they will work through their issues slowly and painfully. This will cause uncertainty among investors. IF the two companies ever sort out their relationship and decide to merge, the combined entity is cheap. Very cheap. If they blow up their Alliance, they are both going to turn out to be expensive.
Earlier this week, TOC announced a ToSTNeT-3 Buyback, to buy up to 4.6mn shares or 4.49% of shares outstanding at ¥778/share. With this latest buyback, TOC has bought back 30% of shares outstanding in the past 14 months after selling a large asset before that. This has resulted in 49.5% of the votes held by the Ohtani family and their namesake companies, another 30% will be held by cross-holders who are loyal to the family, about 8-9% of the company will be owned by passive investors, and 11-13% of shares will be held by everyone else.
The company’s largest and most famous asset is a near-50-year-old building. There have been suggestions of redevelopment (discussed in more depth here). The two family members controlling almost 50% of the shares (plus the New Otani Company parent) are 72 and 66yrs old respectively. A 10-year redevelopment project might outlast them. The project might be better off in other hands.
The company has very long-held real estate assets – some of which are fully-depreciated and have very low land price book values. The share price is trading below Tangible Book Value. The shares trade at roughly 8x EBIT, which is very inexpensive for deeply undervalued and still earning real estate assets.
The stock is illiquid, trading US$1.25mm/day on a three-month average, and sometimes a lot less, but there is considerable asset backing to these shares. Travis would want to be long here.
Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gained ~10% earlier in the week in response to rumours of a government takeout of Thaicom. I estimate the discount to NAV at ~23%, versus an average of 28%, around its narrowest inside a year. The implied stub is at its narrowest inside a year. It was a decent move, translating to a Bt15.2bn lift in Intouch’s market cap, ~4.5x the value of the holding in Thaicom. That alone would suggest Intouch had been overbought.
That the Thai State-run CAT Telecom may take over Thaicom has a ring of truth to it. The military/government uses Thaicom, the only satellite operator in Thailand, and perhaps it is not (finally) comfortable with Singapore’s indirect interest in Thaicom via Singtel (ST SP)‘s stake in Intouch. It is an election year.
The rumoured price tag is Bt8.50/share or ~28% premium to the undisturbed price. Even a takeover premium north of 50% has no material impact on Intouch, as Thaicom accounts for 2% of NAV/GAV. However, selling Thaicom will further clean up what is already a very straightforward single-stock Holdco structure.
Optically Intouch has run its course in response to these Thaicom rumours – Intouch has denied any definitive approach/agreement – however, if a sale unfolds, this may help nudge the discount marginally lower from here.
Should CAT buy out Intouch’s stake, would it be required to make an Offer for all remaining shares? As the stake is above one of the key thresholds, (that is, 25%, 50% or 75% of its the total voting rights) it would be required to conduct a mandatory tender offer. But CAT may be afforded a partial offer, if Thaicom shareholders approve.
With SamE’s1P discount to Common at 16.61%, the lowest since mid-November last year, Sanghyun recommends to go long Common and short 1P with a short term horizon.
LEAP Holdings Group Ltd (1499 HK)announced an MGO at $0.1585/share vs. the last close of $0.39, but above Anthony Wong’s (the seller) in-price of $0.1236/share. Like Wong, this new Offeror has no experience in LEAP’s business. The Offeror is primarily a vehicle owned by Xu Mingxing, who has experience in blockchain technology. However, a more detailed overview of the Offeror can be found on page 14 of the HKEx link, which provides details of no less than 15 individuals with stakes into the Offeror.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
We run through our views on the main themes that will impact the oil and gas market in 2019 and the stocks to play these through. We outline the 10 key themes including oil demand, US oil supply growth, OPEC+ policy, base production decline rates, exploration potential and the outlook for new project final investment decisions. We also look at the refining market, LNG supply and demand, the M&A prospects and the impact of the energy transition. We outline 12 stocks (7 bullish and 5 bearish calls) that we think you can play the themes through.
We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates – overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.
A visit to Ramayana Lestari Sentosa (RALS IJ) in Jakarta confirmed that its positive transformation continues, as it strives to move up the value chain, bringing in more consignment brands and reassigning space to complementary tenants in its stores to draw in the crowds. This is reducing its heavy dependence on Lebaran sales, as it moves up the value chain to attract a slightly more affluent customer.
Ramayana Lestari Sentosa (RALS IJ) continues to upgrade its stores and bring in new tenants, such as cinemas and F&B such as Starbucks, as its closes loss-making supermarkets. A revamped store is expected to see a 20-25% sales enhancement. It will transform a further 30 stores in 2019, including cinemas into the mix.
The company continues to see strong performance from its consignment and fashion sales, with the drop off in supermarket sales lessening and this business no longer losing money.
Ramayana Lestari Sentosa (RALS IJ) strives to be the leader in providing fashion for the masses and continues to use celebrities to endorse its own brands.
It has decentralised sourcing of products and incentivised stores managers at the EBIT level rather than for sales. It has also introduced a strict process for discounting, which is enhancing profitability.
The company will introduce a further 20 new consignment brands in 2019 to help grow this side of the business and move up the value chain. Shoes are one of the most important growth categories.
Ramayana Lestari Sentosa (RALS IJ) is in the midst of a significant metamorphosis, which could see the company truly realise the value of its nationwide franchise, and move up the value to become less reliant on Lebaran sales. It continues to transform its store portfolio, introducing more consignment vendors and complementary tenants into its stores to increase footfall. According to Capital IQ consensus, the stock trades on 18.3x FY19E PER and 17.3x FY20E PER, with estimated EPS growth of +9% and +6% for FY19E and FY20E respectively. These growth expectations look to be conservative given the positive direction that management is taking both on its merchandising, brands, and tenant mix.
Politics: Corruption moved to the fore of campaign sparring, as National Mandate Party (Pan) founder Amien Rais accused President Joko Widodo of “crimes of omission”. The attack may reflect mounting grounds for concern about the poll position of Pan, which risks suffering exclusion from the next parliament. Prabowo Subianto and his campaigners continue to issue vague insinuations, rather than highlighting the plain fact that four active investigations are embroiling Widodo‑government ministries (Page 2). Basuki Purnama left prison and asked to be called ‘BPT’. Megawati’s cool treatment of the former Jakarta governor reflects her diffidence about championing pluralism (p. 3).
Disasters: Flooding has killed dozens and displaced thousands in 10 districts of South Sulawesi, including Makassar. The governor faults past management of watersheds (p. 4).
Electoral System: Yet again, the State Administrative Court (PTUN) has contradicted the General Election Commission (KPU), putting the latter at odds with the Election Oversight Agency (Bawaslu) in a case pertaining to Oesman Sapta Odang (OSO), the Hanura chair who is speaker of the Regional Representatives Assembly (DPD). Although OSO is disreputable, Hanura is tiny and the DPD virtually powerless, the case nonetheless poses risks for the KPU’s prestige and effectiveness (p. 5).
Justice: The spiritual leader of the former terrorist organization Jemaah Islamiyah (JI), Abubakar Baasyir, has not yet won release. He must first issue a written statement declaring loyalty to the Republic of Indonesia and the pluralist state ideology Pancasila (p. 7).
Policy News: The president finally enacted a long-planned regulation to require natural-resource exporters to recycle their foreign-exchange earnings through domestic banks. Some coal producers complain that the move conflicts with the terms of their offtake-and-financing agreements. But the measure holds promise for rectifying the tight onshore dollar liquidity that has long rendered the rupiah highly volatile (p. 9). A new tax IT system is undergoing procurement, with full deployment targeted for 2023 (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Jakarta: The March opening of the MRT – and all 13 stations – is on schedule (p. 12).
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Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:
Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade. However, there still is foreign interest in the market.
The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high.
Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs. This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.
The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing. Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency. My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan. Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market. The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.
Highlights of significant recent happenings include:
Substantive Deep Dive – Canada’s BlackBerry Ltd (BB CN) seeks to be the go-to provider of web Security: Why we believe investors should look at Blackberry as a way to hedge their exposures to the increasing list of companies who are susceptible to adverse impact from security breaches.
Feeding the Dragon – Chinese buying of US firms brakes abruptly, obliterating the long-term trend, and now Japan has become the second-largest market for outbound M&A globally. Also, South Korean food giant Cj Cheiljedang (097950 KS) is continuing its aggressive expansion into the U.S. market
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Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:
Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade. However, there still is foreign interest in the market.
The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high.
Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs. This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.
The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing. Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency. My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan. Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market. The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.
Highlights of significant recent happenings include:
Substantive Deep Dive – Canada’s BlackBerry Ltd (BB CN) seeks to be the go-to provider of web Security: Why we believe investors should look at Blackberry as a way to hedge their exposures to the increasing list of companies who are susceptible to adverse impact from security breaches.
Feeding the Dragon – Chinese buying of US firms brakes abruptly, obliterating the long-term trend, and now Japan has become the second-largest market for outbound M&A globally. Also, South Korean food giant Cj Cheiljedang (097950 KS) is continuing its aggressive expansion into the U.S. market
Wars in old times were made to get slaves. The modern implement of imposing slavery is debt. Ezra Pound
Governments used public sector balance sheets to bail out private financial institutions and assist private companies to emerge from bankruptcy in the GFC. These actions transferred credit risk from the private to the public sector, yet falling nominal interest rates minimised, and in some cases froze, the cost of servicing the mounting government debt until late 2016. Since then, many borrowers have paid rising interest rates on increasing amounts of debt. Debt service charges are rising faster than nominal GDP in a growing number of nations as a result. It is estimated that the US federal funding requirement will rise from minus US$ 700bn to US$ 2tr in 2022.
Looking at the telco space for Emerging Asean markets in 2019, we see a number of key themes.
Revenue trends are likely to worsen in Thailand and the Philippines, but improve in Indonesia and possibly Malaysia.
Margin trends usually follow revenue but Indonesia will have the added benefit of reduced subscriber churn following the SIM registration completion in 2018.
Political risk is elevated with elections in Thailand (although renewed talk of delays) and Indonesia.
Overall, Indonesia looks to be the most interesting market with rising revenue growth as the market stabilizes. Telekom Indonesia (TLKM IJ) is our top pick, followed by Xl Axiata (EXCL IJ). Elsewhere, Malaysia looks to be improving but valuations remain high. The outlook has worsened in Thailand with DTAC (DTAC TB) getting hold of spectrum and now litigation risk coming to the fore with old cases with TOT/CAT. The Philippine duopoly faces the rude shock from the China Telecom Consortium’s entry in late 2019.
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In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in BDMN, five years after DBS’ aborted attempt to obtain a majority in the same bank. Mid-week, local papers announced the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019.
It looks like this is almost completely bedded down. MUFG has a good relationship with Indonesian regulators and it would not have arrived at this Step 3 without pretty clear pre-approval indicated.
The result is an effective Tender Offer Trade at IDR 9,590/share for the float of BDMN. With shares up 8% the day of the announcement, there was another 6+% left for payment in three months and a week which comes out to 25.4% annualized in IDR terms through the close. Travis thought this is an excellent return for the risk here.
Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. The upshot is that if you tender, you will get the Tender Offer consideration. And if EVERY public shareholder tenders, MUFG will have to conduct a selldown of 7.5% within a very short period, and a selldown of 20% within 2 years or up to 5 years (a virtual IPO when it comes), in order to meet the free float requirements.
ESR has now declared its Offer for Propertylink “to be best and final“, and the Offer has been extended until the 28 February (unless further extended). After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash. The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG, together with unanimous PLG board support.
The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) its 19.5% stake in PLG.
Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“.
Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Currently trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.
The company announced a Tender Offer to buy back 26.666mm of its own shares at a roughly 10.5% premium to last trade. That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding. Shinmaywa prepared this well because they rearranged their holding grouping to be all held under corporate entities (in many situations, they hold under personal names). For some of us, that should have been a clue.
The main purpose of this effort is to get rid of Murakami-san, but Travis’ back of the napkin suggests just a 25% gain for Murakami, which is small beer for an investor bullish on the company’s prospects.
The outright long prospects do not impress. There are a lot of companies in the market with 3+% dividend rates and low PERs which are illiquid. The company will go into a net debt situation. That will likely cap future buybacks to the limit of spending this year’s net income. That would be big, but Travis expects with a high dividend, buybacks will be less likely.
Overall the business is OK, but it is unlikely to grow dramatically enough to warrant an ROE and margins which would make a price of 1.3-1.5x book appropriate in the near-term. Travis expects the tender offer to go through, and expects the price to be a bit “sticky” at this level near-term.
Huarong-CMB network [HCN] play New Sports announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close. The Offeror (China Goldjoy (1282 HK) – another HCN play) has entered into an SPA to acquire 37.18% of shares out. Upon successful completion of the SPA, Goldjoy will hold 66.44% and be required to make an unconditional general offer for all remaining shares.
The key condition to the SPA is Goldjoy’s shareholder approval. This should be a simple majority and the major shareholder, Yao Jianhui, has 41.9% in Goldjoy according to HKEx and page 23 of the Offer announcement.
Despite the potential issues faced by New Sports, this is a very real deal, with financing in place for the cash option.
The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” KDDI needs non-telecom revenue channels. KDDI has a bank, and life insurance, and some investment in asset management channels. It needs more, and better. A broker with a bank attached is a pretty good way to get long-term investment and savings products to customers.
Kabu.com is not the best one out there in terms of bang for buck. But KDDI already has a JV with kabu.com majority shareholder MUFG and another with kabu.com. If you could buy an online broker, you might choose to buy Rakuten or SBI, but you can’t. You have to buy the rest of the company with them.
Kabu.com shares were bid limit up all day long after the Nikkei article and closed at ¥462, which is a 10+ year closing high. You have to believe that KDDI is willing to pay a knock-out price to get this trade done. They may, but that is the bet. But Travis sees no impediment to the deal getting done.
Printing and HR services company and funeral parlor operator Kosaido announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement.
While the pretense will be that the deal is designed to grow the funeral parlor business (which, given the demographics, should be a decent business over time), this is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.
It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, Travis expect this gets done. If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.
This is a small deal. It is meaningless in the grand scheme of things. But it is a deal which should not have been done at this price because better governance would have meant the stock traded at better than 0.4x book before the announcement.
Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumour mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene acquisition provided further assurance of BMY’s commitment to the deal.
There was, however, no discussion, in the prepared remarks or the Q&A, of the status of antitrust filings (nor was the question asked in the Q&A). The U.S. Hart-Scott-Rodino antitrust filing should have been made with the FTC/DoJ by January 16th, 2019 according to the terms of the merger agreement, although this has not been publicly confirmed. The EU Competition web site does not show a competition filing having been made, and I would not have expected one so soon after the announcement of the deal.
Closing prices equate to annualised rates of return of ~20% / ~26.5%, respectively, by John DeMasi‘s calcs, which is very attractive.
Travis succinctly summarised the ongoing saga of governance and control that is the Renault/Nissan Alliance and speculates on the next chapter.
Carlos Ghosn is likely in more trouble. The release last Friday by Nissan and Mitsubishi makes clear that Ghosn effectively signed contracts to pay himself a very large sum of money from the funds of the Nissan-Mitsubishi Alliance treasury in ways which contravened the rules established for that Joint Venture.
The other news was that French visitors to Tokyo allegedly informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently, the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. This is, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement.
Nissan CAN react to any Renault breach of Nissan’s governance by purchasing shares to render Renault’s shares voteless. It can, for example, purchase economic exposure to Renault shares in the form of a cash-settled derivative, where it had neither voting rights nor the access to obtain them.It can do so quickly enough to react to anything that Renault can do by surprise, but it would be a clear breach of the Alliance Agreement to do so quickly.
Travis reckons Renault and Nissan will not deliberately blow up their Alliance – they will work through their issues slowly and painfully. This will cause uncertainty among investors. IF the two companies ever sort out their relationship and decide to merge, the combined entity is cheap. Very cheap. If they blow up their Alliance, they are both going to turn out to be expensive.
Earlier this week, TOC announced a ToSTNeT-3 Buyback, to buy up to 4.6mn shares or 4.49% of shares outstanding at ¥778/share. With this latest buyback, TOC has bought back 30% of shares outstanding in the past 14 months after selling a large asset before that. This has resulted in 49.5% of the votes held by the Ohtani family and their namesake companies, another 30% will be held by cross-holders who are loyal to the family, about 8-9% of the company will be owned by passive investors, and 11-13% of shares will be held by everyone else.
The company’s largest and most famous asset is a near-50-year-old building. There have been suggestions of redevelopment (discussed in more depth here). The two family members controlling almost 50% of the shares (plus the New Otani Company parent) are 72 and 66yrs old respectively. A 10-year redevelopment project might outlast them. The project might be better off in other hands.
The company has very long-held real estate assets – some of which are fully-depreciated and have very low land price book values. The share price is trading below Tangible Book Value. The shares trade at roughly 8x EBIT, which is very inexpensive for deeply undervalued and still earning real estate assets.
The stock is illiquid, trading US$1.25mm/day on a three-month average, and sometimes a lot less, but there is considerable asset backing to these shares. Travis would want to be long here.
Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gained ~10% earlier in the week in response to rumours of a government takeout of Thaicom. I estimate the discount to NAV at ~23%, versus an average of 28%, around its narrowest inside a year. The implied stub is at its narrowest inside a year. It was a decent move, translating to a Bt15.2bn lift in Intouch’s market cap, ~4.5x the value of the holding in Thaicom. That alone would suggest Intouch had been overbought.
That the Thai State-run CAT Telecom may take over Thaicom has a ring of truth to it. The military/government uses Thaicom, the only satellite operator in Thailand, and perhaps it is not (finally) comfortable with Singapore’s indirect interest in Thaicom via Singtel (ST SP)‘s stake in Intouch. It is an election year.
The rumoured price tag is Bt8.50/share or ~28% premium to the undisturbed price. Even a takeover premium north of 50% has no material impact on Intouch, as Thaicom accounts for 2% of NAV/GAV. However, selling Thaicom will further clean up what is already a very straightforward single-stock Holdco structure.
Optically Intouch has run its course in response to these Thaicom rumours – Intouch has denied any definitive approach/agreement – however, if a sale unfolds, this may help nudge the discount marginally lower from here.
Should CAT buy out Intouch’s stake, would it be required to make an Offer for all remaining shares? As the stake is above one of the key thresholds, (that is, 25%, 50% or 75% of its the total voting rights) it would be required to conduct a mandatory tender offer. But CAT may be afforded a partial offer, if Thaicom shareholders approve.
With SamE’s1P discount to Common at 16.61%, the lowest since mid-November last year, Sanghyun recommends to go long Common and short 1P with a short term horizon.
LEAP Holdings Group Ltd (1499 HK)announced an MGO at $0.1585/share vs. the last close of $0.39, but above Anthony Wong’s (the seller) in-price of $0.1236/share. Like Wong, this new Offeror has no experience in LEAP’s business. The Offeror is primarily a vehicle owned by Xu Mingxing, who has experience in blockchain technology. However, a more detailed overview of the Offeror can be found on page 14 of the HKEx link, which provides details of no less than 15 individuals with stakes into the Offeror.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
We run through our views on the main themes that will impact the oil and gas market in 2019 and the stocks to play these through. We outline the 10 key themes including oil demand, US oil supply growth, OPEC+ policy, base production decline rates, exploration potential and the outlook for new project final investment decisions. We also look at the refining market, LNG supply and demand, the M&A prospects and the impact of the energy transition. We outline 12 stocks (7 bullish and 5 bearish calls) that we think you can play the themes through.
We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates – overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.
A visit to Ramayana Lestari Sentosa (RALS IJ) in Jakarta confirmed that its positive transformation continues, as it strives to move up the value chain, bringing in more consignment brands and reassigning space to complementary tenants in its stores to draw in the crowds. This is reducing its heavy dependence on Lebaran sales, as it moves up the value chain to attract a slightly more affluent customer.
Ramayana Lestari Sentosa (RALS IJ) continues to upgrade its stores and bring in new tenants, such as cinemas and F&B such as Starbucks, as its closes loss-making supermarkets. A revamped store is expected to see a 20-25% sales enhancement. It will transform a further 30 stores in 2019, including cinemas into the mix.
The company continues to see strong performance from its consignment and fashion sales, with the drop off in supermarket sales lessening and this business no longer losing money.
Ramayana Lestari Sentosa (RALS IJ) strives to be the leader in providing fashion for the masses and continues to use celebrities to endorse its own brands.
It has decentralised sourcing of products and incentivised stores managers at the EBIT level rather than for sales. It has also introduced a strict process for discounting, which is enhancing profitability.
The company will introduce a further 20 new consignment brands in 2019 to help grow this side of the business and move up the value chain. Shoes are one of the most important growth categories.
Ramayana Lestari Sentosa (RALS IJ) is in the midst of a significant metamorphosis, which could see the company truly realise the value of its nationwide franchise, and move up the value to become less reliant on Lebaran sales. It continues to transform its store portfolio, introducing more consignment vendors and complementary tenants into its stores to increase footfall. According to Capital IQ consensus, the stock trades on 18.3x FY19E PER and 17.3x FY20E PER, with estimated EPS growth of +9% and +6% for FY19E and FY20E respectively. These growth expectations look to be conservative given the positive direction that management is taking both on its merchandising, brands, and tenant mix.
Politics: Corruption moved to the fore of campaign sparring, as National Mandate Party (Pan) founder Amien Rais accused President Joko Widodo of “crimes of omission”. The attack may reflect mounting grounds for concern about the poll position of Pan, which risks suffering exclusion from the next parliament. Prabowo Subianto and his campaigners continue to issue vague insinuations, rather than highlighting the plain fact that four active investigations are embroiling Widodo‑government ministries (Page 2). Basuki Purnama left prison and asked to be called ‘BPT’. Megawati’s cool treatment of the former Jakarta governor reflects her diffidence about championing pluralism (p. 3).
Disasters: Flooding has killed dozens and displaced thousands in 10 districts of South Sulawesi, including Makassar. The governor faults past management of watersheds (p. 4).
Electoral System: Yet again, the State Administrative Court (PTUN) has contradicted the General Election Commission (KPU), putting the latter at odds with the Election Oversight Agency (Bawaslu) in a case pertaining to Oesman Sapta Odang (OSO), the Hanura chair who is speaker of the Regional Representatives Assembly (DPD). Although OSO is disreputable, Hanura is tiny and the DPD virtually powerless, the case nonetheless poses risks for the KPU’s prestige and effectiveness (p. 5).
Justice: The spiritual leader of the former terrorist organization Jemaah Islamiyah (JI), Abubakar Baasyir, has not yet won release. He must first issue a written statement declaring loyalty to the Republic of Indonesia and the pluralist state ideology Pancasila (p. 7).
Policy News: The president finally enacted a long-planned regulation to require natural-resource exporters to recycle their foreign-exchange earnings through domestic banks. Some coal producers complain that the move conflicts with the terms of their offtake-and-financing agreements. But the measure holds promise for rectifying the tight onshore dollar liquidity that has long rendered the rupiah highly volatile (p. 9). A new tax IT system is undergoing procurement, with full deployment targeted for 2023 (p. 11).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Jakarta: The March opening of the MRT – and all 13 stations – is on schedule (p. 12).
In our base case, we do not expect the trade war between the US and China to end soon. The next bilateral meeting between Liu He and US Trade Representative Robert Lighthizer is scheduled at the end of this month. If the Chinese side is hoping to placate the US with promises to purchase US commodities, this is unlikely to be sufficient to achieve a lasting improvement in the relationship. We are sceptical that the Chinese leadership will agree to launch structural reforms under pressure from the US.
Elsewhere, we are concerned with growing geopolitical and security risks in Nigeria where both presidential and parliamentary elections are scheduled in February. The relations between Turkey and the US have also soured ahead of the Turkish local elections. In Poland, the assassination of the Gdansk mayor put the polarisation of the society into the spotlight ahead of the parliamentary elections due this autumn. There are signs that the US is about to ramp up pressure on Russia after newly elected Democratic House members filled their seats earlier this month.
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On January 24’th 2019, SEMI announced that Wafer Fab Equipment (WFE) billings for North America-based manufacturers of semiconductor equipment amounted to $2.11 billion worldwide in December 2018. This represents an 8.5% MoM increase, although still lower YoY by 12.1%. December’s data marks the reversal of a six month long downtrend in monthly billings, a bullish signal that the WFE segment has bottomed and better times lie ahead.
This latest billings data coincides with WFE bellwether Lam Research (LRCX US)‘s latest earnings report which slightly exceeded guidance with revenues of $2.5 billion, up 8.7% sequentially. On the call, company executives stated that first quarter CY 2019 would mark the trough from a gross margin perspective, strongly implying that it would be the same for revenues.
LRCX shares surged 15.7% in overnight trading triggering a rising tide that lifted large swathes of semiconductor stocks, particularly those within the WFE sector. Two swallows don’t necessarily mean it’s Spring, but for now, the markets are betting that it does.
Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again.
Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.
On the back of a growing LNG global trade volume, LNG producers have outperformed the US market and their E&P peers including the oil majors over the last two years. As global LNG production reaches a record 316m tonnes in 2018, a 9.6% increase year on year, new capacity additions set to come online in the next three years will be dominated by the US. This insight will examine how the recent entry of US LNG in the market is transforming the LNG industry and which emerging players are driving the change.
Exhibit 1: LNG Producers Outperform the US Market
Source: Capital IQ. Prices as of 22 of January. Un-weighted indexed composites. Oil Majors: Exxon, Chevron, Shell, BP, Total and ENI. Australia LNG: Woodside Energy, Santos, Oil Search. independent E&Ps: oil and gas upstream companies with market value greater than $300m as of 18 April 2018.
2018 was a year to forget for many active GEM managers. Absolute returns were the worst since 2011 and, relative to the I-Shares MSCI Emerging Markets ETF, active funds registered their first average underperformance since 2008. Here we share some of the key data points on active fund performance for 2018 and over the longer term.
There is a certain scenario in which the Indonesian market in 2019 could outperform on relative basis. If global growth slows while the resilient household sector holds up, capital inflows coud prove sufficient to cover the current account and avert yet more depreciation.
An adverse policy framework is depressing key sectors and hampering investment – at a time when the current account deficit (Cad) is jeopardizing stability. The administration of President Joko Widodo, who is cruising to re-election, shows little urgency about rectifying recent declines in Foreign Direct Investment (FDI). These concerns have underpinned our bearish outlook for the market in 2019 (see Indonesia: The Year of Dithering Dangerously). But in the event of a sharp global slowdown this year, Indonesia has potential – on a relative basis – to outperform.
Indonesia’s economy is poorly integrated with the international arena, and this ‘decoupling’ can offer insulation from global turbulence under certain conditions. And the key driver of GDP is household consumption, which has shown resiliency by sustaining a 4.9‑5.1 percent pace of annual growth over the past five years. As global growth deteriorates, Indonesia’s stalwart consumer‑growth engine may stand out and garner attention; if so, this may attract the capital inflows needed to cover the Cad.
However, risks remain high due to a background context that features policy flaws and institutional dysfunctions. Reforms to address the investment climate could bring about a substantial upward re‑rating – but prospects for Widodo to move assertively in this direction seem poor. In the continued absence of meaningful reforms, macro-economic stability will remain fragile, vulnerable to abrupt reversals in short‑term portfolio flows. Given Indonesia’s weak export performance and growing dependence on imported oil, the currency would face renewed pressure in the event of excessive Federal Reserve hikes or global shocks. However, in a scenario of global deceleration without undue turbulence, Indonesia has potential to outperform.
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A very normal part of the semiconductor cycle is inventory clearance. DRAM makers are starting to discuss this in their earnings calls. What they are NOT telling their investors is how significant this is to the onset of a price collapse, perhaps because they don’t understand it themselves. This Insight will help readers to learn how and why an inventory clearance helps ratchet a budding oversupply into a full-blown glut.
INVESTMENT VIEW: The Australian Bureau of Meteorology has just downgraded its risk of El Niño from ‘Alert’ to ‘Watch’, and as a result, we temper our optimism for a near-term rally in CPO prices. Longer-term, we remain bullish on Golden Agri Resources (GGR SP), but higher CPO prices remain a key catalyst for our bullish call on the shares.
We opine that Jokowi (incumbent President) is the best performer/debater in terms of public speaking and argument skills during the first Indo presidential debate.
What stands out to us is the display of stark personality differences between Jokowi (humble, down to earth) and Prabowo (hard-nosed, tough minded).
The debate improves Jokowi’s likelihood of getting re-elected (a positive catalyst to Indo stock market), in our opinion.
The dramatic defeat of PM May’s Brexit arrangement with the EU was seen by the markets as a positive development. Apparently the markets believe that this could result in Britain remaining in the EU.
While we agree this would be good news we consider it unlikely without many more months or years of uncertainty as another referendum is organized and implemented.
Romania: GDP in Q3 grew 4.4% y/y, up from 4.1% in Q2. The country’s economy is doing better than most EU countries. Brazil: The CPI in Dec rose 3.7%, down from 4.05% in Nov. Lowest rate since May, as prices slowed for food and fuel. India: The trade deficit in Dec narrowed to $13.1 bn. Exports rose a meager 0.3% and imports fell 2.44%. GDP growth of 7% is expected for this year and next..
The globe is facing more than an ordinary business cycle.
Joseph C. Sternberg, editorial-page editor and European political-economy columnist for the Wall Street Journal’s European edition, recently interviewed Claudio Borio, head of the Monetaryand Economic Department of the BIS. Mr. Borio said that politicians have relied far too much on central banks, which are constrained by economic theories that offer little meaningful guidance on how to sustain growth and financial stability. The only tool they have is an interest rate that can affect output in the short run but ends up affecting only inflation in the end.
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BI held its benchmark rate steady due to current account concerns; in any event, bank credit growth suggests that the economy has considerable momentum despite international headwinds and the 2018 rate hikes. Widodo did enough to surpass Prabowo in the 1st of 5 presidential debates, although Prabowo avoided gaffes and both candidates lacked energy. Dubbed a ‘dud’ in headlines, it at least featured constructive discussion of bureaucratic reform. Widodo also promised a National Legislative Center to rectify conflicting and excessive regulation. A Charta Politik poll shows steady margins for Widodo and PDI-P as of late December and the sole reform-minded party, the new PSI, finally registered support of 1.5%. Planners remain at odds over a location for a downtown terminus of Jakarta’s elevated LRT — a project crucial for complementing the imminent MRT.
Politics: Despite a critical domestic press reaction and a lack of sensational moments, the first presidential debate produced the most detailed high‑level discussion of bureaucratic reform in more than a decade. Overall, President Joko Widodo fared better than his challenger, Gerindra Chair Prabowo Subianto, but both seemed lacking in energy. Both also succeeded in avoiding pitfalls: Widodo’s running mate, the aging cleric Mar’uf Amin, caused no major embarrassment for the ticket; and Prabowo maintained an even temper with no unseemly rants. The candidates traded barbs: Prabowo hit home by questioning Widodo’s decision to appoint a “top law enforcement official” (i.e., the attorney general) who is a party representative; and Widodo twice inflicted damage by citing Gerindra’s lack of women in its leadership and its nomination of corruption convicts for legislative offices. Widodo unveiled a plan for a National Legislative Center (Puslegnas). The debate, translated in full by Ref Wkly, seems unlikely to alter the candidates’ poll positions (Page 2). The president approved the release of the 80‑year‑old icon of terrorist groups, Abu Bakar Basyir (p. 15). Widodo visited a fair for businesses run by impoverished households and, oddly, purchased 100,000 1‑liter bottles of dishsoap from one vendor. At best, the episode may indicate a preoccupation with his family’s catering business; at worst, it shows haphazard handling of his personal finances (p. 16).
Surveys: Charta Politik measured President Joko Widodo’s margin as being virtually unchanged at 19 percentage points in late December. It also confirmed that PDI‑P’s nomination of Widodo is a major reason for its popular support. The pro‑reform Solidarity Party (PSI) finally registered detectable support of 1.5 percent (p. 17).
Produced since 2003, the Reformasi Weekly Review provides timely, relevant and independent analysis on Indonesian political and policy news. The writer is Kevin O’Rourke, author of the book Reformasi. For subscription info please contact: <[email protected]>.
Infrastructure: Differences between the central and provincial government persist over where to locate the terminus of the Light Rail Train (LRT) in downtown Jakarta. A large land plot south of Landmark Tower has been vacant for decades – but the central government prefers a less central location (p. 19).
Economics: The rupiah has partially rebounded amid easier external financing conditions in recent weeks, but Bank Indonesia (BI) nonetheless decided this week to maintain its benchmark rate at 6.0 percent – due to a persistently high current account deficit. In part, the deficit reflects Indonesia’s considerable economic momentum. Nonetheless, rising fuel imports and falling oil production signal continued current account pressure ahead, necessitating vigilance from BI (p. 20).
Trawling through >1500 global banks, based on the last quarter of reported Balance Sheets, we apply the discipline of the PH Score™ , a value-quality fundamental momentum screen, plus a low RSI screen, and a low Franchise Valuation (FV) screen to deliver our latest rankings for global banks.
While not all of top decile 1 scores are a buy – some are value traps while others maybe somewhat small and obscure and traded sparsely- the bottom decile names should awaken caution. We would be hard pressed to recommend some of the more popular and fashionable names from the bottom decile. Names such as ICICI Bank Ltd (ICICIBC IN) , Credicorp of Peru, Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB US) are EM favourites. Their share prices have performed well for an extended period and thus carry valuation risk. They represent pricey quality in some cases. They are not priced for disappointment but rather for hope. Are the constituents of the bottom decile not fertile grounds for short sellers?
Why pay top dollar for a bank franchise given risks related to domestic (let alone global) politics and the economy? Some investors and analysts have expressed “inspiration” for developments in Brazil and Argentina. But Brazilian bonds are now trading as if the country is Investment Grade again. (This is relevant for banks especially). Guedes and co. may deliver on pension/social security reform. If so, prices will become even more inflated. But what happens if they don’t deliver on reform? Why pay top dollar for hope given the ramp up in prices already? Argentina is an even more fragile “hope narrative”. More of a “Hope take 2”. Similar to Brazil, bank Franchise Valuations are elevated. While the current account adjustment and easing inflation are to be expected, the political and social scene will be a challenge. LATAM seems to be “hot” again with investment bankers talking of resilience. But resilience is different from valuation. Banks from Chile, Peru, and Colombia feature in the bottom decile too. If an investor wants to be in these markets and desires bank exposure, surely it makes sense to look for the best value on offer. Grupo Aval Acciones y Valores (AVAL CB) may represent one such opportunity.
Our bottom decile rankings feature a great deal of banks from Indonesia. In a promising market such as Indonesia, given bank valuations, one needs to tread extremely carefully to not end up paying over the odds, to not pay for extrapolation. In addition, India is a susceptible jurisdiction for any bank operating there – no bank is “superhuman” and especially not at the prices on offer for the popular private sector “winners”. Saudi Arabia is another market that suddenly became popular last year. We are mindful of valuations and FX.
Does it not make more sense to look at opportunity in the top decile? While some of the names here will be too small or illiquid (mea culpa), there are genuine portfolio candidates. South Korea stands out in the rankings. Woori Bank (WF US) is top of the rankings after a share price plunge related to a stock overhang but this will pass. Hana Financial (086790 KS) , Industrial Bank of Korea (IBK LX) and DGB Financial Group (139130 KS) are portfolio candidates. Elsewhere, Russia and Vietnam rightly feature while Sri Lanka and Pakistan contribute some names despite very real political and macro risks. We would caution on some of the relatively small Chinese names but recommend the big 4 versus EM peers – they are not expensive. In fact some of the big 4 feature in decile 2 of our rankings. There are many Japanese banks here too. And many, like some Chinese lenders, are cheap for a reason. While the technical picture for Japanese banks is bearish, at some stage selective weeding out of opportunity within Japan’s banking sector may be rewarding. The megabanks are certainly not dear. Europe is another matter. Despite valuations, we are cautious on French lenders and on German consolidation narratives – did a merger of 2 weak banks ever deliver shareholder value? The inclusion of two Romanian banks in the top decile is somewhat of a headscratcher. These are perfectly investable opportunities but share prices have been poor of late.
Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
Uzbekistan’s economy is a frontier market stand out and has a large number of attractive characteristics:
Uzbekistan’s stock market trades at a substantial discount to other frontier markets, though the extremely illiquid nature of the market makes it hard to trade. However, there still is foreign interest in the market.
The IMF projects that the economy will grow by 5% during 2018 and 2019, and eventually reach 6% by 2022, though this is still below its historical high.
Market reforms were spearheaded in December 2016 when the newly elected president, Shavkat Mirziyoyev decided to transition towards a market- oriented economy led by private sector growth, as the public sector was unable to create enough jobs. This represents a significant shift given that Uzbekistan had been a closed, centrally planned economy until 2016.
Tourist arrivals grew by 91.6% during H1 2018, and this is poised to improve greater in the future due to the impact of the visa liberalization measures.
Twin deficits have remained under control and Uzbekistan is one of few current account surplus frontier markets.
Uzbekistan is also very attractive compared to other markets in the frontier space given that its minimum wage is only US$24/month, compared to around $70-75/month in Kyrgyzstan and Kazakhstan.
The market reforms that the country recently implemented will be a major catalyst for future economic growth and makes investment in this market appealing. Apart from strong growth, the market is also appealing due to its high foreign exchange reserves ( nearly 2 years of import cover), consistent CA surplus, and stable currency. My latest frontier and emerging market recap highlights the appeals of markets such as Bangladesh, Vietnam, and Egypt, while expressing concerns for markets such as Sri Lanka and Pakistan. Uzbekistan is a suitable addition given its stable macro/political picture, and the main negative factor of this market is the highly inaccessible nature of the equity market. The ADTV is less than $100,000, which is a far cry from other frontier markets like Romania, Sri Lanka and Kenya.
Highlights of significant recent happenings include:
Substantive Deep Dive – Canada’s BlackBerry Ltd (BB CN) seeks to be the go-to provider of web Security: Why we believe investors should look at Blackberry as a way to hedge their exposures to the increasing list of companies who are susceptible to adverse impact from security breaches.
Feeding the Dragon – Chinese buying of US firms brakes abruptly, obliterating the long-term trend, and now Japan has become the second-largest market for outbound M&A globally. Also, South Korean food giant Cj Cheiljedang (097950 KS) is continuing its aggressive expansion into the U.S. market
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