Industrials

• A double dose of StubWorld this week as Pasona Group (2168 JP) finally takes the hint to sell (if not exit altogether) its holding in Benefit One Inc (2412 JP).
• Preceding my comments on Pasona/Benefit One are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• General Electric intends to offload its entire shareholding via a secondary offer, a positive development as it removes the share overhang
• Opportune time to own Aercap as aircraft is in high demand and supply chain disruptions mean limited supply over the medium-term, ensuring high lease rates and strong profits 
• BUY with target price of $81.45 (+21% UPSIDE) pegged to FY24 P/BV of 0.94x, Aercap is the best in the pack with superior net lease margin, finance cost, and ROE     

• Top shareholder Gubel (59.9% stake) launches a cash partial takeover offer for Prosegur Cia De Seguridad Sa (PSG SM) at €1.83/share, cum dividend, except for €0.0661/share dividend payable on 1 December.
• Premium 27.4%, 4.1x EV/Fwd NTM EBITDA, 7.5x Fwd P/E. The founders profit from an underperforming share price to increase their stake, and this could comfortably be financed with the dividends.
• Gross spread, including December dividend, is c. 7%, which is quite good even considering risk of apportionment, although patience may be needed to accumulate a large position.

• We are publishing this note to introduce a new HNI financial model inclusive of the acquisition of Kimball International.
• We expect this new model will be more user-friendly for investors who want to see how we arrive at our estimates or tinker with the assumptions.
• Per our discipline, our model is available on request or visible through our partners.

Mytilineos (MYTIL) is continuing to deliver on its transformation into a simpler structure based on two pillars, Energy and Metals. Its strategy is focused on realising synergies in the group and building its renewable energy sources (RES) business, with its existing industrial assets providing a solid platform for growth. In our view, €1bn/year in EBITDA looks achievable in FY23 and would reset earnings at a higher level. We are increasing our valuation from €36/share to €45/share, in part due to the growth of its RES business, partly funded by its asset rotation strategy.

• A double dose of StubWorld this week as Pasona Group (2168 JP) finally takes the hint to sell (if not exit altogether) its holding in Benefit One Inc (2412 JP).
• Preceding my comments on Pasona/Benefit One are the current setup/unwind tables for Asia-Pacific Holdcos.
• These relationships trade with a minimum liquidity of US$1mn, and a % market capitalisation >20%.

• General Electric intends to offload its entire shareholding via a secondary offer, a positive development as it removes the share overhang
• Opportune time to own Aercap as aircraft is in high demand and supply chain disruptions mean limited supply over the medium-term, ensuring high lease rates and strong profits 
• BUY with target price of $81.45 (+21% UPSIDE) pegged to FY24 P/BV of 0.94x, Aercap is the best in the pack with superior net lease margin, finance cost, and ROE     

• Top shareholder Gubel (59.9% stake) launches a cash partial takeover offer for Prosegur Cia De Seguridad Sa (PSG SM) at €1.83/share, cum dividend, except for €0.0661/share dividend payable on 1 December.
• Premium 27.4%, 4.1x EV/Fwd NTM EBITDA, 7.5x Fwd P/E. The founders profit from an underperforming share price to increase their stake, and this could comfortably be financed with the dividends.
• Gross spread, including December dividend, is c. 7%, which is quite good even considering risk of apportionment, although patience may be needed to accumulate a large position.

• We are publishing this note to introduce a new HNI financial model inclusive of the acquisition of Kimball International.
• We expect this new model will be more user-friendly for investors who want to see how we arrive at our estimates or tinker with the assumptions.
• Per our discipline, our model is available on request or visible through our partners.

Mytilineos (MYTIL) is continuing to deliver on its transformation into a simpler structure based on two pillars, Energy and Metals. Its strategy is focused on realising synergies in the group and building its renewable energy sources (RES) business, with its existing industrial assets providing a solid platform for growth. In our view, €1bn/year in EBITDA looks achievable in FY23 and would reset earnings at a higher level. We are increasing our valuation from €36/share to €45/share, in part due to the growth of its RES business, partly funded by its asset rotation strategy.

• Today after the close with Benefit One Inc (2412 JP) reporting earnings, M3 Inc (2413 JP) announced a Partial Tender Offer to buy 81.21-83.31mm shares of Benefit One at ¥1600/share.
• That cleans out Pasona, which owns 81.21mm shares. Or does it… Shareholder structure dynamics and the problems they cause later bear some detailed examination. 
• This one is going to be a fun special sit.

• Benefit One Inc (2412 JP) announced a partial tender offer from M3 Inc (2413 JP) at JPY1,600 per share, a 40.0% premium to the undisturbed price. 
• The transaction facilitates Pasona Group (2168 JP)‘s exit. The offer is for a minimum of 81.2 million shares (51.16% ownership ratio) and a maximum of 87.3 million shares (55.00%). 
• Irrevocables from Pasona represent a 51.16% ownership ratio, satisfying the minimum acceptance condition. The offer is light vs. historical multiples and share prices. 

• Dearth of international flights from Chinese and Russian carriers — 2nd & 3rd biggest global aviation market, will distort supply, underpins strong yields and profitability.  
• SIA’s cost management is superior thanks to high asset utilisation, stable SGD vs. the USD, and access to attractive financing.  SIA’s competitors severely lack these attributes. 
• We forecast FY24 net profit of SGD2.4b (+13.1% YoY) and peg it to 10x PE to derive a TP of SGD8.07, +30% UPSIDE potential.  

• ZEEKR (ZK US), a premium Chinese BEV manufacturer and a subsidiary of Geely Auto (175 HK), has filed for a US$500 million IPO to list on the NYSE.
• ZEEKR has launched three models – the luxury shooting brake coupe ZEEKR 001, the luxury pure electric MPV – ZEEKR 009 and the new luxury versatile SUV – ZEEKR X.
• The bull case rests on bestselling premium BEVs, rapid vehicle sales growth, rising gross margin, debt-free balance sheet and a favourable cash conversion cycle.

• Grab‘s 3Q2023 results demonstrate a high degree of success in achieving a delicate balance between growth and profitability, with significant progress across all verticals, and a  broadening of product offerings.
• The company turned adjusted EBITDA breakeven for the first time in 3Q2023, through lower incentives, cost efficiencies, and lower regional corporate costs, with further progress towards FCF breakeven in 4Q2023.
• Grab remains confident about the outlook with guidance revised upwards, with the company looking at some potentially interesting M&A, which should be earnings accretive and beneficial to the ecosystem. 

• SCG Decor PCL (SCGD TB) is looking to raise around US$180m in its Thailand IPO.
• SCG Decor (SCGD) is Siam Cement Group’s flagship company in the decor surfaces and sanitaryware business.
• In this note, we look at the firm’s past performance.

• DNOW’s business has been resilient in the face of a declining US rig count through the first three quarters of 2023.
• 3Q23 US revenue was $448 million, 3% higher than 3Q22 despite an 11% fall in the average rig count.
• On a per rig basis, US 3Q23 revenue averaged ~$689,000, a 20% Y/Y gain

• Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
• We assess Azul’s ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Adequate”.
• Founded in 2008, Azul SA is a Brazilian airline offering the largest number of flights and destinations in the domestic market.

Braemar announced today that it would be releasing its FY23 results and its 2023 Annual Report and Accounts on 16 November, followed by its H124 results for the period to 31 August on 29 November. This unusual situation follows the suspension of the shares in July, pending an investigation into a historical transaction. It will be seeking a relisting of the shares after the FY23 announcement.

• Today after the close with Benefit One Inc (2412 JP) reporting earnings, M3 Inc (2413 JP) announced a Partial Tender Offer to buy 81.21-83.31mm shares of Benefit One at ¥1600/share.
• That cleans out Pasona, which owns 81.21mm shares. Or does it… Shareholder structure dynamics and the problems they cause later bear some detailed examination. 
• This one is going to be a fun special sit.

• Benefit One Inc (2412 JP) announced a partial tender offer from M3 Inc (2413 JP) at JPY1,600 per share, a 40.0% premium to the undisturbed price. 
• The transaction facilitates Pasona Group (2168 JP)‘s exit. The offer is for a minimum of 81.2 million shares (51.16% ownership ratio) and a maximum of 87.3 million shares (55.00%). 
• Irrevocables from Pasona represent a 51.16% ownership ratio, satisfying the minimum acceptance condition. The offer is light vs. historical multiples and share prices. 

• Dearth of international flights from Chinese and Russian carriers — 2nd & 3rd biggest global aviation market, will distort supply, underpins strong yields and profitability.  
• SIA’s cost management is superior thanks to high asset utilisation, stable SGD vs. the USD, and access to attractive financing.  SIA’s competitors severely lack these attributes. 
• We forecast FY24 net profit of SGD2.4b (+13.1% YoY) and peg it to 10x PE to derive a TP of SGD8.07, +30% UPSIDE potential.  

• ZEEKR (ZK US), a premium Chinese BEV manufacturer and a subsidiary of Geely Auto (175 HK), has filed for a US$500 million IPO to list on the NYSE.
• ZEEKR has launched three models – the luxury shooting brake coupe ZEEKR 001, the luxury pure electric MPV – ZEEKR 009 and the new luxury versatile SUV – ZEEKR X.
• The bull case rests on bestselling premium BEVs, rapid vehicle sales growth, rising gross margin, debt-free balance sheet and a favourable cash conversion cycle.

• Grab‘s 3Q2023 results demonstrate a high degree of success in achieving a delicate balance between growth and profitability, with significant progress across all verticals, and a  broadening of product offerings.
• The company turned adjusted EBITDA breakeven for the first time in 3Q2023, through lower incentives, cost efficiencies, and lower regional corporate costs, with further progress towards FCF breakeven in 4Q2023.
• Grab remains confident about the outlook with guidance revised upwards, with the company looking at some potentially interesting M&A, which should be earnings accretive and beneficial to the ecosystem. 

• SCG Decor PCL (SCGD TB) is looking to raise around US$180m in its Thailand IPO.
• SCG Decor (SCGD) is Siam Cement Group’s flagship company in the decor surfaces and sanitaryware business.
• In this note, we look at the firm’s past performance.

• DNOW’s business has been resilient in the face of a declining US rig count through the first three quarters of 2023.
• 3Q23 US revenue was $448 million, 3% higher than 3Q22 despite an 11% fall in the average rig count.
• On a per rig basis, US 3Q23 revenue averaged ~$689,000, a 20% Y/Y gain

• Lucror Analytics’ ESG Scores are based on a 3-tiered scale and are adjusted for Controversies (if applicable).
• We assess Azul’s ESG as “Adequate”, in line with its Environmental, Social and Governance scores. Controversies are “Immaterial” and Disclosure is “Adequate”.
• Founded in 2008, Azul SA is a Brazilian airline offering the largest number of flights and destinations in the domestic market.

Braemar announced today that it would be releasing its FY23 results and its 2023 Annual Report and Accounts on 16 November, followed by its H124 results for the period to 31 August on 29 November. This unusual situation follows the suspension of the shares in July, pending an investigation into a historical transaction. It will be seeking a relisting of the shares after the FY23 announcement.

• Last week, Zhejiang Expressway Co H (576 HK) announced its rights offering on both its H-Shares and its A-Shares, previously mooted on 23 May, and the Circular on 26 June.
• The company applied, got CSRC approval on 5 Nov, announced the issuance on 6 Nov, and shares went ex- on 10 November. It’s probably unneeded, but it’s there. 
• The stock is cheap. The company will boost its payout ratio. And it isn’t that “heavy” a deal. The Rights Trading Dynamics may be interesting.

• Impressive progress to date – Q1-4 FY9/2023 results were at record highs for the company, demonstrating a sustained track record of above-average profitability and disciplined capital allocation via M&A.
• Business diversification to life sciences has led to sales mix improvement and a more resilient business in our view.
• Company guidance for FY9/2024 indicates a decrease in earnings YoY, attributed to the accumulation of strategic upfront investments for business development. 

Adani Ports and Special Economic Zone’s (APSEZ) H1/23-24 results came in slightly above expectations, with revenue growth of 26% y-o-y exceeding management’s full-year guidance for a 15-20% increase. EBITDA (excluding FX losses) rose by 17%, at the higher end of the 13-17% guidance. Net adjusted leverage improved to 3.4x (FY 2022-23: 4.0x). We expect the company’s leverage to continue improving in FY 2023-24, in line with management’s guidance.

In our view, there remains a small degree of regulatory overhang and negative headline risk facing the broader Adani Group, which may affect group entities’ financing access in the offshore bond market (particularly on an unsecured basis). That said, the group’s access to onshore and bank financing remains intact.

Separately, we note that the Supreme Court hearing regarding the Securities and Exchange Board of India’s (SEBI) investigation on Adani Group has been repeatedly deferred. The Supreme Court requested on November 6th that all parties file final submissions regarding the case by November 8th. We believe the regulatory overhang may only be resolved by the eventual outcome of SEBI’s investigation and the Supreme Court’s judgement. 

• Success of disruptive innovation – we believe Q1-2 FY3/2024 results were ahead of the run-rate for FY guidance, driven by 1) sustained growth in maintenance and repair service contracts, and
• 2) stronger than expected demand for modernization services, resulting in gross margin improvement QoQ in Q2 FY3/2024 via amplified proposal effectiveness and increases in pricing.
• We expect to see JES continue to successfully disrupt the market via innovation, driven by secular growth as building owners convert to reputable independent providers for cost management and structural demand from aging elevators requiring modernization.

• J&T debuted with a rich valuation, but little investor enthusiasm to date
• Focusing on J&T’s valuation alone could be a boon to CaiNiao’s valuation…
• …but, with few other comps, J&T’s lackluster early performance could be a drag

• KEX’s EBIT margin fell to -38% in Q323, but showed Q/Q improvement vs Q223
• Q/Q progress on margin most likely due to KEX initiatives, not market recovery
• Ongoing weakness in Thai domestic express market marginally negative for J&T 

Carr’s Group has announced a fully refreshed executive team, none having been in-situ at the start of 2023. This will enable the executives to have an uninhibited view of the operations, enabling the development and implementation of a strategy reflecting the different opportunities and challenges facing the Engineering and Speciality Agriculture divisions.

• Last week, Zhejiang Expressway Co H (576 HK) announced its rights offering on both its H-Shares and its A-Shares, previously mooted on 23 May, and the Circular on 26 June.
• The company applied, got CSRC approval on 5 Nov, announced the issuance on 6 Nov, and shares went ex- on 10 November. It’s probably unneeded, but it’s there. 
• The stock is cheap. The company will boost its payout ratio. And it isn’t that “heavy” a deal. The Rights Trading Dynamics may be interesting.

• Impressive progress to date – Q1-4 FY9/2023 results were at record highs for the company, demonstrating a sustained track record of above-average profitability and disciplined capital allocation via M&A.
• Business diversification to life sciences has led to sales mix improvement and a more resilient business in our view.
• Company guidance for FY9/2024 indicates a decrease in earnings YoY, attributed to the accumulation of strategic upfront investments for business development. 

Adani Ports and Special Economic Zone’s (APSEZ) H1/23-24 results came in slightly above expectations, with revenue growth of 26% y-o-y exceeding management’s full-year guidance for a 15-20% increase. EBITDA (excluding FX losses) rose by 17%, at the higher end of the 13-17% guidance. Net adjusted leverage improved to 3.4x (FY 2022-23: 4.0x). We expect the company’s leverage to continue improving in FY 2023-24, in line with management’s guidance.

In our view, there remains a small degree of regulatory overhang and negative headline risk facing the broader Adani Group, which may affect group entities’ financing access in the offshore bond market (particularly on an unsecured basis). That said, the group’s access to onshore and bank financing remains intact.

Separately, we note that the Supreme Court hearing regarding the Securities and Exchange Board of India’s (SEBI) investigation on Adani Group has been repeatedly deferred. The Supreme Court requested on November 6th that all parties file final submissions regarding the case by November 8th. We believe the regulatory overhang may only be resolved by the eventual outcome of SEBI’s investigation and the Supreme Court’s judgement. 

• Success of disruptive innovation – we believe Q1-2 FY3/2024 results were ahead of the run-rate for FY guidance, driven by 1) sustained growth in maintenance and repair service contracts, and
• 2) stronger than expected demand for modernization services, resulting in gross margin improvement QoQ in Q2 FY3/2024 via amplified proposal effectiveness and increases in pricing.
• We expect to see JES continue to successfully disrupt the market via innovation, driven by secular growth as building owners convert to reputable independent providers for cost management and structural demand from aging elevators requiring modernization.

• J&T debuted with a rich valuation, but little investor enthusiasm to date
• Focusing on J&T’s valuation alone could be a boon to CaiNiao’s valuation…
• …but, with few other comps, J&T’s lackluster early performance could be a drag

• KEX’s EBIT margin fell to -38% in Q323, but showed Q/Q improvement vs Q223
• Q/Q progress on margin most likely due to KEX initiatives, not market recovery
• Ongoing weakness in Thai domestic express market marginally negative for J&T 

Carr’s Group has announced a fully refreshed executive team, none having been in-situ at the start of 2023. This will enable the executives to have an uninhibited view of the operations, enabling the development and implementation of a strategy reflecting the different opportunities and challenges facing the Engineering and Speciality Agriculture divisions.

• Although not explicitly outlined, it appears practical to interpret that we should filter out stocks that have entered a trading suspension among those receiving a WARNING designation.
• The dynamics of KOSPI 200 flow trading have become notably tumultuous due to the abrupt short selling ban and additional liquidity halts imposed on market makers in the futures market.
• The manifestation of price impact due to passive flows may be significantly delayed. So, we should prepare for this week’s announcement day setup targeting the delayed impact of passive flows.

• The HSI INDEX last week closed down (CC=-1), down for 3 months (almost 4), quite OVERSOLD and not in sync with the general “rally” (read: rebound) in other markets.
• LONG support for this week is between Q3 and Inner Fence levels: 16800-16300 area, but the current pattern behavior is not really encouraging LONG trades.
• Wait-And-See approach recommended before investment in HSI stocks, but if the index dives for the next 2 weeks it may be the right time to buy for a Christmas rally…

• The share price has risen by more than 20% in the past month as 1H results beat guidance, FY guidance was raised and the yen weakened.
• The 2-for-1 stock split may also have attracted retail investors. But the new FY guidance implies lower 2H guidance. 
• The outlook is for higher but volatile sales and profits. Valuations are reasonable but not compelling. Wait for a pullback.

• Deere & Company manufactures and distributes various equipment worldwide. The company operates through four segments: Production and Precision Agriculture, Small Agriculture and Turf, Construction and Forestry, and Financial Services.
• The Production and Precision Agriculture segment provides mid-size tractors, combines, cotton pickers and strippers, sugarcane harvesters, harvesting front-end equipment, sugarcane loaders, pull-behind scrapers, and tillage and seeding equipment, as well as application equipment, including sprayers and nutrient management, and soil preparation machinery for grain growers.
• The Small Agriculture and Turf segment offers utility tractors, and related loaders and attachments; turf and utility equipment, including riding lawn equipment, commercial mowing equipment, golf course equipment, and utility vehicles, as well as implements for mowing, tilling, snow and debris handling, aerating, residential, commercial, golf, and sports turf care applications; other outdoor power products; and hay and forage equipment. 

• Although not explicitly outlined, it appears practical to interpret that we should filter out stocks that have entered a trading suspension among those receiving a WARNING designation.
• The dynamics of KOSPI 200 flow trading have become notably tumultuous due to the abrupt short selling ban and additional liquidity halts imposed on market makers in the futures market.
• The manifestation of price impact due to passive flows may be significantly delayed. So, we should prepare for this week’s announcement day setup targeting the delayed impact of passive flows.

• The HSI INDEX last week closed down (CC=-1), down for 3 months (almost 4), quite OVERSOLD and not in sync with the general “rally” (read: rebound) in other markets.
• LONG support for this week is between Q3 and Inner Fence levels: 16800-16300 area, but the current pattern behavior is not really encouraging LONG trades.
• Wait-And-See approach recommended before investment in HSI stocks, but if the index dives for the next 2 weeks it may be the right time to buy for a Christmas rally…

• The share price has risen by more than 20% in the past month as 1H results beat guidance, FY guidance was raised and the yen weakened.
• The 2-for-1 stock split may also have attracted retail investors. But the new FY guidance implies lower 2H guidance. 
• The outlook is for higher but volatile sales and profits. Valuations are reasonable but not compelling. Wait for a pullback.

• Deere & Company manufactures and distributes various equipment worldwide. The company operates through four segments: Production and Precision Agriculture, Small Agriculture and Turf, Construction and Forestry, and Financial Services.
• The Production and Precision Agriculture segment provides mid-size tractors, combines, cotton pickers and strippers, sugarcane harvesters, harvesting front-end equipment, sugarcane loaders, pull-behind scrapers, and tillage and seeding equipment, as well as application equipment, including sprayers and nutrient management, and soil preparation machinery for grain growers.
• The Small Agriculture and Turf segment offers utility tractors, and related loaders and attachments; turf and utility equipment, including riding lawn equipment, commercial mowing equipment, golf course equipment, and utility vehicles, as well as implements for mowing, tilling, snow and debris handling, aerating, residential, commercial, golf, and sports turf care applications; other outdoor power products; and hay and forage equipment. 

• Reports emphasizing that SMIC fell short of 3Q expectations don’t make much sense. The real test starts this quarter with 7nm smart phone processors for Huawei in mass production.
• Profits are under pressure from low capacity utilization, rising depreciation and continued high investment. Cash flow is adequate. The balance sheet is sound.
• The share price dropped 6.8% on Friday after rising 44% from late August to early November. 4Q guidance points to near-zero operating and net profit. Recovery will take time.

• Last week, as Ps Mitsubishi Construction (1871 JP) reported earnings, Taisei Corp (1801 JP) announced a Partial Offer for PS Mitsubishi, buying out Ube Cement & Taiheiyo Cement stakes.
• Partial offers have recently traded well before the close, and badly after the result. As we near year-end, this one could trade a bit softer, suggesting a lower back end.
• Shareholder Structure, Pro-ration analysis, and back end calculation grids below. 

• Reports emphasizing that SMIC fell short of 3Q expectations don’t make much sense. The real test starts this quarter with 7nm smart phone processors for Huawei in mass production.
• Profits are under pressure from low capacity utilization, rising depreciation and continued high investment. Cash flow is adequate. The balance sheet is sound.
• The share price dropped 6.8% on Friday after rising 44% from late August to early November. 4Q guidance points to near-zero operating and net profit. Recovery will take time.

• Last week, as Ps Mitsubishi Construction (1871 JP) reported earnings, Taisei Corp (1801 JP) announced a Partial Offer for PS Mitsubishi, buying out Ube Cement & Taiheiyo Cement stakes.
• Partial offers have recently traded well before the close, and badly after the result. As we near year-end, this one could trade a bit softer, suggesting a lower back end.
• Shareholder Structure, Pro-ration analysis, and back end calculation grids below.