Industrials

• Uchi Technologies (UCHI MK), a manufacturer of controllers for coffee machines, has a 23-year track record of operating margins of over 40% and ROCEs of over 20%.  
• Trading at 11.9x trailing PE, with a dividend yield of 9%, and 15% of the market cap in cash, the company has been serially paying dividends (payout > 70%). 
• In its 2022 annual report, for the first time in its history, the company mentioned it has exciting growth plans that will be revealed over the year. 

• In this insight, we provide gap trade opportunities among 30 small cap Korean preferred stocks with market cap of less than 100 billion won and more than 20 billion won.
• Among these 30 companies, there are some in interesting gap trade opportunities, especially among those with relatively high dividend yields (more than 5%).
• We have ranked these 30 stocks in terms of three criteria including market cap, pref/common share price ratio, and dividend yields. 

• White knight Georg Fischer AG (FI/N SW) announced a voluntary recommended public €28.85/share cash offer for Uponor OYJ (UNR1V FH), a 12% premium to Aliaxis’s offer, with c.37% irrevocable undertakings.
• Although Aliaxis could still block a squeeze-out, GF and Uponor could make its life difficult and are granting it an honourable exit with capital gains around €55 million.
• Spread is 0.52%/1.05% (gross/annualised, assuming settlement by mid-December). Although I believe the deal will close, it is probably not worth going long Uponor it on this spread level.

FY23 results highlight that we believe revenue quality remains materially underappreciated by the market (see our June update note), especially now the UK and EU are embarking on huge investment programmes to renew and upgrade infrastructure. In our view, the outlook in the UK, continental Europe, especially post recent M&A, and India is not fully reflected in the FY24e P/E rating of c 7.5x, which is comfortably below the long-term average of 10.0x. Our positive stance is supported by the company’s strong balance sheet, progressive dividend and yield over 5%.

• Uchi Technologies (UCHI MK), a manufacturer of controllers for coffee machines, has a 23-year track record of operating margins of over 40% and ROCEs of over 20%.  
• Trading at 11.9x trailing PE, with a dividend yield of 9%, and 15% of the market cap in cash, the company has been serially paying dividends (payout > 70%). 
• In its 2022 annual report, for the first time in its history, the company mentioned it has exciting growth plans that will be revealed over the year. 

• In this insight, we provide gap trade opportunities among 30 small cap Korean preferred stocks with market cap of less than 100 billion won and more than 20 billion won.
• Among these 30 companies, there are some in interesting gap trade opportunities, especially among those with relatively high dividend yields (more than 5%).
• We have ranked these 30 stocks in terms of three criteria including market cap, pref/common share price ratio, and dividend yields. 

• White knight Georg Fischer AG (FI/N SW) announced a voluntary recommended public €28.85/share cash offer for Uponor OYJ (UNR1V FH), a 12% premium to Aliaxis’s offer, with c.37% irrevocable undertakings.
• Although Aliaxis could still block a squeeze-out, GF and Uponor could make its life difficult and are granting it an honourable exit with capital gains around €55 million.
• Spread is 0.52%/1.05% (gross/annualised, assuming settlement by mid-December). Although I believe the deal will close, it is probably not worth going long Uponor it on this spread level.

FY23 results highlight that we believe revenue quality remains materially underappreciated by the market (see our June update note), especially now the UK and EU are embarking on huge investment programmes to renew and upgrade infrastructure. In our view, the outlook in the UK, continental Europe, especially post recent M&A, and India is not fully reflected in the FY24e P/E rating of c 7.5x, which is comfortably below the long-term average of 10.0x. Our positive stance is supported by the company’s strong balance sheet, progressive dividend and yield over 5%.

• Austal Ltd (ASB AU) is drawing takeover interest from Cerberus Capital, according to AFR. Cerebus joins Arlington Capital Partners and Bondi Partners as rumoured suitors, increasing the bid odds.
• Takeover interest in Austal is driven by the desire to capitalise on the opportunities presented by the AUKUS defence pact between Australia, the US and the UK. 
• Andrew Forrest’s 19.34% stake can make or break a deal. Peer multiples point to an offer of at least A$2.80, a 22% premium to the last close.  

• Cirrus Aircraft (0153126D US) is looking to raise up to US$300m in its upcoming HK IPO. The deal will be run by CICC.
• Cirrus Aircraft designs, develops, manufactures, and sells premium aircrafts. Its two aircraft product lines, the SR2X Series and the Vision Jet, are currently certified and validated in over 60 countries. 
• According to F&S, the SR2X Series aircraft represented 46.3% of the market share in the fixed tricycle gear certified piston aircraft segment based on delivered units in 2022. 

• Austal Ltd (ASB AU) is drawing takeover interest from Cerberus Capital, according to AFR. Cerebus joins Arlington Capital Partners and Bondi Partners as rumoured suitors, increasing the bid odds.
• Takeover interest in Austal is driven by the desire to capitalise on the opportunities presented by the AUKUS defence pact between Australia, the US and the UK. 
• Andrew Forrest’s 19.34% stake can make or break a deal. Peer multiples point to an offer of at least A$2.80, a 22% premium to the last close.  

• Cirrus Aircraft (0153126D US) is looking to raise up to US$300m in its upcoming HK IPO. The deal will be run by CICC.
• Cirrus Aircraft designs, develops, manufactures, and sells premium aircrafts. Its two aircraft product lines, the SR2X Series and the Vision Jet, are currently certified and validated in over 60 countries. 
• According to F&S, the SR2X Series aircraft represented 46.3% of the market share in the fixed tricycle gear certified piston aircraft segment based on delivered units in 2022. 

• Today, YFO (WK1 Limited) filed an amendment to its Large Shareholder Filing saying it had increased its stake from 27.19% to 28.51%. GK Yamauchi No10 Family Office bought 1.32%.
• Almost immediately, Toyo Construction (1890 JP) said YFO had likely conducted an illegal act according to US Securities Exchange Act of 1934, Rule 14e-5. This is likely hogwash.
• YFO is upping its stake for a zero premium tender and Toyo is fighting old battles. And the stock chugs higher.

• Auckland City Council plans to sell 7% of Auckland Intl Airport (AIA NZ)  to fund its budget requirements for 2023-24.
• Auckland City Mayor has been talking about selling the stake since at least Dec 2022 and hence, the deal is already very well flagged.
• In this note, we will talk about the possible placement and other deal dynamics.

• Takuma presents an undervalued investment opportunity with strong financials, and a robust balance sheet. The focus on environmental solutions position it to capitalize on the demand for carbon neutrality.
• The recent involvement of AVI Japan as activist investors adds an exciting catalyst to Takuma’s investment case. We expect AVI to work with management to unlock further value.
• Takuma’s management is targeting enhanced profitability by transitioning from a more volatile EPC model to a recurring revenue-driven approach centred on O&M. Attractive valuations underpin our bullish view.

• China Railway Signal & Communication (3969 HK) (CRSC) has achieved good share price performance YTD, but we think there is more room to go for the rest of the year.
• We like its steady domestic growth, exposure to overseas recovery, strong order backlog, and net cash position. 1Q23 new contracts reached Rmb13.7bn, an impressive 35.8% YoY growth.
• Unlike the highly-geared infrastructure construction peers, CRSC’s net cash equals 52% of the share price. On such basis, its P/B of 0.7x relative to ROE of 9-10% is inexpensive.

• The S&P 500 has marginally surpassed the 4300-4325 area which we have anticipated would cap upside for 2023. 
• As noted in our 6/6/23 Compass, we are vigilant at these levels given we expect inflation to remain elevated, but we cannot be bearishif the SPX is above 4165-4200
• Breadth has continued to improve within the Russell 2000, and the $IWM is approaching our first target of $190 following the breakout above $180. Also see breadth improving within SPX.

• The SPDR® S&P 500 ETF Trust is primed to receive support from lower implied risk premiums amid an interest rate slowdown from the Federal Reserve.
• However, a broad-based analysis suggests that the S&R 500 and the SPDR S &P 500ETF Trust are potentially undervalued.
• The S&P 500’s (SP500) year-to-date surge might have surprised many, as the talk of the town at the turn of the year was geared toward a sustained market drawdown until an interest rate pivot occurred.

• Today, YFO (WK1 Limited) filed an amendment to its Large Shareholder Filing saying it had increased its stake from 27.19% to 28.51%. GK Yamauchi No10 Family Office bought 1.32%.
• Almost immediately, Toyo Construction (1890 JP) said YFO had likely conducted an illegal act according to US Securities Exchange Act of 1934, Rule 14e-5. This is likely hogwash.
• YFO is upping its stake for a zero premium tender and Toyo is fighting old battles. And the stock chugs higher.

• Auckland City Council plans to sell 7% of Auckland Intl Airport (AIA NZ)  to fund its budget requirements for 2023-24.
• Auckland City Mayor has been talking about selling the stake since at least Dec 2022 and hence, the deal is already very well flagged.
• In this note, we will talk about the possible placement and other deal dynamics.

• Takuma presents an undervalued investment opportunity with strong financials, and a robust balance sheet. The focus on environmental solutions position it to capitalize on the demand for carbon neutrality.
• The recent involvement of AVI Japan as activist investors adds an exciting catalyst to Takuma’s investment case. We expect AVI to work with management to unlock further value.
• Takuma’s management is targeting enhanced profitability by transitioning from a more volatile EPC model to a recurring revenue-driven approach centred on O&M. Attractive valuations underpin our bullish view.

• China Railway Signal & Communication (3969 HK) (CRSC) has achieved good share price performance YTD, but we think there is more room to go for the rest of the year.
• We like its steady domestic growth, exposure to overseas recovery, strong order backlog, and net cash position. 1Q23 new contracts reached Rmb13.7bn, an impressive 35.8% YoY growth.
• Unlike the highly-geared infrastructure construction peers, CRSC’s net cash equals 52% of the share price. On such basis, its P/B of 0.7x relative to ROE of 9-10% is inexpensive.

• The S&P 500 has marginally surpassed the 4300-4325 area which we have anticipated would cap upside for 2023. 
• As noted in our 6/6/23 Compass, we are vigilant at these levels given we expect inflation to remain elevated, but we cannot be bearishif the SPX is above 4165-4200
• Breadth has continued to improve within the Russell 2000, and the $IWM is approaching our first target of $190 following the breakout above $180. Also see breadth improving within SPX.

• The SPDR® S&P 500 ETF Trust is primed to receive support from lower implied risk premiums amid an interest rate slowdown from the Federal Reserve.
• However, a broad-based analysis suggests that the S&R 500 and the SPDR S &P 500ETF Trust are potentially undervalued.
• The S&P 500’s (SP500) year-to-date surge might have surprised many, as the talk of the town at the turn of the year was geared toward a sustained market drawdown until an interest rate pivot occurred.

• In this insight, we discuss the increasing likelihood of delisting of five preferred stocks in Korea at end of June.
• These five preferred stocks are as follows: Samsung Heavy Industries Pref, SK Networks Pref, DB Hitek Pref, Hyundai BNG Steel Pref, and Heungkuk Fire & Marine Insurance Pref 2B. 
• Because the combined market cap of these five preferred shares is 37 billion won, it will have only a minor, positive impact on their common counterparts.

• Secom’s share price has surged by 8% following shareholder proposals submitted by Dalton Investments, raising expectations for potential approval of a 10% share buyback and its impact on stock price.
• Secom, operating in a mature industry with limited growth prospects, faces challenges in deploying capital and maintaining consistent earnings growth, leading to an accumulation of capital on its balance sheet.
• While Dalton’s proposals may not gain sufficient support to pass at the upcoming AGM, the potential involvement of other activists warrant a bullish outlook.

• Recruit’s share price been up +13% YTD and gained more than 22% over the last 30-days with the US Dept of Labour releasing job data for April 2023.
• Job openings were 10.1m in April 2023 vs estimates of c. 9.4m which created positive sentiment over labour market’s resilience to economic turmoil. However, April numbers were 13.5% down YoY.
• Recruit Holdings (6098 JP) is currently trading at a lofty FY+2 EV/EBIT multiple of 17.9x despite earnings expectations deteriorating, we are set to benefit nicely on the short side.

• In this insight, we discuss the increasing likelihood of delisting of five preferred stocks in Korea at end of June.
• These five preferred stocks are as follows: Samsung Heavy Industries Pref, SK Networks Pref, DB Hitek Pref, Hyundai BNG Steel Pref, and Heungkuk Fire & Marine Insurance Pref 2B. 
• Because the combined market cap of these five preferred shares is 37 billion won, it will have only a minor, positive impact on their common counterparts.

• Secom’s share price has surged by 8% following shareholder proposals submitted by Dalton Investments, raising expectations for potential approval of a 10% share buyback and its impact on stock price.
• Secom, operating in a mature industry with limited growth prospects, faces challenges in deploying capital and maintaining consistent earnings growth, leading to an accumulation of capital on its balance sheet.
• While Dalton’s proposals may not gain sufficient support to pass at the upcoming AGM, the potential involvement of other activists warrant a bullish outlook.

• Recruit’s share price been up +13% YTD and gained more than 22% over the last 30-days with the US Dept of Labour releasing job data for April 2023.
• Job openings were 10.1m in April 2023 vs estimates of c. 9.4m which created positive sentiment over labour market’s resilience to economic turmoil. However, April numbers were 13.5% down YoY.
• Recruit Holdings (6098 JP) is currently trading at a lofty FY+2 EV/EBIT multiple of 17.9x despite earnings expectations deteriorating, we are set to benefit nicely on the short side.

• Surpassing the pre-COVID average of 49%, the NAV discount currently stands at 61%, implying potential 12% market-neutral returns in the short-term through the recovery of the core transportation business.
• Activist investor influence in distributing Keisei Electric’s ¥1,980bn Oriental Land (4661 JP) stake to existing shareholders could unleash over 150% potential upside, surpassing the earlier mentioned 12% gain.
• Thus, there is high likelihood of Keisei Electric Railway Co (9009 JP)‘s continued outperformance over Oriental Land in the medium term.

• Three years ago, Seino Holdings (9076 JP) delivered a lot of its cash back to shareholders in a big buyback. They bought back almost 15mm shares (7.5%).
• Since then, they’ve bought another 2.5%. In February, they changed their Dividend Policy to max(2.4% DOE, 30% payout ratio). Then they set a cap and floor on the dividend.
• Four months later they have a new MTMP, and a new Dividend Policy. Simple. 4.0%+ DOE. Div +70% vs last year. Oh… and there’s an 11% buyback. 

• Deere managed to exceed analyst expectations in terms of revenue as well as earnings.
• Revenues and net sales were up and price realization was positive.
• Deere viewed production and precision ag net revenue to rise.

• Heico delivered a mixed set of results for the previous quarter, with revenues well below analyst expectations but managed an earnings beat.
• The operating income of The Flight Support Group increased, reflecting the improved gross profit margin and net sales growth.
• The improved gross margin replicates higher net sales within Heico’s Specialty Products as well as Aftermarket Replacement Parts product lines.

• Parker-Hannifin delivered a solid result and managed an all-around beat in the last quarter.
• Organic sales increased by roughly 12% in the quarter, extending the company’s track record of double-digit organic growth quarters.
• Given these strong results, the company anticipates 4% organic growth for the next quarter, with segment operating margins of roughly 22.6%.

• Surpassing the pre-COVID average of 49%, the NAV discount currently stands at 61%, implying potential 12% market-neutral returns in the short-term through the recovery of the core transportation business.
• Activist investor influence in distributing Keisei Electric’s ¥1,980bn Oriental Land (4661 JP) stake to existing shareholders could unleash over 150% potential upside, surpassing the earlier mentioned 12% gain.
• Thus, there is high likelihood of Keisei Electric Railway Co (9009 JP)‘s continued outperformance over Oriental Land in the medium term.

• Three years ago, Seino Holdings (9076 JP) delivered a lot of its cash back to shareholders in a big buyback. They bought back almost 15mm shares (7.5%).
• Since then, they’ve bought another 2.5%. In February, they changed their Dividend Policy to max(2.4% DOE, 30% payout ratio). Then they set a cap and floor on the dividend.
• Four months later they have a new MTMP, and a new Dividend Policy. Simple. 4.0%+ DOE. Div +70% vs last year. Oh… and there’s an 11% buyback. 

• Deere managed to exceed analyst expectations in terms of revenue as well as earnings.
• Revenues and net sales were up and price realization was positive.
• Deere viewed production and precision ag net revenue to rise.

• Heico delivered a mixed set of results for the previous quarter, with revenues well below analyst expectations but managed an earnings beat.
• The operating income of The Flight Support Group increased, reflecting the improved gross profit margin and net sales growth.
• The improved gross margin replicates higher net sales within Heico’s Specialty Products as well as Aftermarket Replacement Parts product lines.

• Parker-Hannifin delivered a solid result and managed an all-around beat in the last quarter.
• Organic sales increased by roughly 12% in the quarter, extending the company’s track record of double-digit organic growth quarters.
• Given these strong results, the company anticipates 4% organic growth for the next quarter, with segment operating margins of roughly 22.6%.