The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.
Last year was Tuesday and Wednesday. The year before was too. The year before that was Monday and Tuesday. Four years ago was Wednesday and Thursday, as it was the year before that.
This Year it is Also Tuesday and Wednesday.
What is it about Tuesday and Wednesday? The answer, as it is every year (on days such as the above), is hundreds of billions of yen of flows from people who are obliged to allocate money on these particular days.
For most, the benchmark is today.
So today and tomorrow should – by all logical measure – see hundreds of billions of yen worth of flow in Japanese equities (and as much as ¥1 trillion) more than any other average day.
Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.
This week in North Asia the Smartkarma team Insights were more Bearish than Bullish.
Close Outs or Sales were recommended on: Kosaido (7868 JP), the Amorepacific Group/Corp pair, the Hyosung TNC/Corp pair, Resona Holdings (8308 JP) and the Japanese market overall.
The Hyundai Autoever IPO was covered by two providers as was the Woori Group all with Bullish flags.
The upcoming KOSPI 200 re balancing was also covered with a list of potential additions and deletions.
– NORTH ASIAN INSIGHT OF THE WEEK –
Our Top Insight of the week was Douglas Kim ‘s interesting note on Korean companies pulling out of China or restructuring their operations in that country.
As Douglas notes, “The pace of major Korean companies that are discontinuing part or all of their operations in China in the past year has been UNPRECEDENTED in the past two decades. This trend is very concerning since it suggests deteriorating business conditions and reduced employment in China”.
The main reason why the Korean companies are pulling out of China is primarily due to the difficulty of generating profits under the current, difficult operating conditions.
However, the reasons why it has become more difficult for these Korean companies to generate profits in China is more complex. The difficult operating environment is a combination of: –
lower Chinese consumer demand for products such as smartphones, autos, cosmetics, and other consumer goods
many of the Korean companies’ products have become less competitive as compared to the products made by the Chinese companies, and.
additional regulatory pressures that are placed on these Korean companies operating in China have contributed towards the difficult operating environment
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On Monday the 18th of March, Yoshiaki Murakami-associated companies announced they had raised their stake in Kosaido Co Ltd (7868 JP) above 10%. That stake raise happened at a price ABOVE where Bain Capital Japan’s bidding entity had set its “final” Tender Offer Price of ¥700/share beforehand, indicating there was no way Murakami-associated companies would accept Bain’s price.
On the 20th, Minami Aoyama Fudosan – another Murakami-associated company heretofore uninvolved – announced a Tender Offer for a minimum of 50.00% of Kosaido (and up to 100% of the shares out) at ¥750/share (and announced they had bought more bringing their stake to 13.47% in total).
The shares reacted strongly Friday the 22nd after a market holiday Thursday, rising 16.6% to close 14.5% through the Murakami-fund terms.
After the close on Friday, the Murakami-affiliated company Reno KK which has been the lead entity to date in the effort – announced a larger position (as I noted on the 19th was likely). Also after the close, Kosaido itself made three public releases.
It is worth reading them, and it is worth thinking about what the company’s options are.
For Recent Insights on the Kosaido Situation Published on Smartkarma…
This was the basis of the trade. Hitachi Ltd (6501 JP) has been susceptible to pressure for a bump since even before the Tender Offer was announced because of the proxy fight at last year’s board meeting for management rights. Hitachi supported the incumbent who consequently retired as chairman, but kept the continuity. The board was split 6:3.
Since late January or early February when it became clear that board support for the deal was still split 6:3 and one of the points in a couple of the independent directors’ comments as reasons why the deal was not supported was that Hitachi’s bid at NT$60/share did not match an informal offer from Otis at $63/share, it has been clear that one way to extinguish that criticism was to bid NT$63 or higher.
And now Hitachi has. After the close on Friday, a release from Yungtay Engineering (1507 TT) hit the mops system saying that Hitachi had amended the Public Purchase statement by raising the Purchase Price to NT$65/share. This is closer to the high end of the original valuations provided by the law firm and public accountancy firms of NT$40.27-68.31 and NT$55.15-67.83. Taiwan Hitachi Elevator released a press release carried by the ChinaTimes here.
Consumer electronics retailers have struggled since 2014, with 2018 proving a rare respite from decline as sales remained flat.
The consumption tax increase in October, along with some other factors, means the market is expected to grow this year, but it could be a while before that happens again.
Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.
Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.
With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.
Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.
The broad decline in global bond yields and curve flattening suggest that the market has become more concerned about weak global economic growth.
The fall in yields is at odds with the rise in equity and commodity prices this year, but the later may have lost upward momentum.
Safe haven currencies, gold and JPY, have strengthened this week and are likely to perform well if yields remain low.
US real yields have fallen more than nominal yields this year, with a partial recovery in inflation expectations from their fall in Q4 last year. Lower real yields point to weaker fundamental support for the USD, and further support safe havens like gold.
Canadian real long term yields have fallen more abruptly than in the USA, into negative territory, suggesting the outlook for the Canadian economy has deteriorated more than most. This may relate to concern over a peaking in the Canadian housing market. The fall in real yields suggests further downside risk for the CAD.
Long term inflation breakevens have fallen in Australia sharply since September last year to now well below the RBA’s 2.5% inflation target.
Australian leading indicators of the labour market have turned lower, albeit from solid levels, and may be enough, combined with broader evidence of weaker growth, for the RBA to announce an easing bias as soon as April.
Asian trade data and flash PMI data for major countries point to ongoing and significant weakness in global trade.
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On Friday 22 February 2019 after the close, Nintendo Co Ltd (7974 JP)announced (J) a Secondary Shares Uridashi Offering of 2,428,700 shares by five shareholder banks, with an overallotment of 364,300 shares. This will be a little bit over 2% of shares outstanding.
Applying a hypothetical 4% discount to the last traded price of ¥30,030/share, this is an ¥80bn Offering including greenshoe.
On the same day, Nintendo announced (E) a share buyback program to buy up to 1 million shares or up to ¥33 billion worth (whichever is reached first) to last from the business day immediately following the delivery date of the Offering shares (practically speaking, a day on or between 13 March and 18 March 2019) to 12 April 2019. Based on an average daily volume traded of 2.2mm shares, 10% participation would mean the buyback would take 5 days to complete. 5% would take 9 days. The company also announced (E) it would cancel 10 million shares on 29 March 2019. That may only be 45% of the post-buyback treasury share position, but it leads to another event investors should watch.
This is the first buyback Nintendo has announced in five years. The Nikkei article discussing the situation suggests that the possibility of supply/demand being weak is the reason for the buyback. The stated reason for the Offering as proposed by Nintendo in its Offering announcement, suggested a goal of increasing and diversifying the shareholder base.
The fact that JPX was selling the shares was not important. The reasoning was. And JPX provided an example of how it should be done (as explained in the insight).
My words then still stand.
And JPX provided an example of how it should be done (as explained in the insight). The ramifications are significant.
The ramifications of this Offering are significant too. This is a lot more than just an offering by entities looking to take profits.
On Friday 22 February after the close, NTT Docomo Inc (9437 JP)announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February.
The buyback has already occurred. This is largely technical. But it has an interesting side effect.
An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.
As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn.
A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.
DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.
For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.
The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.
Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.
The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK)made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.
If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out).
So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.
When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.
Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough.
This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself.
After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.
At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. Doable, but as it is an agreed deal, Travis doesn’t see the need to push it.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier – alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.
Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done. 45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?
Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop.
Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.
In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).
Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.
This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.
There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.
Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt. Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.
Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.
Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme. The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED, holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.
MYOB Group Ltd (MYO AU)announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal. At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.
CCASS
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.
Issuance of the new shares and common stock to be delisted from the Tokyo Stock Exchange
C
Japan
Descente
Off-Mkt
14-Mar
Tender Offer Close Date
C
Japan
JIEC
Off-Mkt
18-Mar
Tender Offer Close Date
C
Japan
Veriserve
Off-Mkt
18-Mar
Tender Offer Close Date
C
Japan
ND Software
Off-Mkt
25-Mar
Tender Offer Close Date
C
Japan
Showa Shell
Scheme
1-Apr
Close of merger
E
Japan
U-Shin
Off-Market
17-Apr
Tender Offer Close Date
C
NZ
Trade Me Group
Scheme
5-Mar
First Court Date
C
Singapore
Courts Asia Limited
Scheme
15-Mar
Offer Close Date
C
Singapore
M1 Limited
Off Mkt
4-Mar
Closing date of offer
C
Singapore
PCI Limited
Scheme
February
Release of Scheme Booklet
E
Taiwan
Yungtay Engineering
Off Mkt
17-Mar
Closing date of offer
C
Thailand
Delta Electronics
Off Mkt
26-Feb
Tender Offer Open
C
Finland
Amer Sports
Off Mkt
7-Mar
Offer Period Expires
C
Norway
Oslo Børs VPS
Off Mkt
4-Mar
Nasdaq Offer Close Date
C
Switzerland
Panalpina Welttransport
Off Mkt
27-Feb
Binding offer to be announced
E
US
Red Hat, Inc.
Scheme
March/April
Deal lodged for approval with EU Regulators
C
Source: Company announcements. E = our estimates; C =confirmed
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Last year was Tuesday and Wednesday. The year before was too. The year before that was Monday and Tuesday. Four years ago was Wednesday and Thursday, as it was the year before that.
This Year it is Also Tuesday and Wednesday.
What is it about Tuesday and Wednesday? The answer, as it is every year (on days such as the above), is hundreds of billions of yen of flows from people who are obliged to allocate money on these particular days.
For most, the benchmark is today.
So today and tomorrow should – by all logical measure – see hundreds of billions of yen worth of flow in Japanese equities (and as much as ¥1 trillion) more than any other average day.
Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.
This week in North Asia the Smartkarma team Insights were more Bearish than Bullish.
Close Outs or Sales were recommended on: Kosaido (7868 JP), the Amorepacific Group/Corp pair, the Hyosung TNC/Corp pair, Resona Holdings (8308 JP) and the Japanese market overall.
The Hyundai Autoever IPO was covered by two providers as was the Woori Group all with Bullish flags.
The upcoming KOSPI 200 re balancing was also covered with a list of potential additions and deletions.
– NORTH ASIAN INSIGHT OF THE WEEK –
Our Top Insight of the week was Douglas Kim ‘s interesting note on Korean companies pulling out of China or restructuring their operations in that country.
As Douglas notes, “The pace of major Korean companies that are discontinuing part or all of their operations in China in the past year has been UNPRECEDENTED in the past two decades. This trend is very concerning since it suggests deteriorating business conditions and reduced employment in China”.
The main reason why the Korean companies are pulling out of China is primarily due to the difficulty of generating profits under the current, difficult operating conditions.
However, the reasons why it has become more difficult for these Korean companies to generate profits in China is more complex. The difficult operating environment is a combination of: –
lower Chinese consumer demand for products such as smartphones, autos, cosmetics, and other consumer goods
many of the Korean companies’ products have become less competitive as compared to the products made by the Chinese companies, and.
additional regulatory pressures that are placed on these Korean companies operating in China have contributed towards the difficult operating environment
FIVE-MONTH HIGH – This bear market rally is now ending. The market composite rose by 15% from the Christmas Day low, peaking on 26th February at ¥659t. The market-value-based percentage above moving averages reached a five-month on Friday. However, the three-month change in that percentage is suggesting that a new bear phase will now commence.
Source: Japan Analytics
SELL SIGNAL – The three-month change in the market-value-based percentage above moving averages reached 38 on Friday. Although this indicator is not always reliable as a long-term indicator, it has been helpful over shorter periods and has called the most recent peak in October and December’s trough. We now expect at least a decline in the market composite to below ¥600t and, if economic conditions continue to weaken, a re-test of the December low.
– SECTORS –
NB: The ‘sparklines’ show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the ‘STDev’ column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.
SECTOR BREAKDOWN – The top six sectors remain mostly domestic and defensive. REITs,Restaurants, Healthcare, Transportation, and Utilities continue from our previous review with Other Commercial Products replacing Information Technology. Equally predictable is the bottom half-dozen – Banks, Non-Bank Finance, Autos, Retail, and Metals remain from two weeks ago, with Energy replacing Construction. With the Yen having broken the ¥110 level against the US dollar on Friday, we would expect the Autos, Machinery, Electrical Equipment, Technology Hardware, and Chemicals sectors to weaken further as indicated by their Negative Crossover percentages.
– COMPANIES –
COMPANY MOVING AVERAGE OUTLIERS – As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company’s share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. ‘Extreme’ values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen.
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
Our most extreme positive outlier two weeks ago, AnGes (4563 JP)is still the most extreme large cap positive outlier and gained a further 8% over the fortnight. We recommend taking short-term profits.
In the same sector Eisai (4523 JP)is the most extreme negative outlier after falling by 16.6% on Friday on the discontinuation of the clinical phase 3 trials of Biogen’s Alzheimer’s treatment Aducanumab as the primary endpoint is unlikely to be reached.Now at an eight-month Relative Price Score low, a short-term recovery to above ¥8,000 is likely.
Source: Japan Analytics
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On Friday 22 February after the close, NTT Docomo Inc (9437 JP)announced (E) that it would cancel 447,067,906 shares (11.82% of issued shares before the cancellation) of Treasury shares on the 28th of February.
The buyback has already occurred. This is largely technical. But it has an interesting side effect.
An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.
As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn.
A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.
DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.
For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.
The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.
Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.
The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK)made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.
If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out).
So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.
When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.
Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough.
This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself.
After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.
At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. Doable, but as it is an agreed deal, Travis doesn’t see the need to push it.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier – alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.
Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done. 45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?
Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop.
Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.
In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).
Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.
This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.
There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.
Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt. Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.
Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.
Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme. The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED, holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.
MYOB Group Ltd (MYO AU)announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal. At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.
CCASS
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.
Issuance of the new shares and common stock to be delisted from the Tokyo Stock Exchange
C
Japan
Descente
Off-Mkt
14-Mar
Tender Offer Close Date
C
Japan
JIEC
Off-Mkt
18-Mar
Tender Offer Close Date
C
Japan
Veriserve
Off-Mkt
18-Mar
Tender Offer Close Date
C
Japan
ND Software
Off-Mkt
25-Mar
Tender Offer Close Date
C
Japan
Showa Shell
Scheme
1-Apr
Close of merger
E
Japan
U-Shin
Off-Market
17-Apr
Tender Offer Close Date
C
NZ
Trade Me Group
Scheme
5-Mar
First Court Date
C
Singapore
Courts Asia Limited
Scheme
15-Mar
Offer Close Date
C
Singapore
M1 Limited
Off Mkt
4-Mar
Closing date of offer
C
Singapore
PCI Limited
Scheme
February
Release of Scheme Booklet
E
Taiwan
Yungtay Engineering
Off Mkt
17-Mar
Closing date of offer
C
Thailand
Delta Electronics
Off Mkt
26-Feb
Tender Offer Open
C
Finland
Amer Sports
Off Mkt
7-Mar
Offer Period Expires
C
Norway
Oslo Børs VPS
Off Mkt
4-Mar
Nasdaq Offer Close Date
C
Switzerland
Panalpina Welttransport
Off Mkt
27-Feb
Binding offer to be announced
E
US
Red Hat, Inc.
Scheme
March/April
Deal lodged for approval with EU Regulators
C
Source: Company announcements. E = our estimates; C =confirmed
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Hankyu Hanshin has outperformed the department store sector in the last few years and continues to invest to lock in its dominance of the Osaka market.
It is now about to unveil a major new update to its Tokyo store, creating a more luxurious Men’s Emporium.
The investment is an example of how the better department stores are repositioning individual buildings to better meet target market needs and find relevance in an e-commerce age.
Interbrand’s annual valuation of top brands saw growing numbers of Japanese firms in retail and FMCG (Fast Moving Consumer Goods) enter its global brand ranking.
At home, online companies like Zozo and Mercari are also climbing the rankings.
Onward Holdings (8016 JP) made a bold stand against price discounts in January when it announced plans to stop selling on ZOZO (3092 JP) but the timing was not ideal as Onward lowered its FY2018 sales guidance shortly thereafter..
With Zozo no longer a partner, Onward is investing in the growth of its own e-commerce business and has installed a new 50-person digital strategy group to make this happen.
If the plan works, Onward could finally break away from its dependence on the contracting department store apparel market but the journey to reach this goal will be a long one.
It is possible that 3/19 results may fall a bit short of estimates but next year will see a decent bounce in earnings given the good orders currently being seen. The shares are very cheap on 2x 3/20 EV/ebitda so we do not see much down side risk here, but any such weakness should be views as a great buying opportunity. This is a well-run and conservative business in an otherwise often poorly run sector. Eventually there must also be the possibility of a higher payout ratio. In our view, however, this is later rather than soon but must come. A decent long term buy in the construction space.
Fujitec (6406)
The shares are cheap. The company is cash rich and owns 10% in treasury stock; it owned more last year but has cancelled 4%. It has some Y6bn in long term investment. EV in our view is Y57bn vs the current market cap of Y110bn. With ebitda next year coming in at Y15bn, EV/ebitda is under 4x. The shares yield 3.4% and trade at book. They have slightly underperformed the market over the last 12 months. For now, we view this as a defensive buy. There remain many issues longer term as to its place in the global elevator world. A potential positive, however, is that in May the company will announce a new mid-term plan and in it, they will outline their view as regards to shareholder returns for the next three years. They are aware that they are very over capitalised, so greater returns are a real possibility.
Prored (7034)
Good, first quarter results and in our view, an upward to come.
The news released on the 11th of March, about Tesla Motors (TSLA US) choosing CATL (A) (300750 CH) as battery supplier has focused much attention on the two companies and other battery suppliers. CATL which grabbed Panasonic Corp (6752 JP)’s leading position in the industry last year now seems to be grabbing the latter’s key customer as well. The news circulating states that, CATL could power Tesla’s Model 3 cars which Tesla is planning to start assembling at Tesla’s new factory near Shanghai. Following the release of this supposed deal, the stocks of the two companies moved positively, with CATL surging by almost 6.7% while Tesla rose by almost 2.4% during the day. However, both parties have not commented on this news yet or made any formal announcement regarding such a potential deal. In our Insight, Tesla Drifting Away Could Leave Panasonic Struggling to Gain Traction in China, we mentioned that Tesla was looking to locally source its batteries in China and that CATL could potentially be one such supplier. However, in January this year, it was reported that Tesla had signed a preliminary agreement with China’s Tianjin Lishen to supply batteries for its new Shanghai car factory, making the current news look less believable. Although it seems like the ongoing news about a Tesla-CATL pair up lacks integrity, with CATL sort of denying its intend to work with Tesla (according to an updated news release), the news does look interesting and its effect upon the related companies seems noteworthy.
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This was the basis of the trade. Hitachi Ltd (6501 JP) has been susceptible to pressure for a bump since even before the Tender Offer was announced because of the proxy fight at last year’s board meeting for management rights. Hitachi supported the incumbent who consequently retired as chairman, but kept the continuity. The board was split 6:3.
Since late January or early February when it became clear that board support for the deal was still split 6:3 and one of the points in a couple of the independent directors’ comments as reasons why the deal was not supported was that Hitachi’s bid at NT$60/share did not match an informal offer from Otis at $63/share, it has been clear that one way to extinguish that criticism was to bid NT$63 or higher.
And now Hitachi has. After the close on Friday, a release from Yungtay Engineering (1507 TT) hit the mops system saying that Hitachi had amended the Public Purchase statement by raising the Purchase Price to NT$65/share. This is closer to the high end of the original valuations provided by the law firm and public accountancy firms of NT$40.27-68.31 and NT$55.15-67.83. Taiwan Hitachi Elevator released a press release carried by the ChinaTimes here.
Consumer electronics retailers have struggled since 2014, with 2018 proving a rare respite from decline as sales remained flat.
The consumption tax increase in October, along with some other factors, means the market is expected to grow this year, but it could be a while before that happens again.
Lasertec hit a new high in the semiconductor stock rally that followed Micron Technology’s March 20 earnings call. On Friday, March 22 (March 21 was a holiday in Japan), Lasertec was up 8.4% to ¥4,900. At this price, the shares are selling at 42x our EPS estimate for FY Jun-19, 36x our estimate for FY Jun-20 and 31x our estimate for FY Jun-21. On a 5-year view, earnings growth could bring the projected P/E multiple down to 21x, in our estimation.
Following strong 1H results, management left FY Jun-19 sales and profit guidance unchanged, but raised semiconductor-related orders guidance by 13% while cutting orders guidance for FPD-related and other products by nearly 40%. Total new orders guidance was raised from ¥37 billion to ¥39 billion, compared with sales guidance of ¥28 billion, implying an increase in the order backlog from ¥39.9 billion to ¥50.9 billion.
With this in mind, we have raised our sales and profit estimates for FY Jun-20 and added new, higher estimates for FY Jun-21 and beyond. Rising demand for EUV mask blank and mask defect inspection equipment should drive an increase in total sales from ¥29 billion this fiscal year to ¥38 billion in FY Jun-21, and approximately ¥50 billion in FY Jun-23. Over the same period, operating profit should rise from ¥7.0 billion to ¥9.5 billion, and then to approximately ¥14 billion.
Risks for investors include the potential delay or reduction of orders and shipments (as just happened with FPD inspection equipment), high volatility in quarterly orders, sales and profits, and extended valuations.
The broad decline in global bond yields and curve flattening suggest that the market has become more concerned about weak global economic growth.
The fall in yields is at odds with the rise in equity and commodity prices this year, but the later may have lost upward momentum.
Safe haven currencies, gold and JPY, have strengthened this week and are likely to perform well if yields remain low.
US real yields have fallen more than nominal yields this year, with a partial recovery in inflation expectations from their fall in Q4 last year. Lower real yields point to weaker fundamental support for the USD, and further support safe havens like gold.
Canadian real long term yields have fallen more abruptly than in the USA, into negative territory, suggesting the outlook for the Canadian economy has deteriorated more than most. This may relate to concern over a peaking in the Canadian housing market. The fall in real yields suggests further downside risk for the CAD.
Long term inflation breakevens have fallen in Australia sharply since September last year to now well below the RBA’s 2.5% inflation target.
Australian leading indicators of the labour market have turned lower, albeit from solid levels, and may be enough, combined with broader evidence of weaker growth, for the RBA to announce an easing bias as soon as April.
Asian trade data and flash PMI data for major countries point to ongoing and significant weakness in global trade.
Today almost all the 50,000 stores run by the big three convenience store chains operate 24-hours a day, but franchise owners everywhere are struggling to find enough staff.
Last month, the owners’ union of the biggest chain, Seven Eleven, issued a demand that each store be allowed to set its own hours.
This move has implications for a retail industry struggling with labour shortages and higher part-time wages.
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Energy Transfer LP (ET US) and Royal Dutch Shell (RDSA LN) have signed a Project Framework Agreement to further develop a large-scale LNG export facility in Lake Charles, Louisiana and move toward a potential final investment decision (FID). They have started actively engaging with LNG Engineering, Procurement and Contracting (EPC) companies with a plan to issue an Invitation to Tender (ITT) in the weeks ahead. We look at the potential contract size and winners and also the other US LNG projects that could be negatively impacted. More detail on the LNG project queue for this year in: A Huge Wave of New LNG Projects Coming in the Next 18 Months: Positive for The E&C Companies.
This week in North Asia the Smartkarma team Insights were more Bearish than Bullish.
Close Outs or Sales were recommended on: Kosaido (7868 JP), the Amorepacific Group/Corp pair, the Hyosung TNC/Corp pair, Resona Holdings (8308 JP) and the Japanese market overall.
The Hyundai Autoever IPO was covered by two providers as was the Woori Group all with Bullish flags.
The upcoming KOSPI 200 re balancing was also covered with a list of potential additions and deletions.
– NORTH ASIAN INSIGHT OF THE WEEK –
Our Top Insight of the week was Douglas Kim ‘s interesting note on Korean companies pulling out of China or restructuring their operations in that country.
As Douglas notes, “The pace of major Korean companies that are discontinuing part or all of their operations in China in the past year has been UNPRECEDENTED in the past two decades. This trend is very concerning since it suggests deteriorating business conditions and reduced employment in China”.
The main reason why the Korean companies are pulling out of China is primarily due to the difficulty of generating profits under the current, difficult operating conditions.
However, the reasons why it has become more difficult for these Korean companies to generate profits in China is more complex. The difficult operating environment is a combination of: –
lower Chinese consumer demand for products such as smartphones, autos, cosmetics, and other consumer goods
many of the Korean companies’ products have become less competitive as compared to the products made by the Chinese companies, and.
additional regulatory pressures that are placed on these Korean companies operating in China have contributed towards the difficult operating environment
FIVE-MONTH HIGH – This bear market rally is now ending. The market composite rose by 15% from the Christmas Day low, peaking on 26th February at ¥659t. The market-value-based percentage above moving averages reached a five-month on Friday. However, the three-month change in that percentage is suggesting that a new bear phase will now commence.
Source: Japan Analytics
SELL SIGNAL – The three-month change in the market-value-based percentage above moving averages reached 38 on Friday. Although this indicator is not always reliable as a long-term indicator, it has been helpful over shorter periods and has called the most recent peak in October and December’s trough. We now expect at least a decline in the market composite to below ¥600t and, if economic conditions continue to weaken, a re-test of the December low.
– SECTORS –
NB: The ‘sparklines’ show the three-year trend in the weighted percentage above moving average relative to the Market Composite and the ‘STDev’ column is a measure of the variability of that relative measure. The table also provides averages for the breaks above and breaks below and the positive and negative crossovers.
SECTOR BREAKDOWN – The top six sectors remain mostly domestic and defensive. REITs,Restaurants, Healthcare, Transportation, and Utilities continue from our previous review with Other Commercial Products replacing Information Technology. Equally predictable is the bottom half-dozen – Banks, Non-Bank Finance, Autos, Retail, and Metals remain from two weeks ago, with Energy replacing Construction. With the Yen having broken the ¥110 level against the US dollar on Friday, we would expect the Autos, Machinery, Electrical Equipment, Technology Hardware, and Chemicals sectors to weaken further as indicated by their Negative Crossover percentages.
– COMPANIES –
COMPANY MOVING AVERAGE OUTLIERS – As with the Market Composite and Sectors, the Moving Average Outlier indicator uses a weighted sum of each company’s share price relative to its 5-day, 20-day, 60-day, 120-day and 240-day moving averages. ‘Extreme’ values are weighted sums greater than 100% and less than -100%. We would caution that this indicator is best used for timing shorter-term reversals and, in many cases, higher highs and lower lows will be seen.
In the DETAIL section below, we highlight the current top and bottom twenty-five large capitalisation outliers, as well as those companies that have seen the most significant positive and negative changes in their outlier percentage in the last two weeks and provide short comments on companies of particular note.
Our most extreme positive outlier two weeks ago, AnGes (4563 JP)is still the most extreme large cap positive outlier and gained a further 8% over the fortnight. We recommend taking short-term profits.
In the same sector Eisai (4523 JP)is the most extreme negative outlier after falling by 16.6% on Friday on the discontinuation of the clinical phase 3 trials of Biogen’s Alzheimer’s treatment Aducanumab as the primary endpoint is unlikely to be reached.Now at an eight-month Relative Price Score low, a short-term recovery to above ¥8,000 is likely.
On Monday the 18th of March, Yoshiaki Murakami-associated companies announced they had raised their stake in Kosaido Co Ltd (7868 JP) above 10%. That stake raise happened at a price ABOVE where Bain Capital Japan’s bidding entity had set its “final” Tender Offer Price of ¥700/share beforehand, indicating there was no way Murakami-associated companies would accept Bain’s price.
On the 20th, Minami Aoyama Fudosan – another Murakami-associated company heretofore uninvolved – announced a Tender Offer for a minimum of 50.00% of Kosaido (and up to 100% of the shares out) at ¥750/share (and announced they had bought more bringing their stake to 13.47% in total).
The shares reacted strongly Friday the 22nd after a market holiday Thursday, rising 16.6% to close 14.5% through the Murakami-fund terms.
After the close on Friday, the Murakami-affiliated company Reno KK which has been the lead entity to date in the effort – announced a larger position (as I noted on the 19th was likely). Also after the close, Kosaido itself made three public releases.
It is worth reading them, and it is worth thinking about what the company’s options are.
For Recent Insights on the Kosaido Situation Published on Smartkarma…
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An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.
As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn.
A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.
DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.
For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.
The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.
Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.
The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK)made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.
If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out).
So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.
When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.
Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough.
This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself.
After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.
At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. Doable, but as it is an agreed deal, Travis doesn’t see the need to push it.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier – alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.
Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done. 45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?
Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop.
Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.
In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).
Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.
This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.
There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.
Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt. Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.
Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.
Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme. The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED, holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.
MYOB Group Ltd (MYO AU)announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal. At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.
CCASS
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.
Issuance of the new shares and common stock to be delisted from the Tokyo Stock Exchange
C
Japan
Descente
Off-Mkt
14-Mar
Tender Offer Close Date
C
Japan
JIEC
Off-Mkt
18-Mar
Tender Offer Close Date
C
Japan
Veriserve
Off-Mkt
18-Mar
Tender Offer Close Date
C
Japan
ND Software
Off-Mkt
25-Mar
Tender Offer Close Date
C
Japan
Showa Shell
Scheme
1-Apr
Close of merger
E
Japan
U-Shin
Off-Market
17-Apr
Tender Offer Close Date
C
NZ
Trade Me Group
Scheme
5-Mar
First Court Date
C
Singapore
Courts Asia Limited
Scheme
15-Mar
Offer Close Date
C
Singapore
M1 Limited
Off Mkt
4-Mar
Closing date of offer
C
Singapore
PCI Limited
Scheme
February
Release of Scheme Booklet
E
Taiwan
Yungtay Engineering
Off Mkt
17-Mar
Closing date of offer
C
Thailand
Delta Electronics
Off Mkt
26-Feb
Tender Offer Open
C
Finland
Amer Sports
Off Mkt
7-Mar
Offer Period Expires
C
Norway
Oslo Børs VPS
Off Mkt
4-Mar
Nasdaq Offer Close Date
C
Switzerland
Panalpina Welttransport
Off Mkt
27-Feb
Binding offer to be announced
E
US
Red Hat, Inc.
Scheme
March/April
Deal lodged for approval with EU Regulators
C
Source: Company announcements. E = our estimates; C =confirmed
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An activist has come forward, and the external statutory auditor and lead shareholder (wife of founder) are against the offer, but Kosaido Co Ltd (7868 JP) situation still fits pretty cleanly in the “Too Hard” bucket for now.
Since announcing its foray into the deeper waters of being the fourth Type I Mobile Network Operator in Japan, Rakuten’s shares have taken a mighty hit. But the focus in this insight is on ride-sharing company Lyft. In March 2015, Rakuten CEO Hiroshi Mikitani announced that Rakuten had invested US$300mn in Lyft, giving it a 11.9% stake after Series E round in May 2015. Recent articles suggest that Rakuten remains the top investor.
As best as Travis Lundy can tell, from sources who track this, Rakuten is the single largest shareholder in Lyft, with a holding in the 10.4-12.0% range. That would suggest a position value of US$900mn-$1.2bn based on the last funding round in June 2018. At a $25bn pre-money IPO valuation, that would be worth US$1.5-2.0bn for a likely pre-tax IPO uplift of US$590-800mn.
A report late Thursday Asia time suggested the Lyft roadshow would start the week of March 18th, which would mean the S-1 will be available two weeks before that. Investors will know more about Rakuten’s ownership of Lyft by the end of next week or very early the following week. Travis would want to be long for now.
DHICO announced a larger-than-expected ₩608.4bn rights offer. ₩543bn is expected to be raised through common shares at a preliminary price of ₩6,390; and ₩65bn via RCPS at a preliminary price of ₩6,970. This is a combined 72.56% capital increase a 42.05% share dilution. Concurrently, Doosan E&C announced a ₩420bn rights offer at a preliminary price of ₩1,255, a 15% discount to last close.
For DHICO, Mar 27 is the ex-rights day for both Common and RCPS. Subscription rights (for the Common) will be listed and trade on Apr 19~25. May 2 is final pricing. May 8 is subscription and May 16 is payment. New Common shares will be listed on May 29.
For E&C, the final price will be fixed on Apr 30. Whichever is higher – ₩1,255 or Apr 26~30 VWAP at a 40% discount – will be the final offering price. Mar 27 will be the ex-rights day. Subscription rights will be listed and traded on Apr 18~24. New shares will be listed on May 24.
₩1,255 is a lot more aggressive than generally viewed. DHICO owns nearly two thirds of E&C. With a 20% oversubscription, nearly ₩300bn will likely come from DHICO, essentially buttressing E&C at an even heftier price. Which is probably why the market is being less harsh on E&C relative to DHICO.
The 247-4 Form is out with a tender offer period between 26 Feb-1 April, and payment on the 4th April. The frustrating part is how Delta’s FY18 dividend of Bt2.30 is treated. On one hand, it says the Bt71 Offer price is final unless there is a MAC. Further into the Offer doc, it mentions the Offeror “reserves the right” to reduce the offer price if a dividend is paid. DELTA’s IR believes the dividend will be added, but it is not crystal clear.
Furthermore, there is no minimum acceptance condition, as potentially flagged earlier, which means there is no possibility of fast-tracking payment. Some precedent voluntary offers included a minimum acceptance, which provides an expedited payment should investors who tender shares AND revoke their right to withdraw – provided that minimum is fulfilled.
Shares traded up after the document came out, shrugging off the ambiguity in the document. Currently trading at a gross/annualised return of 1.1%/11%. The dividend is subject to a 10% tax for non-residents.
The previous Friday, the Offerors for M1 announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%. Axiata Group (AXIATA MK)made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. Going unconditional has triggered an extension of the Closing Date to 4 March 2019.
If you want to fight this with an appraisal, you can. Travis doesn’t see the point. If you want to hold on to the stock in order to block full squeezeout and play chicken with the big boys, you can, but it requires a relatively big ticket (roughly 6.73% of the shares out).
So Travis recommends taking the money. It was better to take the money in early January and re-deploy, rather than wait for the close of the offer. He would accept now and sees no upside from waiting.
When the Tender Offer / MBO for Kosaido was announced last month, Travis’ first reaction was that this was wrong, concluding this was a virtual asset strip in progress, and suggested that the only way this was likely to not get done is if some brave activist came forward.
Shortly afterwards, an activist did come forward. Yoshiaki Murakami’s bought 5% through his entity Reno KK, and later lifted his stake (combined with affiliates) to 9.55%. Travis thought the stock had run too far at that point (¥775/share). While still cheap, he did not expect Bain to lift its price by 30+%, nor a white knight to arrive quickly enough.
This week a media article suggested longstanding external statutory auditor Mr. Nakatsuji and lead shareholder Sakurai Mie were against the takeover.
The possibility this deal fails because the “put protection” of the deal price at ¥610 is no longer solid has gone up. Conversely, the probability that Bain and the MBO have to come in with a price adjustment higher has gone up. Travis is inclined to remain bearish in the medium-term as there is a significant likelihood there is no alternative solution during the Tender Offer period itself.
After announcing earlier this month a number of indicative non-binding bids were received for a “whole of company transaction”, the AFR is now reporting (paywalled) that Lone Star has also joined the battle for Aveo Group (AOG AU). (A Case for Privatising Aveo)
Saputo Inc (SAP CN) and Dairy Crest announced an all-cash deal where Saputo will buy Dairy Crest for 620p/share, to be implemented through a Scheme of Arrangement with an expected close in Q2 2019. This appears to tick all the necessary boxes. Friendly, horizontal integration, and limited job losses. Shares are trading through terms early (he published at 628.5p), perhaps on expectations the wide open register means shareholders can try to hold out for a higher price.
At almost 14x EV/EBITDA on a TTM basis and a bit lower on a March 2019 FY-end basis, it is a high enough multiple to not be insulting for a dairy company, and may keep other suitors away.
Dairy Crest’s directors have given irrevocable notice to accept, and the directors’ advisors (Greenhill & Co) have deemed the Offer “fair and reasonable.”
One extra turn of EV/EBITDA would lift the takeover price just under 10%. That would clear out most of the naysayers who bought in the frothier “we’re going to be an asset-light branded goods company” days of 2015-2017. Doable, but as it is an agreed deal, Travis doesn’t see the need to push it.
In its prior letter to Ophir on the 14 January, Petrus recommended selling the South-East Asian (SEA) assets to Medco, with a low-end fair value, before synergies, of £0.64/share, through to £1.42/share on a blue sky basis. It also argued that Ophir should negotiate with the Equatorial Guinea ministry (the regulator that terminated the Fortuna license, resulting in write-offs of US$610mn) to be compensated for its $700mn investment and the unfair seizure of the license, otherwise it would set a precedent for other international operators doing business in EG.
Petrus has now rounded on Schrader over perceived mismanagement of the EG licence, and a lack of professionalism in not soliciting and considering offers for Ophir from other buyers. Petrus’ beef is not an outlier – alternative hedge fund Sand Grove has increased its exposure, via cash-settled derivatives, to 17.28% (as at 13 February); while Ian Hannam, who advised Ophir’s board on its 2013 right issue, is understood to have also written to Ophir’s interim CEO Alan Booth and the board saying Medco’s offer is too low.
Overall, Petrus’ assertions that Ophir is being sold at “sub optimal terms” appear valid, most notably on the EG compensation and the illogical operations update earlier this month. The alternative push to sell the SEA assets separately, as that has been Medco’s core focus, not international operations, also makes sense.
Last month, DSV A/S (DSV DC) made a public proposal of a takeover for cash and scrip valued at CHF 170/share, which came at a 24% premium to last and +31% vs 1-month VWAP. The #2, #3, and long-time #4 shareholders are firmly and publicly in the camp of trying to get something done. 45.9%-shareholder Ernst Göhner Foundation is sending mixed signals – do they want a higher price? Or do they want to wait and let Panalpina grow by its own consolidator strategy?
Panalpina has now confirmed that it in preliminary talks with Kuwait-listed logistics company Agility Public Warehouse. A Bloomberg report suggested a deal could be reached as early as this past week for Agility’s logistics business. The same article suggested the Göhner Foundation is supportive of the new talks. Agility’s press release was much more non-committal.
DSV has also announced a new all cash CHF 180/share offer for Panalpina; although the original cash and scrip offer was then worth CHF 184.5/share, which is an even better premium to pre-offer terms. One wonders whether cash-only would suit the Foundation; the DSV press release seemed to respond to that.
It is not clear what would drive the Foundation to give up its control. And Panalpina’s measly share price reaction to the all-cash offer suggest there is considerable skepticism out there. But at some price, Panalpina’s board looks pretty stupid to not accept the cash.
If you do not think a deal with DSV has any chance of getting up, Panalpina shares are a sell here. If they overpay for Agility and cannot improve their own margins well past historical highs in a market trending weaker, then the shares could drop.
Using Curtis’ figures, the implied stub is at its lowest level since a brief downward spike in February 2015, and you would have to go back to April 2014 to find a lower level.
The push back on this setup is that the auto operations have recorded marginally, yet sequential profit declines in FY16 and FY17; while recording three sequential quarterly declines up to December 2018. The big question is whether Mahindra can regain market share as it kick-starts a new model cycle.
In contrast, Sanghyun believes the Holdco is still undervalued relative to the Sub by about 10%. Plugging in Sanghyun’s numbers, I back out a discount to NAV of 45% against a one-year average of 30%, with a 12-month range of -51.5% to 15.5% (premium).
Back on the 13 December 2018, Can One announced a proposed MGO for Kian Joo at RM3.10/share, a 52.7% premium to last close. This required Can One shareholders’ approval which was received on the 14 February. Can One’s current 33% stake in Kian Joo accounts for ~86% of its market cap. The offer doc should be out, on or before the 7 March, with payment either late March (along with the first close of the Offer), or early April, depending on when the offer turns unconditional. The offer is conditional on 50% acceptance. Both sides are illiquid.
This looks like a decent exit for Kian Joo shareholders. Apart from EPF with 10.1%, former NED Teow China See is the only other shareholder with >5% with 8.9%.
For Can One, this is an aggressive pitch to make Kian Joo a subsidiary amidst an uncertain economic backdrop, while potential synergies may be offset via higher interest costs.
There are still two schools of thought on the HMG restructuring. One is that Glovis/Mobis are merged into a holdco entity. Or Glovis becomes the holdco with Mobis→ HM→ Kia Motors Corp (000270 KS) below. Since late 3Q18, there has been increased speculation on the latter. This has pushed up Glovis’ price relative to Mobis.
Each outcome is beset with its own set of issues. For Glovis to be the sole holdco, it has to come up with nearly ₩2tn to buy Kia’s Mobis stake, probably through new, and burdensome, debt. Glovis may also face the risk of forced holdco conversion, creating an issue with Kia as a “great grandson” subsidiary.
This speculation pushing up Glovis relative to Mobis has yet to be substantiated/justified, suggesting Glovis is overbought. Sanghyun expects a mean reversion, and recommends a long Mobis and short Glovis.
Navitas Ltd (NVT AU) has agreed to extend the exclusivity period granted to the BGH consortium to 1 March (from 18 Feb), in order to allow additional time for BGH to complete a limited set of remaining due diligence investigations.
Netcomm Wireless (NTC AU) has received $1.10 cash offer (53% premium to last close) from Casa Systems (CASA US) via a Scheme. The deal values Netcomm at ~US$114m. The scheme is subject to FIRB and shareholder approval. Stewart David Paul James, a NED, holds 12.3% and is the major shareholder. The announcement states that each Netcomm director intends to vote the Netcomm shares held by them in favour of the scheme – subject to a +ve IFA opinion and in the absence of a competing offer. This includes Stewart’s stake.
MYOB Group Ltd (MYO AU)announced no superior proposal emerged after concluding its ’go shop’ period for rival offers to KKR’s takeover proposal. At a gross/annualised spread of 0.9%/4.8%, assuming early May payment, this looks to be trading a bit tight.
CCASS
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.
NextDecade Corp (NEXT US) recently announced that it started offering long-term contracts indexed to the crude Brent in order to attract more LNG buyers. This follows the agreement reached by Tellurian Inc (TELL US) with Vitol back in December to index a long term contract with the Asian LNG price benchmark JKM. While typically US LNG projects are indexed to the Henry Hub, declining crude oil and LNG prices seem to have diminished the appeal of the Henry Hub pricing compared to the oil indexation. This insight takes a look at the latest trends in the LNG markets to assess which companies are taking the lead in the race to bring to FID in 2019 their proposed LNG projects.
Exhibit 1: NextDecade adds Brent indexation to its commercial offering
Source: NextDecade Corporate Presentation February 2019
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