Positive news surrounding trade and dovish Fed rhetoric has continued to flow, resulting in a reversal from December’s oversold extremes to our current, overbought extremes according to the S&P 500’s percentage of stocks above their 50-day moving average (see chart below). We continue to believe the market is going through a bottoming process, and we prefer to be on the cautious side at current levels considering how far and how quickly the market has risen.
In today’s report we highlight attractive stocks within Materials and Technology: large- and small-cap gold, silver, platinum, and optical equipment companies.
In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPOprice range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1.
In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative.
A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again.
With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend (Bt2.30/share) for Delta Electronics Thai (DELTA TB)having been announced, this insight briefly provides an updated indicative timetable for investors.
The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.
Date to be on the registry to receive full-year dividend
As announced
22-Mar-19
Last day for revocation of shares
20th day of Tender Offer1
29-Mar-19
Close of Offer
Assuming 25 business days tender period
2-Apr-19
AGM
As announced
3-Apr-19
Consideration paid under the Offer
Assume 3 business days after close of Offer
11-Apr-19
Payment of FY18 dividend
As announced2
Source: Delta, my estimates 1 assuming the shareholder has not forfeited the right to revoke 2 the dividend is subject to a 10% WHT for non-residents.
This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered.
In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.
Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.
Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.
Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.
We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP) and Robotics names such as Fanuc Corp (6954 JP).
While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).
As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.
Change in 2019 OP Estimate Vs. Peak
Peak OP Estimate Date
Peak to Trough Share Price Change
Share Price Vs. Peak
Peak Share Price Date
Caterpillar
-6.4%
Aug 18
-35.2%
-21.4%
Jan 18
Komatsu
-2.1%
Dec 18
-49.7%
-38.8%
Jan 18
Hitachi Construction Machinery
-4.6%
Oct 18
-50.5%
-41.2%
Feb 18
Average
-4.4%
-45.1%
-33.8%
ASML
-10.1%
Jan 19
-31.2%
-14.4%
Jul 18
Applied Materials
-38.4%
Apr 18
-53.2%
-36.8%
Mar 18
LAM Research
-28.7%
Apr 18
-46.4%
-21.3%
Mar 18
Tokyo Electron
-36.6%
Jul 18
-49.9%
-32.4%
Nov 17
Average
-28.5%
-45.2%
-26.2%
Fanuc
-44.7%
Mar 18
-52.9%
-42.4%
Jan 18
Yaskawa
-34.7%
Mar 18
-58.5%
-47.0%
Jan 18
Harmonic Drive Systems
-43.2%
May 18
-65.9%
-49.3%
Jan 18
Average
-40.9%
-59.1%
-46.2%
Source: Bloomberg, LSR
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In this report, we provide a trading strategy for Ecopro BM Co Ltd (247540 KS) IPO, which is expected to start trading on March 5th. The IPO price has been determined at 48,000 won, which is 19% higher than the mid-point of the original IPOprice range of 37,500 won to 42,900 won. The institutional investors’ demand for the Ecopro BM IPO was extremely strong at 988 to 1.
In our previous report Ecopro BM IPO: Valuation Analysis, we proposed the base case to high end of the company’s value to be between 56,000 won and 67,800 won. Given the enormous institutional demand for this IPO, it appears that our base case valuation (56,000 won), which is 17% higher than the IPO price, may be too conservative.
A more likely scenario now is that the stock reaches about 65,000 won to 70,000 won in the first few hours of trading on the first day, overshooting its intrinsic value and sells off a bit for a few days/weeks, enters a consolidation phase and then resumes its higher share price again.
With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend (Bt2.30/share) for Delta Electronics Thai (DELTA TB)having been announced, this insight briefly provides an updated indicative timetable for investors.
The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.
Date to be on the registry to receive full-year dividend
As announced
22-Mar-19
Last day for revocation of shares
20th day of Tender Offer1
29-Mar-19
Close of Offer
Assuming 25 business days tender period
2-Apr-19
AGM
As announced
3-Apr-19
Consideration paid under the Offer
Assume 3 business days after close of Offer
11-Apr-19
Payment of FY18 dividend
As announced2
Source: Delta, my estimates 1 assuming the shareholder has not forfeited the right to revoke 2 the dividend is subject to a 10% WHT for non-residents.
This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered.
In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.
Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.
Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.
Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.
We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP) and Robotics names such as Fanuc Corp (6954 JP).
While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).
As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.
Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
With Form 247-3 (Intention to Make a Tender Offer) and the FY18 dividend (Bt2.30/share) for Delta Electronics Thai (DELTA TB)having been announced, this insight briefly provides an updated indicative timetable for investors.
The next key date is the submission of Form 247-4, the Tender Offer for Securities, which will provide full details of the Offer.
Date to be on the registry to receive full-year dividend
As announced
22-Mar-19
Last day for revocation of shares
20th day of Tender Offer1
29-Mar-19
Close of Offer
Assuming 25 business days tender period
2-Apr-19
AGM
As announced
3-Apr-19
Consideration paid under the Offer
Assume 3 business days after close of Offer
11-Apr-19
Payment of FY18 dividend
As announced2
Source: Delta, my estimates 1 assuming the shareholder has not forfeited the right to revoke 2 the dividend is subject to a 10% WHT for non-residents.
This above indicative timetable assumes a conditional offer based on a minimum acceptance level of at least 50%. Payment under the offer may indeed be earlier, as explained below, which also ties in with a shareholders’ right to revoke shares tendered.
In addition, investors should not tender once the offer opens – assuming the tender period commences on the 25 February – but wait until their shares are on the registry as at 4 March to receive the FY18 dividend.
Currently trading at a 2.2%/22% gross/annualised spread. Bear in mind the dividend is subject to 10% tax.
Recently, Softbank’s (9984 JP) shares jumped +18% after announcing a $5.5bn share buyback. Using Smartkarma’s holdco monitor, the discount to NAV had widened to around 55% prior to the announcement but is now sitting around 40-45%. There were a few key reasons for the buyback: (1) the Softbank Corp (9434 JP) (KK) IPO netted $20bn, giving the company the flexibility to do the buyback, and (2) Softbank is taking a more disciplined approach to further platform investments.
Both these arguments are also available to Naspers (NPN SJ) management and a move to buy back 5% of market cap is feasible and we believe would narrow the discount. The question is whether management are listening. They have been dismissive of buybacks in the past but this could change.
We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP) and Robotics names such as Fanuc Corp (6954 JP).
While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).
As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.
Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
Tencent’s market share as measured by the number of active users increased during the the period license suspension.
We believe that Tencent’s market share as measured by active users will bring increased market share as measured by revenues.
We also believe that during the hard times small companies always die.
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We have been struck by the degree of underperformance of the construction machinery names despite strong earnings performance. While the cyclical nature of the names makes judging performance purely on earnings results (or even the outlook) hazardous, in this case we believe the market has been premature and excessive in its derating of these stocks which have sold off to similar levels as the WFE names such as Tokyo Electron (8035 JP) and Robotics names such as Fanuc Corp (6954 JP).
While it is possible that Komatsu Ltd (6301 JP), Hitachi Construction Machinery (6305 JP) and Caterpillar Inc (CAT US) have sold off partly due to their China exposure, it needs to be emphasised that 1) these companies are no longer heavily dependent on China and revenue exposure is 12% for HCM, 10% for CAT and 7% for Komatsu, and 2) while the Chinese market at about 60k excavators is probably close to the top of its cycle, it is not a bubble like in 2010 when it 111k units and thus a collapse in demand is unlikely (though a decline is).
As the table below notes, earnings estimates for the construction machinery companies have only tapered marginally from their peaks, and while find the forecasts for continued growth into 2020 somewhat optimistic the resilience of mining demand means we are disinclined to dismiss them out of hand. On the other hand estimates for WFE and Robot names have dropped significantly, but despite this, share price performance is similar for all three categories of stocks. We discuss this stark discrepancy further below.
Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
We recently downgraded the Chinese telcos on rising concerns that the telcos will be required to do “national service” to support China’s technological leadership in 5G. The closure of many overseas markets to Chinese equipment suppliers (esp Huawei, but also Zte Corp H (763 HK)) means the risk of a more aggressive 5G roll-out has increased. Markets have started to take notice but the initial reaction has been positive on excitement over the 5G opportunity. Given the lack of a strong business case for 5G currently, we don think additional capex is a positive. We model what an extreme roll-out could look like and the impact on the telcos. Along with a weakening macro outlook, we have further downgraded target prices for all three operators and cut China Mobile (941 HK) and China Telecom (728 HK) to Reduce and China Unicom (762 HK) to Neutral.
Xl Axiata’s (EXCL IJ) 4Q18 results triggered a very strong rally last week that continues this week. The market has been very concerned about competitive pressures in Indonesia and extremely low data prices. We believe that Indonesia is now past the worst and there is evidence that data pricing is starting to rise modestly. That is delivering a powerful tail wind for Indonesian telcos in 2019, with XL Axiata likely to report several very strong quarters.
XL Axiata now reporting strong sequential revenue growth (% QoQ)
Source: New Street Research
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Preceding my comments on Can One/Kian Joo, Mahindra and other stubs are the weekly setup/unwind tables for Asia-Pacific Holdcos.
These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.
We recently downgraded the Chinese telcos on rising concerns that the telcos will be required to do “national service” to support China’s technological leadership in 5G. The closure of many overseas markets to Chinese equipment suppliers (esp Huawei, but also Zte Corp H (763 HK)) means the risk of a more aggressive 5G roll-out has increased. Markets have started to take notice but the initial reaction has been positive on excitement over the 5G opportunity. Given the lack of a strong business case for 5G currently, we don think additional capex is a positive. We model what an extreme roll-out could look like and the impact on the telcos. Along with a weakening macro outlook, we have further downgraded target prices for all three operators and cut China Mobile (941 HK) and China Telecom (728 HK) to Reduce and China Unicom (762 HK) to Neutral.
Xl Axiata’s (EXCL IJ) 4Q18 results triggered a very strong rally last week that continues this week. The market has been very concerned about competitive pressures in Indonesia and extremely low data prices. We believe that Indonesia is now past the worst and there is evidence that data pricing is starting to rise modestly. That is delivering a powerful tail wind for Indonesian telcos in 2019, with XL Axiata likely to report several very strong quarters.
XL Axiata now reporting strong sequential revenue growth (% QoQ)
Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance
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Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
We met AIS (ADVANC TB) earlier this week at their Analyst Day in Bangkok. The recent results confirm our concerns over market growth slowing, with service revenue flat YoY. The guided 4-6% growth for 2019 may be difficult to achieve. On the mobile side, AIS is feeling competitive pressure from a resurgent DTAC (DTAC TB) and continuing gains from TRUE (TRUE TB) . While “hostilities” have eased recently (less aggressive price offers), we remain wary of the outlook for 2019. On the fixed side, AIS is making slow progress and we continue to think M&A is warranted.
There was a fair amount of discussion around 5G at the meeting, but this looks like a long term issue for AIS. Thailand has never been in the forefront on telecom technology upgrades in the past and there is plenty to do with 4G and fixed broadband still.
Chris Hoare remains cautious on AIS in the current slowing environment, and ahead of delayed elections. Earnings forecasts have edged lower recently and that is translating to lower dividends (a 70% payout ratio to be retained for now). We remain at Neutral with a target price of THB187.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
It has been a fairly quiet week in the ECM space.
We are hearing that Douyu (game streaming like HUYA Inc (HUYA US), Tiger Brokers (backed by Jim Rogers), Genshuixue (education) have either filed confidentially or seeking to list in the US.
In Hong Kong, Bank of Guizhou is said to be planning for a US$1bn IPO and we heard that Zhejiang New Century Hotel Management is pre-marketing for its US$200m IPO. The PHIP has already been filed on the Hong Kong Exchange.
Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Reliance General Insurance (re-filed, India)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
We recently downgraded the Chinese telcos on rising concerns that the telcos will be required to do “national service” to support China’s technological leadership in 5G. The closure of many overseas markets to Chinese equipment suppliers (esp Huawei, but also Zte Corp H (763 HK)) means the risk of a more aggressive 5G roll-out has increased. Markets have started to take notice but the initial reaction has been positive on excitement over the 5G opportunity. Given the lack of a strong business case for 5G currently, we don think additional capex is a positive. We model what an extreme roll-out could look like and the impact on the telcos. Along with a weakening macro outlook, we have further downgraded target prices for all three operators and cut China Mobile (941 HK) and China Telecom (728 HK) to Reduce and China Unicom (762 HK) to Neutral.
Xl Axiata’s (EXCL IJ) 4Q18 results triggered a very strong rally last week that continues this week. The market has been very concerned about competitive pressures in Indonesia and extremely low data prices. We believe that Indonesia is now past the worst and there is evidence that data pricing is starting to rise modestly. That is delivering a powerful tail wind for Indonesian telcos in 2019, with XL Axiata likely to report several very strong quarters.
XL Axiata now reporting strong sequential revenue growth (% QoQ)
Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance
Friday 15 February after the close, the Offerors for M1 Ltd (M1 SP)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. The reasoning for the disposal was that given the long-term view required because of changes in the Singaporean telecom market structure and the inability of Axiata to exert management control, the disposal fit within Axiata’s portfolio rebalancing strategy and would serve to mitigate short- to medium-term risks associated with the changes in the Singaporean market.
Going unconditional has triggered an extension of the Closing Date to 4 March 2019 at 5:30pm Singapore time (our estimate pre-Offer Despatch was closing of 7 March).
If you are going to tender, you might as well do it now. Consideration (the offer price) will be despatched to those Shareholders who have already tendered within 7 business days, and those who accept the Offer starting now will get their funds within 7 business days of the Offer acceptance being validated.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
Aequitas Research puts out a weekly update on the deals that have been covered by Smartkarma Insight Providers recently, along with updates for upcoming IPOs.
It has been a fairly quiet week in the ECM space.
We are hearing that Douyu (game streaming like HUYA Inc (HUYA US), Tiger Brokers (backed by Jim Rogers), Genshuixue (education) have either filed confidentially or seeking to list in the US.
In Hong Kong, Bank of Guizhou is said to be planning for a US$1bn IPO and we heard that Zhejiang New Century Hotel Management is pre-marketing for its US$200m IPO. The PHIP has already been filed on the Hong Kong Exchange.
Our overall accuracy rate is 72.1% for IPOs and 63.8% for Placements
(Performance measurement criteria is explained at the end of the note)
New IPO filings
Reliance General Insurance (re-filed, India)
Below is a snippet of our IPO tool showing upcoming events for the next week. The IPO tool is designed to provide readers with timely information on all IPO related events (Book open/closing, listing, initiation, lock-up expiry, etc) for all the deals that we have worked on. You can access the tool here or through the tools menu.
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.
We recently downgraded the Chinese telcos on rising concerns that the telcos will be required to do “national service” to support China’s technological leadership in 5G. The closure of many overseas markets to Chinese equipment suppliers (esp Huawei, but also Zte Corp H (763 HK)) means the risk of a more aggressive 5G roll-out has increased. Markets have started to take notice but the initial reaction has been positive on excitement over the 5G opportunity. Given the lack of a strong business case for 5G currently, we don think additional capex is a positive. We model what an extreme roll-out could look like and the impact on the telcos. Along with a weakening macro outlook, we have further downgraded target prices for all three operators and cut China Mobile (941 HK) and China Telecom (728 HK) to Reduce and China Unicom (762 HK) to Neutral.
Xl Axiata’s (EXCL IJ) 4Q18 results triggered a very strong rally last week that continues this week. The market has been very concerned about competitive pressures in Indonesia and extremely low data prices. We believe that Indonesia is now past the worst and there is evidence that data pricing is starting to rise modestly. That is delivering a powerful tail wind for Indonesian telcos in 2019, with XL Axiata likely to report several very strong quarters.
XL Axiata now reporting strong sequential revenue growth (% QoQ)
Singtel (ST SP) recent 3Q18 results were relatively lackluster. Singapore revenue trends were encouraging, but EBITDA remains under pressure esp in the Enterprise segment. Optus saw good net subscriber additions, but this came at a cost – lower ARPU and mobile service revenue (MSR). We have lowered our forecast to reflect pressure on EBITDA and continued losses in Group Digital Life (GDL) but maintain a BUY on the stock with a target price of S$4.00. The near 6% dividend yield is the key support and we believe it can continue to be paid without resorting to increased leverage. Longer term, the fate of key associates (India and Indonesia in particular) are key to the stock’s performance
Friday 15 February after the close, the Offerors for M1 Ltd (M1 SP)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. The reasoning for the disposal was that given the long-term view required because of changes in the Singaporean telecom market structure and the inability of Axiata to exert management control, the disposal fit within Axiata’s portfolio rebalancing strategy and would serve to mitigate short- to medium-term risks associated with the changes in the Singaporean market.
Going unconditional has triggered an extension of the Closing Date to 4 March 2019 at 5:30pm Singapore time (our estimate pre-Offer Despatch was closing of 7 March).
If you are going to tender, you might as well do it now. Consideration (the offer price) will be despatched to those Shareholders who have already tendered within 7 business days, and those who accept the Offer starting now will get their funds within 7 business days of the Offer acceptance being validated.
Silverlake Axis (SILV SP) published 2Q19 results which again confirmed that the long-anticipated rise in revenues (+20% YoY) and profits (+99% YoY) has finally arrived. After three years of stagnation, this is the second quarter in a row that real earnings growth is visible.
YTD the share price of SILV has run by approximately 31% as we saw some larger volume spikes earlier this year which indicate that HNA is now finally off the register as a significant shareholder. Since HNA’s stake had dropped below 5% the new buyer has not had to step forward and disclose its identity.
Importantly, management believes the first half of FY19 was just the beginning of a new 3-year growth cycle and prospects are looking good for both FY2019 (ends June 2019) and FY2020 (ends June 2020). Dividends will continue but might be tempered depending on the number of acquisitions that are made.
Risk-Reward is not as attractive as early November but continues to look solid at these levels with a total return of 20% still achievable (assuming mid-point of historical P/E range) or a total return of 60% (assuming high-end of historical P/E range).
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MYOB Group Ltd (MYO AU)‘s shares are trading A$3.42, marginally above KKR & Co Inc (KKR US)‘s revised lower offer of A$3.40 cash per share, due to the expectation of a bidder trumping KKR. The optimism has also been stoked by the sharp market rally since MYOB agreed to recommend KKR’s revised lower offer on 24 December 2018. The ASX 200 and ASX 300 Information Technology Index has rallied 10% and 20% respectively from 24 December 2018 to 15 February 2019.
While shareholders may feel like KKR is acquiring MYOB at a knockdown price, the market could quickly revert to a downward trend. We believe that shareholders hoping for a white knight to ride to the rescue will be disappointed.
KCL-SPH again extended the closing date of the offer from 18 February to 4 March 2019. M1’s shares are trading at S$2.04 per share, marginally below the VGO price of S$2.06 per share. We believe that the KCL-SPH should get the valid acceptances to complete the delisting and wholly own M1.
Softbank has announced a buyback of ¥600bn – its largest buyback ever. At ~¥10,500/share it is 57mm shares or 5.2% of shares out. At ¥12,000/share it is 50mm shares or 4.6%. The “official” float is about 68.7% or 750mm shares. However, by Travis’ estimate, only 44.5% of shares out or 488mm shares are Real World Float. 57mm shares out of 488mm shares is 11.7%. That is a non-negligible portion of float, and will mean significant reduction in foreign active management exposure to Softbank, or significant reduction in individual investor exposure to Softbank, or both.
Travis Lundy wrote the buyback will have further impact on the stock price simply because of flow dynamics. It isn’t easy to buy 10% of float. And we should remember that the BOJ is still buying ¥100bn+ of Softbank shares per year as it continues to buy ¥6trln of ETFs per year. And given the stock will be in the top momentum ranks of large cap Japan, Travis expects momentum flows will join the party adding more inflow.
For trading types, he thought Softbank was a buy, relatively and on an absolute basis. The Japan market is CHEAP on a current year and forecast year ahead, which suggests either the market is “wrong” or economic headwinds are picking up to a greater extent than pundits suggest.
The pre-conditons have been fulfilled and Delta Electronics (2308 TT)will now move to a tender offer. But there exist a number of unknowns for the transaction, which could delay the Offer timetable.
Although the initial wording in the August conditional voluntary tender offer announcement suggests the offer will be for ALL shares, there is talk there may be a maximum acceptance condition, therefore possible clawback for shareholders tendering. A rumoured 60% maximum translates to a minimum 50% pro-rata, potentially 67% if the family tenders 40% and the rest of holders tender half.
It is not clear whether the FY18 dividend will be netted. DELTA has announced two sets of quarterly results since the initial Offer announcement and it would be unjust for DEISG to net off any dividend. It would likely suit the family to receive the dividend. The Offer is pitched at a 1.79% premium to the then-current price. If the dividend is netted, then the Offer price will, in fact, be at a discount to last close as of announcement. DELTA will announce its full-year dividend tomorrow (18th February) and the terms of the deal may also be announced the same day. The AGM to ratify the dividend will take place around the 2 April.
Currently trading at terms or a gross/annualised spread of 4.6/21%, if including a Bt3.30 FY18 dividend and mid-May payment. That looks overly tight in the face of timing delays and actual consideration to be paid if indeed it comes out to be a partial offer.
Three months ago, Minebea Mitsumi (6479 JP) announced it would launch a Tender Offer for U Shin and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November. Travis first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB he had seen in a while. Minebea Mitsumi has now announced the launch of its Tender Offer, at the same price as originally planned (¥985/share).
This deal is still perplexing to Travis. It’s easy enough from an industrial standpoint. Why not buy relatively cheap assets then see if you can cross-sell or assume some attrition? But for investors, he wonders why they put up with this. The process of reaching a “fair” valuation is, by definition, conflicted. It cannot NOT be conflicted. And just because some independent directors who don’t have skin in the game, and may have no clue about corporate valuation methodology, or fair market price, agree to a price that the acquiree’s managers, not wanting to lose their jobs, agree to doesn’t make this “fair.”
The tender offer period is QUITE long. Most tender offers are 30 days in order to give time for people to tender or “offer sufficient time for a rival bidder.” This time Travis thinks it is longer so people can take their time and get bored and tender.
Travis would sell shares now and use the balance sheet elsewhere until an activist shows his hand. If no activist, this deal is not an interesting one.
After multiple news outlets reported that LG Uplus Corp (032640 KS) will finalise a transaction with the CJ Hello, a deal was done at ₩800bn (instead of ₩1tn speculated), and only 50%+1 share instead of the full 53.92% stake held by CJ ENM (035760 KS). The acquisition price of ₩20,659 is a 107% premium to last price and translates to a EV/EBITDA multiple of 6.6x.
This is a straight stock acquisition deal. CJ Hello will be a subsidiary of LG Uplus and will continue to exist as a separate listed company. CJ ENM still owns nearly 4% CJH stake. SKT owns 8.61%.
LG Group is publicly saying that they have no plan of an immediate merger, which means neither party requires shareholder approval. But the transaction is subject to local regulator approval – MSIT and Korea FTC. MSIT approval is not an issue. FTC rejected the SKT-CJH deal last time. This time, the FTC’s head Kim Sang-jo is hinting that this deal will go through.
LG Uplus’ acquisition of CJ Hellovision is likely to further accelerate the consolidation of the Korean cable TV/media sector. KT Corp (030200 KS)is now likely to aggressively try to acquire cable-operator D’Live. SK Telecom (017670 KS) has shown some interests in acquiring Tbroad cable company.
Glow announced that the Energy Regulatory Commission (“ERC”) has resolved to approve the merger with GPSC, provided Glow sells its Glow SPP1 plant before or at the same time as the merger. A number of conditions were also attached to some of the remaining power plants. No price has been disclosed for the 69.11% stake in Glow, ex the SPP1 plant, but it will be in reference to the Bt94.892 Offer price previously announced, net of expenses with selling SPP1 and the reduced synergy thereon.
Given SPP1 is an immaterial contributor (~5%) to Glow, in terms of revenue, it can be argued that GPSC may make only a minimal change to the Offer price. Still, even a 5% downward adjustment would equate to a price below where Glow is trading.
The downside is ~8%, if using the closing price on the 11 October. Glow/GPSC/Engie want this deal to complete. I think the final Offer price will come in very close to that initially proposed. But I would not buy through Bt90, preferring to pick up shares at Bt89 or below. The merger is expected to be completed by next month, triggering a mandatory tender offer, which may take an additional 2 months or so to complete.
Sigma Healthcare released a 2-page Market Update saying the four month Business Review had identified A$100mm of annual cost savings, confirmed the FY19 EBIT guidance of A$75mn, and confirmed the FY20 EBITDA guidance of $55-60mm. The business review sees 10% underlying EBITDA growth from FY20 to FY23 so that after cost savings are included, FY23 sees the same EBITDA as FY19 [i.e. almost A$90mm].
On a standalone basis, at the end of FY22 looking towards FY23, at 8x EV/EBITDA, it looks like there is something like 60-80% upside. EBITDA might be worth even more than A$90mm in FY23 as long as the DCs can run at high capacity. And at mid-high teens PER that would be a pretty great result. They won’t get that 60-80% upside from now doing a deal with API, but they won’t have to wait for 4 years to get it either.
Travis expects another A$0.15 of value would do it. He doesn’t think they need A$0.20. The shares bounced and traded around A$0.80-1.00 from mid summer 2017 to mid-summer 2018. But that is when EBIT was supposed to fall to A$90mm. And that was nearer-term. Now we have a forecast of EBITDA of A$90mm and that is 3+ years out.
Travis thinks this could get done at 0.42-0.45 shares of API and A$0.23 of cash, given that would probably impact API shares a little bit, that would end up being a 10-15% bump vs original terms, but all told that would be pretty good – and almost a double from undisturbed.
KDDI Corp (9433 JP) announced its intention to conduct a Tender Offer for Kabu.com through a made-for-purpose SPC. The deal is not terribly different in scope than the one discussed in KDDI Deal for Kabu.com (8703 JP) Coming? about two weeks ago.
The Tender Offer is to purchase a minimum of 45,758,400 shares at ¥559/share, which is a 5.67% premium to last close and a 46.3% premium to the undisturbed price of 23 January 2019. Obtaining the minimum would get the combination of KDDI and MUFJ Securities (which currently holds 52.96% of the shares outstanding, and will not tender) to 66.67% which would allow the combination to do a Two Step Squeezeout, which KDDI states in the document that it intends to do.
Anti-trust and regulatory approvals are required (Travis can’t imagine any issues), and KDDI expects that the Tender Offer will commence in late April. This looks pretty easy as a deal, with few impediments. A rival bid is unlikely – KDDI has a headstart with the shares of MUFG Bank which have committed to the deal.
This is going to be boring. One can make markets, carry it, or allocate capital to something more interesting. However Kabu.com’s ¥6/share dividend for end March 2019 WILL BE PAID according to a press release by Kabu.com today after the close. That means there will be a down-shift in price on the ex-date of the dividend at end-March.
Via subsidiary NSITEXE, Inc, Denso has acquired a stake in Californian start-up quadric.io. NSITEXE was established to develop high performance, next generation semiconductor devices for automated driving solutions. quadric’s edge processing units compliment this technology push.
Xingfa announced its major shareholder, Guangxin Aluminium (a wholly-owned Guangdong SASAC vehicle), has acquired 5,000 shares, lifting its stake to 30.001%, triggering a mandatory general offer. The offer price is $5.60, a premium of just 2.94% to last close.
Guangxin, together with certain management of Xingfa, attempted to take Xingfa private at $3.70/share back in 1H17. That scheme failed comprehensively, which was a good outcome for minorities as FY17 net income increased 28%. 1H18 profit was also a 25% improvement over the corresponding period.
The offer price is in line with where Xingfa traded last October and is 23% below the recent peak back in mid-June 2018. It is also 37% below where China Lesso Group Holdings (2128 HK) acquired its 26.3% stake in April last year.
There has to be some behind the scenes play for Xingfa’s shares, and this potentially centres on China Lesso. While a look at CCASS shows Liao Yuqing (an ED in Xingfa) intriguingly moving his entire 48.2mn (11.5% of shares out) outside of CCASS in early December 2018.
OSLO NS is the target of competing tender offers from Euronext NV (ENX FP)andNasdaq Inc (NDAQ US). Euronext owns 5.3% and has irrevocables for 45.2% of OSLO NS shares, for 50.5% total. It launched an Offer to acquire all shares at NOK 145, and just raised that to NOK 158 on February 11, 2019. Nasdaq has irrevocables for 35.2% of OSLO NS shares and has launched an Offer to acquire all OSLO NS shares at NOK 152 per share. Nasdaq’s Offer received the unanimous recommendation of Oslo Børs VPS’s Board when it was announced. The IFA opined that NOK 152 per share is above the top end of what shareholders could expect.
Nasdaq’s undertakings are irrevocable and binding, including in the event of a higher offer. The pre-acceptances further include an obligation on the part of the pre-accepting shareholders not to accept the Euronext Offer. Irrevocables for both bidders have an end date of 31 December 2019, after which they are no longer binding.
Nasdaq, which is conditional on a 90% acceptance level, seems to have the weaker hand since its acceptance threshold condition won’t be met unless Euronext folds its cards and walks away; while Euronext (with a 50.01% acceptance condition) can keep its 50.5% “stake” as long as it gets regulatory approval. Therefore, Nasdaq would need to waive its 90% acceptance condition in order to stay in the game.
The Norwegian Ministry of Finance MoF may resolve this by approving both bidders, provided they reach a super majority acceptance threshold of two-thirds or 90% of shares outstanding (but not less). In this scenario, either party will have enough to block the other from reaching the threshold while the irrevocables are binding.
If the MoF says both parties have approval if they get to whatever super majority the MoF decides or is statutorily permitted to impose, and puts a deadline on getting there of some date after the irrevocable lock-up expiration (say, January 31, 2020), then the formerly locked-up shares are free to go to whichever bidder they chose.
I estimate HLG’s discount to NAV at 41% compared to its one-year average of 38%. The implied stub is right at the 2STD extreme and excluding a brief dip in late April 2018, is at the lowest level since June 2013.
What assets HLG does directly own at the stub level are intertwined with HLP’s own investments. There is therefore, very little to distinguish between the two companies. In addition, HLG has gradually offloaded its HK properties – to HLP no less – further increasing its exposure to China and blurring the lines between HLP and HLG’s business exposure.
HLG has also been increasing its stake in HLP since June 2011, from 48.96% to 57.62% as at 31 Dec 2018. It’s a pretty astute trade to sell a property at book to HLP, then “buy” it back indirectly via increasing its stake in HLP, which trades at 0.6x P/B.
There is no significant catalyst for the NAV discount to narrow. And liquidity does play a role, although HLG’s volume has narrowed the gap to HLP’s in recent years. Nevertheless, a ~40% discount to NAV is extreme for a straightforward, passive, single stock holdco structure.
Athaporn Arayasantiparb, CFA discussed his one-on-one with Intouch. Of interest is his discussions on the stub assets specifically InVent, a venture capital arm and considered the market leader in growth stage funding. In 2018, InVent invested Bt30m into ytm thailand, an end-to-end digital marketing and feedback platform, which used the proceeds to buy offline digital access; Bt40m into Choco CRM, a CRM and POS (point of sales) platform for SME; and Bt40m into E Studio, a B2C lifestyle portal.
Other investments discussed by Athaporn, at the stub level, include Wongnai and HSN. Wongnai is an online foodie guide and one of their largest investments to date, boasted 8m active users, 120m page views, 200,000 patron restaurants, and 10m pictures posted so far. Revenue grew 60% in 2018 to Bt250mn, and is expected to grow at 50%. HSN is an online shopping venture between Intuch and Hyundai, which managed to breakeven on a net basis.
The overall value of these investments, and the estimated 11 other start-up companies under InVent, is very much a “finger in the air” calculation. They may exceed the value of Intouch’s 41.1% stake in Thaicom Pcl (THCOM TB), but that still would be just 1% of NAV.
I estimate Intouch’s discount to NAV at ~21% (vs. the one-year average of 27%), having significantly narrowed in response to rumours of a purported sale of Thaicom (discussed in StubWorld: Intouch Gains On Possible Sale of Thaicom). At the time, I thought Intouch had run its course, noting Intouch had denied any definitive approach/agreement.
New Street Research also met with AIS and remains cautious on this telco in the current slowing environment ahead of delayed elections.
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
We met AIS (ADVANC TB) earlier this week at their Analyst Day in Bangkok. The recent results confirm our concerns over market growth slowing, with service revenue flat YoY. The guided 4-6% growth for 2019 may be difficult to achieve. On the mobile side, AIS is feeling competitive pressure from a resurgent DTAC (DTAC TB) and continuing gains from TRUE (TRUE TB) . While “hostilities” have eased recently (less aggressive price offers), we remain wary of the outlook for 2019. On the fixed side, AIS is making slow progress and we continue to think M&A is warranted.
There was a fair amount of discussion around 5G at the meeting, but this looks like a long term issue for AIS. Thailand has never been in the forefront on telecom technology upgrades in the past and there is plenty to do with 4G and fixed broadband still.
Chris Hoare remains cautious on AIS in the current slowing environment, and ahead of delayed elections. Earnings forecasts have edged lower recently and that is translating to lower dividends (a 70% payout ratio to be retained for now). We remain at Neutral with a target price of THB187.
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