Value Investing

In this briefing:

1. Philippines: El Niño’s Comback – How Bad?
2. China Blood Products: Deals Highlight Values
3. Woori Bank: Overhang Versus Valuation
4. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap
5. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

1. Philippines: El Niño’s Comback – How Bad?

• With SST (sea surface temperature) in the Pacific past 26^oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 

• The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.

• Buy bonds with preference for the curve’s belly to short-duration.

2. China Blood Products: Deals Highlight Values

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

3. Woori Bank: Overhang Versus Valuation

Given overhang risk, investors have been bailing out of Woori or taking short positions. Woori Bank Employees Stock Ownership Association seems to have absorbed part of the selling from the likes of Blackrock, Samsung Asset, SEB Investment, Northern Trust, State Street, Russell Investment, and JP Morgan Asset. We do note though that Vanguard and TIAA have increased their position during the HoldCo transition.

There is still to come the 12% stake in Woori Holdings that Woori Bank receives relating to the transfer of the credit card entity that needs to be sold. KDIC’s 18% stake adds to the overhang risk. With https://www.smartkarma.com/insights/woori-bank-holdco-conversion-current-status-trade-approach Sanghyun Park has detailed the risk.

We delve into the latest financials of Woori Financial Group. The picture is mixed. While efficiency advances were the main positive standout, we highlight sharply higher funding costs and a build-up of precautionary loans as main areas of concern. The bottom line was also boosted by much lower loan loss provisions as headline NPLs fell.

A constructive view of the Group is thus based on the credibility of what appears to be underlying asset improvement and the benefits of returning to HoldCo status.

We conclude that despite the overhang risk, shares are not expensive. Shares inhabit the highest decile of our global VFM (Valuation, Fundamentals, Momentum) rankings. There may though be a better entry point for bargain hunters.

4. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

Sutl Enterprise (SUTL SP) did not grow revenues in 2018 as it continued to operate only its flagship Sentosa marina. Change is coming as it has 9 projects in the pipeline which could dramatically alter the financial future of the company by FY21. 

The biggest news is the groundbreaking of Puteri Harbor in Malaysia last week. With a sales gallery opening by May 2019, it will be very interesting to follow the progress on this project and its contribution to SUTL’s top/bottom-line results in FY19/FY20.

SUTL is misunderstood by investors because management disclosure is lacking and liquidity is poor. The valuation of SUTL could be improved if investors had a better understanding of the earnings trajectory we could expect in FY19-FY21.

We realize the Tay family is not looking to sell its stake anytime soon so is not concerned about its current market cap. We caution that this might not be a smart way to run a publicly listed company as a more expensive ‘currency’  (stock price) might help the company be taken more seriously when attempting to make acquisitions overseas. 

However, this does not alter the fact that 84% of the market cap is cash and the EV of this consistently profitable company is barely 6.7M USD. SUTL is undeniably one of the cheapest stocks on SGX.

5. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

In this briefing:

1. China Blood Products: Deals Highlight Values
2. Woori Bank: Overhang Versus Valuation
3. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap
4. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
5. When Job ‘Quality’ Prevailed over ‘Headcount’

1. China Blood Products: Deals Highlight Values

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

2. Woori Bank: Overhang Versus Valuation

Given overhang risk, investors have been bailing out of Woori or taking short positions. Woori Bank Employees Stock Ownership Association seems to have absorbed part of the selling from the likes of Blackrock, Samsung Asset, SEB Investment, Northern Trust, State Street, Russell Investment, and JP Morgan Asset. We do note though that Vanguard and TIAA have increased their position during the HoldCo transition.

There is still to come the 12% stake in Woori Holdings that Woori Bank receives relating to the transfer of the credit card entity that needs to be sold. KDIC’s 18% stake adds to the overhang risk. With https://www.smartkarma.com/insights/woori-bank-holdco-conversion-current-status-trade-approach Sanghyun Park has detailed the risk.

We delve into the latest financials of Woori Financial Group. The picture is mixed. While efficiency advances were the main positive standout, we highlight sharply higher funding costs and a build-up of precautionary loans as main areas of concern. The bottom line was also boosted by much lower loan loss provisions as headline NPLs fell.

A constructive view of the Group is thus based on the credibility of what appears to be underlying asset improvement and the benefits of returning to HoldCo status.

We conclude that despite the overhang risk, shares are not expensive. Shares inhabit the highest decile of our global VFM (Valuation, Fundamentals, Momentum) rankings. There may though be a better entry point for bargain hunters.

3. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

Sutl Enterprise (SUTL SP) did not grow revenues in 2018 as it continued to operate only its flagship Sentosa marina. Change is coming as it has 9 projects in the pipeline which could dramatically alter the financial future of the company by FY21. 

The biggest news is the groundbreaking of Puteri Harbor in Malaysia last week. With a sales gallery opening by May 2019, it will be very interesting to follow the progress on this project and its contribution to SUTL’s top/bottom-line results in FY19/FY20.

SUTL is misunderstood by investors because management disclosure is lacking and liquidity is poor. The valuation of SUTL could be improved if investors had a better understanding of the earnings trajectory we could expect in FY19-FY21.

We realize the Tay family is not looking to sell its stake anytime soon so is not concerned about its current market cap. We caution that this might not be a smart way to run a publicly listed company as a more expensive ‘currency’  (stock price) might help the company be taken more seriously when attempting to make acquisitions overseas. 

However, this does not alter the fact that 84% of the market cap is cash and the EV of this consistently profitable company is barely 6.7M USD. SUTL is undeniably one of the cheapest stocks on SGX.

4. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

5. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

In this briefing:

1. Woori Bank: Overhang Versus Valuation
2. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap
3. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
4. When Job ‘Quality’ Prevailed over ‘Headcount’
5. Eurobank: Battle-Hardened and Transformation Bound

1. Woori Bank: Overhang Versus Valuation

Given overhang risk, investors have been bailing out of Woori or taking short positions. Woori Bank Employees Stock Ownership Association seems to have absorbed part of the selling from the likes of Blackrock, Samsung Asset, SEB Investment, Northern Trust, State Street, Russell Investment, and JP Morgan Asset. We do note though that Vanguard and TIAA have increased their position during the HoldCo transition.

There is still to come the 12% stake in Woori Holdings that Woori Bank receives relating to the transfer of the credit card entity that needs to be sold. KDIC’s 18% stake adds to the overhang risk. With https://www.smartkarma.com/insights/woori-bank-holdco-conversion-current-status-trade-approach Sanghyun Park has detailed the risk.

We delve into the latest financials of Woori Financial Group. The picture is mixed. While efficiency advances were the main positive standout, we highlight sharply higher funding costs and a build-up of precautionary loans as main areas of concern. The bottom line was also boosted by much lower loan loss provisions as headline NPLs fell.

A constructive view of the Group is thus based on the credibility of what appears to be underlying asset improvement and the benefits of returning to HoldCo status.

We conclude that despite the overhang risk, shares are not expensive. Shares inhabit the highest decile of our global VFM (Valuation, Fundamentals, Momentum) rankings. There may though be a better entry point for bargain hunters.

2. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

Sutl Enterprise (SUTL SP) did not grow revenues in 2018 as it continued to operate only its flagship Sentosa marina. Change is coming as it has 9 projects in the pipeline which could dramatically alter the financial future of the company by FY21. 

The biggest news is the groundbreaking of Puteri Harbor in Malaysia last week. With a sales gallery opening by May 2019, it will be very interesting to follow the progress on this project and its contribution to SUTL’s top/bottom-line results in FY19/FY20.

SUTL is misunderstood by investors because management disclosure is lacking and liquidity is poor. The valuation of SUTL could be improved if investors had a better understanding of the earnings trajectory we could expect in FY19-FY21.

We realize the Tay family is not looking to sell its stake anytime soon so is not concerned about its current market cap. We caution that this might not be a smart way to run a publicly listed company as a more expensive ‘currency’  (stock price) might help the company be taken more seriously when attempting to make acquisitions overseas. 

However, this does not alter the fact that 84% of the market cap is cash and the EV of this consistently profitable company is barely 6.7M USD. SUTL is undeniably one of the cheapest stocks on SGX.

3. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

4. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

5. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

In this briefing:

1. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap
2. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
3. When Job ‘Quality’ Prevailed over ‘Headcount’
4. Eurobank: Battle-Hardened and Transformation Bound
5. Krung Thai Bank: Not as Cheap as It Looks

1. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

Sutl Enterprise (SUTL SP) did not grow revenues in 2018 as it continued to operate only its flagship Sentosa marina. Change is coming as it has 9 projects in the pipeline which could dramatically alter the financial future of the company by FY21. 

The biggest news is the groundbreaking of Puteri Harbor in Malaysia last week. With a sales gallery opening by May 2019, it will be very interesting to follow the progress on this project and its contribution to SUTL’s top/bottom-line results in FY19/FY20.

SUTL is misunderstood by investors because management disclosure is lacking and liquidity is poor. The valuation of SUTL could be improved if investors had a better understanding of the earnings trajectory we could expect in FY19-FY21.

We realize the Tay family is not looking to sell its stake anytime soon so is not concerned about its current market cap. We caution that this might not be a smart way to run a publicly listed company as a more expensive ‘currency’  (stock price) might help the company be taken more seriously when attempting to make acquisitions overseas. 

However, this does not alter the fact that 84% of the market cap is cash and the EV of this consistently profitable company is barely 6.7M USD. SUTL is undeniably one of the cheapest stocks on SGX.

2. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

3. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

4. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

5. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

In this briefing:

1. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)
2. When Job ‘Quality’ Prevailed over ‘Headcount’
3. Eurobank: Battle-Hardened and Transformation Bound
4. Krung Thai Bank: Not as Cheap as It Looks
5. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

1. Indonesia Property – In Search of the End of the Rainbow – Part 4 – Alam Sutera Realty (ASRI IJ)

In this series under Smartkarma Originals, CrossASEAN insight providers AngusMackintosh and Jessica Irene seek to determine whether or not we are close to the end of the rainbow and to a period of outperformance for the property sector. Our end conclusions will be based on a series of company visits to the major listed property companies in Indonesia, conversations with local banks, property agents, and other relevant channel checks. 

The fourth company that we explore is township developer Alam Sutera Realty (ASRI IJ), which provides an interesting exposure to a mix of landed housing, high-rise and low-rise condominiums through its Alam Sutera Township near Serpong and its Pasir Kemis township 15 km further out on the toll road. 

Given the diminishing area of high-value land bank in Alam Sutera, the company has shifted emphasis towards selling low-rise condominiums and commercial lots for shop houses, which has been a success story. 

Alam Sutera Realty (ASRI IJ) also has a contract with a Chinese developer, China Fortune Land Development (CFLD), to develop a total of 500 ha over a five year period in its Pasir Kamis Township.  This has provided a fillip for the company during a quiet period of marketing sales and will continue to underpin earnings for the next 2 years.

The company stands to benefit from the completion of two new toll-roads, one soon to be completed to the south connecting directly to BSD City and longer term a new toll to Soekarno Hatta Airport to the north.

It will start to utilise new land bank in North Serpong in 2021, which will extend the development potential in the area significantly longer-term. 

Management is optimistic about marketing sales for 2019 and expects growth of +16% versus last year’s number, which already exceeded expectations.

Alam Sutera Realty (ASRI IJ) has less recurrent income than peers at around 10% of total revenue but has the potential to see better contributions from the Garuda Wisnu Kencana Cultural Centre (GWK) in Bali. 

The new regulations on the booking of sales financed by mortgages introduced in August 2018 will benefit Alam Sutera Realty (ASRI IJ) from a cash flow perspective. Given that the company is consistently producing free cash flow, this is also a strong deleveraging story.

One of the biggest risks for the company is its US$ debt, which totals US$480m and is made up of two bonds expiring in 2020 and 2022. 

From a valuation perspective, Alam Sutera Realty (ASRI IJ) looks very interesting, trading on 4.9x FY19E PER, at 0.67x PBV, and at a 71% discount to NAV. On all three measures, at 1 STD below its historical mean. Our target price of IDR600 takes a blended approach, based on the company trading at historical mean on all three measures implies upside of 91% from current levels. Catalysts include better marketing sales from its low-rise developments at its Alam Sutera township and further cluster sales there, a pick-up in sales and pricing at its Pasir Kemis township, a sale of its office inventory at The Tower, a pick up in recurrent income driven by improving tenant mix at GWK. Given that the company has high levels of US$ debt, a stable currency will also benefit the company. A more dovish outlook on interest rates will also be a positive, given a large and rising portion of buyers use a mortgage to buy its properties. 

2. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

3. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

4. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

5. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.

In this briefing:

1. When Job ‘Quality’ Prevailed over ‘Headcount’
2. Eurobank: Battle-Hardened and Transformation Bound
3. Krung Thai Bank: Not as Cheap as It Looks
4. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
5. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

1. When Job ‘Quality’ Prevailed over ‘Headcount’

• A 387k decline in employment didn’t weigh on the jobless rate of 5.2% according to the latest labor survey data. As the labor participation rate declined in 4Q18, roughly 2.1mn of those in the labor pool voluntarily passed up the job search, to ease any employment demand-supply mismatch.

• For those employed particularly in the non-farm, production sectors led by manufacturing and construction, the quality of jobs generated dominated the lack of headcount gains in determining incomes, if not, uplifting purchasing power. If we exclude direct government job creation from the labor stats, we obtain a non-farm, private job creation of 1.1mn (vs 3Q18: -8.6k) up 3.8%YoY. Average weekly work hours were 43.2 versus 40.6 a year-ago suggesting more overtime work. Salaried workers grew by 1.4mn (+5.6%YoY) employed mainly from private establishments. Underemployment fell to 15.6% in the latest job survey vs 18% a year-ago.

• As inflation recedes, the robust non-farm employment and better job quality won’t be compelling for policymakers to rush any form of monetary accommodation. Since the jobs data or GDP prospects are not as vulnerable to sharp downswings due to onshore catalysts, e.g., upbeat public investments, consumption recovery, despite a less-than-encouraging global backdrop, the Central Bank may focus on possible risk of a liquidity crunch and emergence of positive, real interest rates in determining the policy options for monetary accommodation this year.

2. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

3. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

4. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.

5. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week. 

Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.

While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.

My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside.  Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.

In this briefing:

1. Eurobank: Battle-Hardened and Transformation Bound
2. Krung Thai Bank: Not as Cheap as It Looks
3. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
4. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
5. Hitachi High Tech’s Ace in the Hole

1. Eurobank: Battle-Hardened and Transformation Bound

Eurobank Ergasias Sa (EUROB GA) FY18 results were satisfactory. The bank is now weaned off ELA, pays a tax rate of 33% for the first time in many years, generates robust deposit inflows, enhancing the liquidity position, and is actively reducing NPEs. Management foresees the current problem loan ratio at 37.1% easing to 16% in 2019 and 9% by 2021. Problem exposures will be slashed by €10bn in 2019 through securitizations, collateral liquidations, sales, recoveries and charge-offs. Recent data show a much more benign situation regarding negative NPE formation. The worst seems to be behind the Greek Banking System, barring some external global or regional event or domestic policy misstep.

The legal framework for banks has improved with the Katseli Law providing lenders with greater protection for recovering mortgage NPE foreclosures in the event of default on restructured loans. The real estate auction system has also been gaining much greater traction.

Eurobank is engaged in a corporate transformation plan in order to unlock value, improve capitalisation, and manage NPEs. The plan revolves around a merger with Grivalia, “Pillar” (€2bn mortgage NPE securitization), “Cairo” (€7.5bn multi-asset securitization), the creation of a loan servicer, and a hive down. The bank will focus on core banking rather than functioning as a distressed real estate asset manager.

The outlook for the Greek economy has improved somewhat. The 2019 Budget is based on a primary surplus target of 3.5% of GDP. Exports and private consumption are drivers for solid growth of around 2%. The cash buffer of at least EUR26.5 bn is equivalent to 2 years of gross financing needs. Moody’s raised Greece’s issuer rating to B1 from B3 and its outlook to stable from positive (Feb19). The sovereign gained market access with recent 5year €2.5bn and 10year €2.5bn issues. A tailwind will be the resurgence of “animal spirits” under a New Democracy administration after elections later this year.

2. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

3. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.

4. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week. 

Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.

While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.

My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside.  Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.

5. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

In this briefing:

1. Krung Thai Bank: Not as Cheap as It Looks
2. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
3. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
4. Hitachi High Tech’s Ace in the Hole
5. Bank Alfalah: Metrics Point to Falāh

1. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

2. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.

3. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week. 

Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.

While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.

My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside.  Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.

4. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

5. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

In this briefing:

1. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
2. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
3. Hitachi High Tech’s Ace in the Hole
4. Bank Alfalah: Metrics Point to Falāh
5. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

1. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders

The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).

We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.

2. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week. 

Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.

While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.

My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside.  Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.

3. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

4. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

5. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

In this briefing:

1. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
2. Hitachi High Tech’s Ace in the Hole
3. Bank Alfalah: Metrics Point to Falāh
4. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range
5. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

1. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action

Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week. 

Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.

While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.

My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside.  Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.

2. Hitachi High Tech’s Ace in the Hole

Last Friday, Hitachi (6501) was reported to be considering selling Hitachi Chemical (4217), according to media sources over the weekend. This has sent Hitachi Chemical and its parent into a frenzy with Hitachi Chemical ADR up 13% last Friday. We believe this news is relevant for Hitachi High Tech because both subsidiaries are 51-52% consolidated by the parent Hitachi, and both have arguably businesses with little synergy with the parent. We believe that Hitachi High Tech is also rumored to be on the block for sale or spin-off.  Media sources say that Hitachi is considering a sale of Hitachi Chemical and would reap Y300bn.  The current value of their 51% ownership in Hitachi Chemical is Y211bn, and thus there is 42% implied upside if the Y300bn figure is achieved.

To recap Q3 results for Hitachi High Tech from January 31, 2019, the numbers were decent with earnings above consensus forecasts by 33% for Q3 (Y15.8bn OP versus Y13.8bn forecast). The profit rise was due to improved margins in medical and continued strength in process semiconductor equipment. The shares are up 20% year-to-date, outperforming the Nikkei by 15%. Some of the fears of a sharp slowdown in semiconductor have been nullified by the continued strength in logic chip investments as well as the improved profitability in medical clinical analyzers. Medical profits soared 46% YoY in Q3 to Y7.6bn on a 13% YoY increase in revenues. OP margin improved from 12.3% to 15.8% YoY.

3. Bank Alfalah: Metrics Point to Falāh

Bank Alfalah (BAFL PA) is heading in the right direction as testified by its metric progression, embodied in its quintile 1 PH Score™.

Valuations are not stretched – especially the Total return Ratio of 1.8x and an Earnings Yield of 14.5%.

Combining the fundamental momentum signals (PH Score™) with franchise valuation, and a low RSI, places BAFL PA in the top decile of bank opportunities globally.

4. Philippines: February Inflation Eases Back to BSP’s Inflation Target Range

• Better-than-expected February inflation of 3.8%YoY wasn’t just a ‘base effect’ result. Broad food and transport CPI readings probably benefited from a year-ago, statistical high. It’s not the same for most of the non-food CPI items like rental & household utilities, and restaurant & miscellaneous goods & services that comprise discretionary expenditures. Lacking the base effect, inflation within this group seemed to have shed off last year’s price catalysts led by TRAIN’s excise hikes, high oil prices and supply shocks. 

• Based on the PSA’s seasonally adjusted data, headline inflation’s annualized pace was a benign 1.2%.

• Our updated monthly time series extrapolation showed headline inflation bottoming out at 1.3%YoY-1.4%YoY in September-October this year.

• Sustained liquidity tightness amid inflation’s benign pace with a trajectory settling in the BSP’s target range could facilitate a staggered bank reserve ratio cut of 2% starting 2Q19.   

• With the pro-growth bias of newly appointed BSP chief Benjamin Diokno (former Budget Secretary), the likelihood of a 25bp policy rate cut has been elevated in 3Q19 when inflation this year is expected to hit rock bottom and the ensuing size of positive, real interest rates could risk threatening growth.
• Considering potential macro upsides this year, e.g., inflation bottoming out alongside consumption recovery, buying risk assets on dips is still the norm.

5. China Tower Results Confirm Lower Capex Outlook, but Were Otherwise Mixed

China Tower (788 HK) reported 4Q18 results that looks slightly disappointing. However, they did deliver strong net profit, confirmation that capex is likely to materially undershoot guidance, and the first dividend for the company. However, while that is positive, there were areas of disappointment, with weaker revenue growth and EBITDA.

Our view remains that China Tower’s shares are relatively undervalued and expect share prices to continue to move higher over time, as the stock reflects its inflecting ROIC. It remains our favored name in China given the risks of policy driven over-investment into 5G (see Chinese Telcos: Rising 5G Capex Risk Leads to Another Downgrade).