Brief Equities Bottom-Up: Toshiba: King Street Round Two and more

In this briefing:

1. Toshiba: King Street Round Two
2. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.
3. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral
4. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
5. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed

1. Toshiba: King Street Round Two

Yesterday, King Street sent a letter to Toshiba Corp (6502 JP) CEO Nobuaki Kurumatani, applying pressure by threatening to nominate alternative directors to the company’s board. The full contents of the letter can be found here.

King Street’s requirements for the new board are stated as:

Among other things, the new Board must:

(i) ensure management applies rigorous financial discipline to capital allocation decisions, including use of excess cash, determination of optimal capital structure and capital expenditure return requirements;

(ii) drive management to re-examine Toshiba’s business portfolio with a critical eye on competitive position, sector landscape, synergies available and profitable growth prospects;

(iii) direct management to evaluate non-operating and underperforming businesses and assets (while respecting that Toshiba may need to be engaged in certain activities important to Japan’s national security interests);

(iv) ensure that management attains global peer profitability levels at each business segment based on projections supported by robust, bottoms-up analysis; and

(v) instill a culture of accountability and ownership at all levels of the organization.

By and large these demands amount to, “follow the instructions in our previous presentation“. That presentation, while thorough in some respects struck us as being naively optimistic, as we noted in Toshiba: King Street Assumptions Look Exceedingly Optimistic.

Travis Lundy also commented on the presentation in Toshiba: King Street’s Buyback Proposals Lack Required Detail and Toshiba: King Street’s Valuation Analysis Is… Punchy?

Given developments in the intervening time period including a sell-down of about 27% of King Street’s initial stake at a price of ¥3,925 (some 64% below the “well over ¥11,000” per share they feel Toshiba is worth) according to Bloomberg, and a downward revision to OP guidance from ¥60bn to ¥20bn, we feel that there is little reason to change our assessment.

2. Lippo Malls REIT – Acquisition of Lippo Mall Puri Announced. Dilutive Rights Issue Coming.

Lippo Malls Indonesia Retail Trust (LMRT SP) (“LMIRT”) today announced the acquisition of Lippo Mall Puri from its sponsor PT Lippo Karawaci Tbk for a consideration of Rp.3,700.0 bil (S$354.7 mil).

There is a significant amount of vendor support provided by Lippo Group to improve the net property income and NPI yield of Lippo Mall Puri. If we exclude the vendor support from the target NPI, the NPI yield excluding vendor support will just be 6.52% per annum.

The transaction is DPU and yield dilutive. The resultant DPU post-transaction will decline from 2.05 S-cents to 1.61 S-cents / 1.42 S-cents. Distribution yield will also fall from 10.25% to 9.28% / 8.85% based on TERP.

The transaction could also potentially result in LMIRT’s gearing increasing from 34.6% to 39.0% which will worsen its balance sheet strength and credit standings. 

In view of the unattractive acquisition and potential EFR dilution, investors should avoid LMIRT for now and wait for opportunity to enter with a greater margin of safety. 

3. Bharti Infratel: Bad News Largely in the Price Now. Upgrade to Neutral

Following three years of share price declines, Chris Hoare has started to moderate his negative view on Bharti Infratel (BHIN IN). Our thesis, that Infratel would struggle as the market consolidated to three players, has largely played out. We remain wary of the viability of Vodafone Idea (IDEA IN) at current tariff levels but the ongoing capital raising at IDEA puts off the day of reckoning, while IDEA’s exit penalties (as they consolidate with Vodafone) are being paid quarterly which will flatter revenues/cash flow. We think earnings forecasts have probably bottomed for the time being and raise our recommendation to Neutral and upgrade our price target to INR270 (from INR220).

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. Meituan Dianping 4Q2018 Quick Read: Monetization Rate and Margins Disappointed

Meituan Dianping reported 4Q2018 numbers last night. As we covered the company’s IPO and lock-up expiry, we took a close look the company 4Q2018 results and listened in the conference call. While we are encouraged by the company’s strong transaction volume and revenue growth in 4Q2018, we are less bullish given the deceleration of monetization growth. We also note that the company trimmed down the details of reporting, in particular, the operation of its New Initiative segment and hence results were less transparent.