In this briefing:
- Itausa: Discounted Access to Premium Quality Itau
- Spark NZ on Track to Meet Long Term Goals but near Top of Trading Range. Now at Neutral.
- Xiaomi (1810 HK): Dead Money
- Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
- Nidec (6594 JP): Big Downward Revision
1. Itausa: Discounted Access to Premium Quality Itau
- Itausa-Investimentos Itau-Pr (ITSA4 BZ) is the main indirect vehicle through which to gain discounted equity exposure to premium ROE-generating Brazilian bank, Itau Unibanco Holding Sa (ITUB4 BZ).
- Itausa trades at a 24% discount to its NAV, with Itau Unibanco accounting for 91% of the asset value of the holding.
- The current NAV discount is close to the 10-year high of 28%, and wider than the 10-year average discount of 21% and the 10-year low of 16%.
2. Spark NZ on Track to Meet Long Term Goals but near Top of Trading Range. Now at Neutral.
We have revised our forecasts for Spark New Zealand (SPK NZ) following recent accounting changes. Ian Martin believes Spark is on track to achieve its revised long term operating EBITDA margin target of 31% by FY21, and possibly by FY20. Spark’s performance is driven largely by on-net mobile, fixed wireless access (FWA) and cloud/data services. Spark has also shown solid cost control gains and is ahead of its target for implementing its Agile program. It plans to launch 5G by July 2020 suggesting steady capex spending, and confidence in its earnings outlook. Spark is also planning to move more deeply into sports content including a partnership with NEC in sports production.
While we remain positive on the long term outlook for Spark, and have raised our target price from NZ$4.05 to NZ$4.40, the stock is not cheap. It trades at 18.2x FY19F EPS and 8.0x FY19 EBITDA. The company needs to show strong cost control to meet targets and for this reason we reduce our recommendation to Neutral.
Three year operating outlook for Spark NZ (NS$ m)
3. Xiaomi (1810 HK): Dead Money
Xiaomi Corp (1810 HK)’s shares are around 43% below the IPO price partly due to the recent well-documented selling of shares following the end of a lock-up period. Ultimately, every share has a “right” value and the investors buying into the recent share placement presumably have the view that the shares are attractive at current levels.
While there is no longer a strong case to sell the shares at current levels, we do not recommend diving head first to buy the shares due to limited upside, potentially worsening market outlook and ongoing share overhang from lockup expiry.
4. Arcs, Valor and Retail Partners Form First Nationwide Supermarket Alliance
The supermarket sector is the most fragmented and uncompetitive of all retail sectors, a situation encouraged by major suppliers and not ideal for consumers.
Despite some effort from the likes of Aeon, consolidation has failed to materialise beyond a few in-group mergers.
Yet pressure on supermarkets to consolidate has been building due to depopulation in the regions, competitive pressures from other food retailers such as convenience stores and drugstore chains, as well as the emerging online food services.
Change is now coming. The biggest industry consolidation yet was announced last month, a precedent-setting alliance between three major supermarkets, Arcs Co Ltd (9948 JP), Valor Holdings (9956 JP) and Retail Partners (8167 JP), carving up a large chunk of the country into three regional fiefdoms.
5. Nidec (6594 JP): Big Downward Revision
Nidec has cut FY Mar-19 sales guidance by 9.4%, operating profit guidance by 25.6% and net profit guidance by 23.8% to reflect what management calls unexpectedly weak demand, the need for large inventory adjustments, and anticipated restructuring charges.
Management attributes this to U.S. – China trade friction, but weak demand for hard disc drives (HDDs) caused by excessive date center investment and falling NAND flash memory prices, and declining auto sales in both China and the U.S., appear to have compounded the problem.
Nidec’s share price was up ¥60 (+0.49%) today to ¥12,395, but the announcement was made after the market closed. Management plans to discuss the situation at a press conference starting at 18:30 Tokyo time today.
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