Daily Equities Bottom-Up: Small Cap Diary: MEGA, Eastwater and more

In this briefing:

1. Small Cap Diary: MEGA, Eastwater
2. SPH REIT Nibbles at Blackstone’s Portfolio
3. Taisho Frontrunner to Acquire BMS’s French OTC Business

1. Small Cap Diary: MEGA, Eastwater

Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.

Here’s some highlights:

• MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
• Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
• East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
• The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.

2. SPH REIT Nibbles at Blackstone’s Portfolio

SPH REIT is acquiring an 85% stake in Figtree Grove Shopping Centre in the inner western suburb of Wollongong, New South Wales, Australia for S$188.2 mn. Australia’s media has reported Blackstone as the property’s vendor. SPH REIT is jointly acquiring Figtree Grove with a publicly listed financial services group, Moelis Australia Limited, which will own the remaining 15% interest.

This acquisition is SPH REIT’s first overseas foray and is only the second acquisition deal since listing. Compared to its first acquisition of The Rail Mall, the acquisition of Figtree Grove is truly meaningful as it opens up the possibility of portfolio acquisitions from its newly established network of contacts.   

While the addition of an Australian retail asset into SPH REIT’s portfolio enhances geographical diversification (5.2% of portfolio by asset value), investors should know that the e-commerce threat to retailers in Australia appears to be greater than in Singapore.  

Estimates show that the acquisition of Figtree Grove is marginally DPU-accretive. I am maintaining my view on SPH REIT as a defensive investment to continue holding, noting the stable yield of 5.6% for FY19F-20F.  Fair value is largely unchanged at S$1.09/unit (previous S$1.08/unit).

3. Taisho Frontrunner to Acquire BMS’s French OTC Business

Event – Bristol Myers Squibb Co (BMY US)‘s  French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b

Our Take

• If Taisho Pharmaceutical Holdin (4581 JP)  indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
• UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
• Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products

Valuation

Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:

• Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
• Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
• Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)