Daily Equities Bottom-Up: SPH REIT Nibbles at Blackstone’s Portfolio and more

In this briefing:

1. SPH REIT Nibbles at Blackstone’s Portfolio
2. Taisho Frontrunner to Acquire BMS’s French OTC Business
3. UTP (UTP TB): Continued Gain from Tight Global Paper Supply
4. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti
5. Nio Surged 31% in November; Will Momentum Continue Through 2019?

1. 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).

2. 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)

3. UTP (UTP TB): Continued Gain from Tight Global Paper Supply

• Strong long-term sales growth, share price is less volatile, and solid short-term earnings momentum relative to its sector
• Sales growth for UTP’s cardboard paper and packaging used for corrugated boxes should be supported by an ongoing 20% ramp-up in production to 20,000 tons/month on tight global supply conditions
• Strong demand and efficiency improvements on older cardboard paper-making equipment has expanded margins, operating margin expanded by 12 ppts in 9M18 YoY
• UTP has shown solid improvements in asset turnover while also improving its net margin
• Risk: Chinese moves to ramp up paper supply again

* Consensus Estimates

4. Exuberance of Korean Retail Investors About Jim Rogers Becoming an Outside Director of Ananti

• After it was announced on 10 December that Jim Rogers was being considered an outside director of Ananti Inc (025980 KS), its share price has soared more than 100% in six business days. At current price of 21,000 won, market cap of Ananti is 1.7 trillion won ($1.5 billion). In six days, Jim Rogers has added more than $800 million in market cap to Ananti, which is now trading at more than 5.0x P/B, compared to 2.5x P/B only a week ago. We think the risk/reward of Ananti is no longer favorable given the steep share price increase.
• This is a classic “buy on rumor, sell on news” trading that could impact the share price. The fact is, Jim Rogers has not yet accepted to be an outside director of the company. Rather, he has been recommended to become an outside director to be decided on December 27th and there are only six more business days until this date. It is almost a given that Jim Rogers will be voted in as an outside director of Ananti. We think that there could be many investors that may be unloading their shares as we get closer to December 27th.
• In addition, there are many other companies that should benefit from a greater opening up of the North Korean economy to South Korea and rest of the world. We have listed the 30 key North Korean related stocks below. Hence, for those investors that want to get a greater exposure to the North Korea related stocks in South Korea, some of these other stocks may provide greater value than Ananti which has soared in price in such a short period of time.

5. Nio Surged 31% in November; Will Momentum Continue Through 2019?

• NIO Inc (NIO US) surged 30.7% in November after reporting steady growth in production and following certain notable investors such as Baillie Gifford & Co (largest investor in Tesla Motors (TSLA US) after Elon Musk) acquiring a stake in the company creating a bullish view on the company.
• The EV start-up delivered 3,089 vehicles in November, registering a more than 96% increase from October, indicating a smooth flow in its production line of ES8. The latter was something its rival, Tesla, took long to establish. The company has reached a total production of more than 10,000 units thus far.
• On the 15^th of December which is the company’s ‘Nio Day’, Nio hopes to launch its ES6, a 5-seater, two-row, high-performance premium electric SUV that will have a longer range and at a lower price than its three-row seven-passenger ES8. Production and delivery of ES6 are expected to begin in 2019.
• Q3 FY2018 results although slightly below the company’s expectations was an improvement compared to the previous quarter and acted as a tailwind in increasing investor confidence in the company. Sales increased to USD214m in Q3 from USD 46 in Q2. Though the company has not yet generated any profits, operating losses as a % of revenues have declined to -191.2% in Q3 cf.-4,077% in Q2.
• For Q4 FY2019E the company expects to deliver 6,700 to 7,000 vehicles more than double the total deliveries during Q3, forecasting revenue between USD 418.5-436 m, at 95-100% increase from Q3. The company has not guided on OP.
• Although the company is still fighting for profits, which seems to be normal for a start-up, it should be noted that the company has a quite steady cash reserve to fund its operation and ramp up production of its to-be-released ES6 model. In our opinion, if the launch of ES6 is as successful as ES8 and the company avoids production delays like Tesla, then it may break even or even make profits within a shorter time period than which Tesla took (almost 8 years). That said, Nio’s stock is likely to witness further surges through 2019 following its recovery since November.