Brief Consumer: FANCL: Playing the Long Game and more

In this briefing:

1. FANCL: Playing the Long Game
2. HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)
3. M1 Offer Unconditional as Axiata Tenders
4. Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here
5. Pepper Food Services 4QFY2018 Results: Burnt, But a Lesson Learnt

1. FANCL: Playing the Long Game

• The declining and ageing population in Japan has been a major cause for concern to many Japanese companies.
• Fancl Corp (4921 JP), is a relatively small player in the Japanese cosmetics and nutritional supplements space who is expected to benefit from the declining and ageing population.
• Compared to the peer average, EV/Sales discount narrowed down significantly over the course of the last year. But we believe the discount remains the same on a growth adjusted basis.
• Still too small for institutional investors to notice. But we expect them to start noticing the company over the coming years.
• One of the cheapest stocks on a long term forward multiple, as we expect FANCL to sustain its high growth over a long period of time.

We are not sure if Fancl Corp (4921 JP) can ever be in the same league as Shiseido or Kao, but we certainly believe the company doesn’t deserve to be about 10% of the size of Shiseido. Thus, we have a very long-term bullish view on FANCL and expect to see the company’s market cap to double over the next 5-7 years

2. HK Connect Discovery Weekly: China Tower, Geely, COFCO Meat (2019-02-15)

In our Discover HK Connect series, we aim to help our investors understand the flow of southbound trades via the Hong Kong Connect, as analyzed by our proprietary data engine. We will discuss the stocks that experienced the most inflow and outflow by mainland investors in the past seven days.

We split the stocks eligible for the Hong Kong Connect trade into three groups: component stocks in the HSCEI index, stocks with a market capitalization between USD 1 billion and USD 5 billion, and stocks with a market capitalization between USD 500 million and USD 1 billion.

In this week’s HK Connect Discovery, we highlight the continuous inflow to China Tower prior to lock-up expiry,  positive news development for automobile stocks, and the pork cycle beneficiary. 

3. M1 Offer Unconditional as Axiata Tenders

Friday 15 February after the close, the Offerors for M1 Ltd (M1 SP)announced that their Offer had been declared Unconditional In All Respects as the tendered amount was 57.04% and the total held by concert parties was 76.35%.

Axiata Group (AXIATA MK) made an announcement to the Bursa Malaysia that it had accepted the Offer as required because it was a significant asset disposal. The reasoning for the disposal was that given the long-term view required because of changes in the Singaporean telecom market structure and the inability of Axiata to exert management control, the disposal fit within Axiata’s portfolio rebalancing strategy and would serve to mitigate short- to medium-term risks associated with the changes in the Singaporean market.

Going unconditional has triggered an extension of the Closing Date to 4 March 2019 at 5:30pm Singapore time (our estimate pre-Offer Despatch was closing of 7 March).

If you are going to tender, you might as well do it now. Consideration (the offer price) will be despatched to those Shareholders who have already tendered within 7 business days, and those who accept the Offer starting now will get their funds within 7 business days of the Offer acceptance being validated.

4. Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here

• Hansae Holdco/Sub duo is giving a very wide price divergence right now. They are now at -227% of σ. This is a 120D low. Holdco discount is 50% to NAV. Sub is 55% of the sub holdings and 60% of Holdco NAV. Sub has made a run lately mainly on improving outlook. Local long-term funds have led the recent Sub buying. They like Sub’s 4Q results. They also expect this trend to continue at least for this year.
• Valuation wise, Sub price is at a little over 17x PER on already adjusted FY19 earnings. This is pretty much in line with the yearly average in the past 3 years. Sub price rally should be resisted at this point. Holdco/Sub price ratio is at the lowest in 120D on a 20D MA. It has also fallen to near 2 year low.
• Local short-term money managers do not seem to be joining the current Sub buying. Shorting on Sub is still at a significant level (nearly 10%). I’d make a trade at this point. I’d go long Holdco and short Sub for a short-term mean reversion. Again, Holdco liquidity can be an issue to some of us.

5. Pepper Food Services 4QFY2018 Results: Burnt, But a Lesson Learnt

On Thursday the 14^th Feb 2019, Pepper Food Service (3053 JP) announced its results for FY2018 and the guidance for both 1HFY2019 and FY2019. The company managed to grow its revenue by an impressive 75.3% YoY outperforming its own estimate by 6.4%.

However, the gross profit only grew by 69.9% during the year as the gross margin slipped 137bps in FY2018 driven by higher energy prices and wages. Higher wages were due to active recruitment of foreign workers within the food service industry which created a supply shortage. To tackle increasing costs, towards the end of the year, Ikinari Steak restaurants increased the prices of its steak. We believe the margin recovery witnessed in 4Q2018 was a direct result of this price increase.

Gross Margin Showing Signs of Recovery

Pepper Food Services saw its EBIT margin decline by 20bps to 6.1% in FY2018, as revenue growth offset most of the gross margin drop through gains from operating leverage. However, its restaurants in New York City continued to underperform. The company expected those restaurants to turn a corner and start contributing to the overall EBIT from FY2018, however, those restaurants failed miserably and continued to drag the overall EBIT margin down. Hence, the company failed to meet its EBIT margin forecast with EBIT falling 4.6% short of company guidance.