Brief Consumer: Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here and more

In this briefing:

1. Hansae Holdco/Sub Trade: Huge Divergence Now, Sub Price Rally Should Be Resisted Here
2. Pepper Food Services 4QFY2018 Results: Burnt, But a Lesson Learnt
3. HDC Holdings Goes Activist on Samyang Foods
4. Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market
5. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

1. 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.

2. 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.

3. HDC Holdings Goes Activist on Samyang Foods

• We have a really interesting and unusual situation in Korea right now with HDC Holdings (012630 KS) going activist on Samyang Foods (003230 KS). HDC Holdings is the second largest owner of Samyang Foods.
• HDC Holdings is recommending that the company should exclude executive directors that have been sentenced to imprisonment on cases such as embezzlement and extreme negligence resulting in significant losses for Samyang Foods. This is an agenda which will be discussed in the Samyang Foods’ AGM next month on March 22nd.
• HDC Holdings is taking a very unusual move right now in going against the traditional “save face” mentality in the Korea Inc. and trying to publicly urge Samyang Foods to make changes to its BOD. 

4. Donaco International Ltd: A Tiny Cap, Low Price Entry Bet on the Bourgeoning Cambodia Gaming Market

• The company’s flagship Star Vegas casino resort was victimized by an alleged diversion of VIP players by its contract management. Now under corporate control it is beginning to recover.
• Its US$124m breech of contract claim against the vendor was filed in there Singapore court system and sits at final appeal stage.
• Cambodia’s new gaming regulation law will stabilize and eliminate wild west dimension of Poipet casinos. This could lead to major earnings gains and increased investment going forward.

5. M1 Ltd (M1 SP): Axiata Throws in the Towel, Delisting Looms

After the market close last Friday, M1 Ltd (M1 SP) announced that the voluntary conditional offer (VGO) became unconditional as Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP) (KCL-SPH) has an interest in M1 of 76.4%. The offer became unconditional due to Axiata Group (AXIATA MK), the single largest shareholder with a 28.7% shareholding, accepting the offer.