Daily Brief Consumer: Flight Centre Travel, Oriental Land, Tesla Motors, Ace Hardware Indonesia, Autogrill SpA, Lemon Tree Hotels Ltd, Melco Resorts & Entertainment, S&P 500, Spotify, Tokyo Stock Exchange Tokyo Price Index Topix and more

• Flight Centre Travel (FLT AU) is looking to raise US$127m from a fully underwritten institutional placement. 
• The proceeds will be used to acquire Luxury Travel Holdings (Scott Dunn), a UK-based luxury travel business.
• In this note, we will discuss deal dynamics, past deal performance, and share the scores on our ECM framework.

• Aided by the Japanese Government’s efforts to rebuild the COVID-ravaged leisure sector, Oriental Land (4661 JP)’s 3QFY23 OP surpassed consensus by more than 35%.
• We believe 3QFY23 could be a peak in terms of financial performance for Oriental Land, at least until the opening of the Fantasy Springs.
• In addition, the growth story that OLC offered through the expansion of DisneySea, seems to be no longer compelling as the management has simply stopped talking about its progress.

• The market says Tesla’s 20-30% price cuts will reverse stalling demand, even though several rounds of expensive cuts & incentives in Q4 didn’t.
• I’m not convinced, as shown in my 2023 model & forecast.
• Tesla apparently isn’t either, as indicated by sharply lower guidance and apparently plans to ramp up debt to bolster cash.

• Ace Hardware has been a distinct laggard amongst listed retailers in Indonesia, with its valuations drifting to multi-year lows, given a slow recovery from the pandemic and limited digital strategy. 
• The company has continued to see lacklustre SSSG finish flat for last year but has recently opined a more optimistic outlook for 2023, planning to open 10-15 new stores.
• Ace Hardware Indonesia (ACES IJ) trades on 13.7x FY2023E PER and 12.7x FY2024E PER when it used to trade on twice that multiple with not dissimilar growth rates.

• The deal is done with the transfer of Edizione’s 50.3% stake in Autogrill under way, and with  all main hurdles cleared. Dufry must launch and offer to buy out minorities. 
• Autogrill shares closed at €6.698 on 30 January, also the implied value of the 0.158 Autogrill/Dufry share swap is 5.8% above the €6.33/share “initial” cash offer. The market expects more.
• The deal will not fall through but the price is still being negotiated, possibly around €6.8-6.9/share. The issue will now become what dilution/leverage will Dufry’s patient shareholders endure.

• Lemon Tree Hotels Ltd (LEMONTRE IN) (“LTHL”) is India’s largest mid-market hotel chain with 7 brands and 87 properties across 54 destinations and 8,489 rooms as at F22.
• We noticed few setbacks on the forensics, particularly with respect to impairment in subsidiary and unusual accounting with revaluation of PPE.
• While the operations have seen a revival in terms of ARR and margins, LTHL however is yet to reach occupancy levels of pre-covid.

We view Melco Resorts (MLCO) as “Medium Risk” on the LARA scale. The company has a sound market position in Macau through its core assets, City of Dreams (COD) Macau and Studio City. Our view takes into account MLCO’s: [1] solid execution track record; [2] satisfactory capital management; and [3] geographical and asset diversification, with six assets. This is balanced against the company’s weakened financial profile owing to the COVID-19 crisis, as well as event risks arising from its expansion plans.

Our fundamental Credit Bias on MLCO is “Negative”, as we expect the company’s FCF to remain negative in H1/23, due to capex for the development of Studio City Phase 2. We view unfavourably MLCO’s small share repurchases despite its ongoing operating cash burn. Positively, the company has a strong liquidity profile, with a robust cash position. It should begin to deleverage from H2, after the COD Mediterranean and Studio City Phase 2 developments have been completed. 

Controversies are “Immaterial”. Some ESG-compliant funds may be prohibited from investing in MLCO, due to the nature of its core business (casinos). That said, Macau’s gaming industry is established, transparent and highly regulated. We believe the curtailment of junket activities would help to further raise operators’ transparency. Moreover, the authorities are seeking to reduce the city’s reliance on gaming and promote leisure tourism in the medium term. These factors should mitigate ESG-related risks. Overall, the ESG Impact on Credit is “Neutral”.

• We previously discussed our belief that equities were in the midst of a rally/short squeeze, but that the rally is likely to fizzle in the 4100-4165 area on S&P 500
• And, as you will see below, countless other indexes and Sectors are testing important resistance levels. We continue to expect 4100-4165 on the S&P 500 to cap upside
• Buy ideas highlighted within defensives, including Consumer Staples, Health Care, and Communications: CMCSA, CHTR, UL, KHC, CAG, SJM, CPB, LLY, MRK, and NVO

• Management promises belt tightening! Losing €659M at ~€12B in revenues? And still won’t be profitable in 2023?  Why should investors believe this change?
• Gross margin guidance misses…again. Two beats in the past 3 years on gross margins.
• Podcasting growing 100% in 1Q22 exited 4Q22 growing 30%…and ad-related revenues still just 14% of the total. Why will this move the needle?

• While shareholder proposals, including those from activist investors, should be considered from independent perspective, it’s clear that even companies with high-% independent directors don’t necessarily get along with activist investors.
• Board independence is not a question of the number or ratio of independent directors; rather, it is a question of whether independent directors are truly functioning on the board.
• If the loss of cash results in missed investment opportunities to expand corporate value, this would conflict with interests of shareholders, so subsequent increases in market capitalization should be verified.