Daily Brief Consumer: S.M.Entertainment Co, Nitori Holdings, DPC Dash, Patanjali Foods, Seven & I Holdings, United Malt Group Ltd, Tokyo Stock Exchange Tokyo Price Index Topix, Parkson Retail, OPAP SA and more

• Korea Investment & Securities announced the final competition rate for the tender offer of SM Entertainment by Kakao Group (8,333,641 shares of SM Entertainment at 150,000 won per share).
• The competition ratio of the tender offer was 2.2655436 to 1. Accordingly, the allocation ratio was set at 44.1395170%. 
• At the current price of 95,100 won, SM Entertainment’s shares are undervalued by about 25% to 45% over the next 6-12 months, in our view. 

• The review period for the Nikkei 225 (NKY INDEX) September rebalance ends end July. We highlight 3 potential inclusions and exclusions for the index.
• There are a few alternate adds that are interesting and their inclusion in the index could move things around a fair bit.
• Due to the large size difference between the potential adds/deletes, there will be a large funding trade with passive trackers needing to sell over 0.5x ADV on many index constituents.

• DPC Dash (1405 HK) raised around US$75m, after pricing its IPO at the bottom-end. 
• The company is the exclusive master franchisee for Domino’s Pizza in China, HK and Macau. DPC operated 604 stores across 17 cities, as of Feb 2023.
• In this note, we talk about the subscription levels and trading dynamics.

• The promoters of Patanjali Foods (PATANJAL IN) are looking to increase the firm’s public shareholding to the minimum required 25% imposed by SEBI.
• We had discussed about this in their effective re-listing FPO last year, and the deal has been well covered by media sources as well, thus it is very well flagged.
• While it would be a large one to digest, representing at least 62.1 days of the firm’s three month ADV, the deal will lift the remaining overhang on the stock.

• Seven & I has revamped its corporate board and announced an updated MTP that improves capital allocation. However…
• Activist investor ValueAct has turned hostile and is seeking to replace the President and three other directors
• The stock price has declined by 12% from its year high and we see substantial upside to our intrinsic valuation

• Consensus estimates suggest that Nitori Holdings (9843 JP)‘s gross margin will experience a sudden change affecting profitability for a few quarters, before returning to 6-8% below the long-term trend.
• We see no apparent reason for a drastic change in Nitori’s profitability and expect it to remain slightly below trend, in line with guidance.
• Nitori is expected to reach ¥140bn and ¥150bn OP for FY24 and FY25, with valuation at 13.3x and 12.4x OP. This is reasonable given Nitori’s rare history of low multiples.

• United Malt Group Ltd (UMG AU) has offered exclusive due diligence to Malteries Soufflet for its non-binding indicative proposal of A$5.00 per share, a 45.3% premium to the undisturbed price.
• The offer follows on from three previous undisclosed proposals. The offer is subject to several conditions such as due diligence, Board recommendation and FIRB approval.
• The presence of several substantial shareholders necessitates an attractive premium. The offer is attractive in comparison to historical share prices and peer multiples. 

• Fujitec’s board composition was above average of Japanese companies in form. This was an opportunity to see an example of a board that is formally structured but not actually functioning.
• Bringing manager’s buddy on as an “independent director” is not likely to contribute to sustainable growth in corporate value.
• If domestic institutional investors, including passive funds, vote according to the will of the company, it will lead to stagnation of the substance of corporate governance in Japanese companies.

• Parkson Retail Group Ltd (Parkson) is a department store operator with 19 years of operating history in China.
• With an extensive network of 50 stores in 36 cities in China under the “Parkson” brand, the Group is one of the largest store operators.
• It targets the middle- and mid-upper-end of the Chinese retail market, with most of its revenues derived from concessionaire sales (90% of total revenues), while direct sales account for the rest.

OPAP’s FY22 results benefited from the ongoing retail recovery post COVID, and a still-growing contribution from online (despite the tough comparative) as the company’s enhanced offering attracts growing customer numbers. The higher-than-expected profit, despite relative disappointment about Q422’s revenue due to the FIFA World Cup, reinforces management’s cost control credentials against a background of higher external cost pressures. Management’s guidance for further profit growth in FY23 and an undergeared balance sheet should be supportive of high cash returns.