In this briefing:
- Vodafone Idea Needs a 55% Price Increase to Return to Viability
- Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
- Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
- WTI 59.50 Top and Turn Target
- Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
1. Vodafone Idea Needs a 55% Price Increase to Return to Viability
Underlying profitability continues to deteriorate at Vodafone Idea (IDEA IN) (IDEA). Chris Hoare has updated his liquidity analysis, and estimates that IDEA needs prices to rise by over 50% to hit cash flow break-even in the medium term. That needs market behavior to change from Jio in particular. Bulls will point to IDEA’s current capital raising and the large capital raising planned at Bharti Airtel (BHARTI IN) as signalling a possible end to hostilities. However, the math at IDEA is such that even a $3.5bn injection gives only temporary relief. What they really need are price increases. Without them (and even with the capital increase), Chris thinks IDEA runs out of cash in about 2 years. We retain our Reduce recommendation and cut our price target to INR16.
2. Yokogawa Electric (6841 JP): A Less Risky Investment in LNG Engineering
Yokogawa Electric is one of the world’s leading suppliers of distributed control systems (DCS) used in the LNG, oil & gas, petrochemical and other industries. It is particularly strong in LNG, having provided control systems for dozens of liquefaction trains, LNG carriers and re-gasification plants.
Unlike Chiyoda Corporation (6366 JP) and JGC (1963 JP), which depend on a small number of large engineering, procurement and construction (EPC) orders, which can be as large as ¥500 billion, Yokogawa only rarely receives an order as large as ¥10 billion and most of its orders are less than ¥1 billion. It is geared primarily to ongoing investments and operating expenditures in its user industries, less exposed to highly variable orders for large LNG and other engineering projects, and relatively immune to cost overruns and other problems at projects gone wrong.
Margins have expanded over the past several years due to a combination of restructuring and technological advance. Unprofitable non-core businesses have been abandoned or sold, high-wage domestic employees retired, and administration, manufacturing and logistics rationalized. Enterprise and robotic process automation (RPA) software have been introduced and an Industrial Internet of Things (IIoT) cloud computing platform is under development. Top-line growth has been slow, but the operating margin has risen from from 5.0% in FY Mar-12 to 8.0% in FY Mar-18, and should reach 10% in FY Mar-21, in our estimation.
At ¥2,215 (Wednesday, March 13 closing price), the shares are selling at 23x our EPS estimate for FY Mar-19 and 20x our estimate for FY Mar-21. Projected EV/EBITDA multiples for the same two years are 9.8x and 8.2x. These and other projected valuation multiples are above their recent historical averages, but indicate upside potential of 20% or more if the anticipated upturn in new LNG investments materializes. Investors willing to take on more speculative risk should look at Chiyoda and JGC.
3. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.
4. WTI 59.50 Top and Turn Target
WTI’s bullish counter trend rally cycle from the touted low at 45 is maturing and we are hunting for a fresh high to turn from long to short WTI. A peak in oil would align with a softer economic cycle in the next quarter.
Price triangulation is touted as a tactical bullish breakout pattern that will induce a fresh high near targeted dual projection/retracement. This rise is viewed as a more exhaustive rally that will begin to run out of steam with risk of a fade near 58-59. This is a tradable upside move.
RSI dual tops have show high confidence in market peaks from early 2018 and a final push higher out of the triangle bull flag would get us back to the 70 top resistance to nail down a double top. It is this dual top and MACD resistance that worn of an intermediate peak for oil into strength.
Energy shares are underperform oil and a frequent cycle leader to an oil peak.
5. Geo Energy (GERL SP): Recovery in Coal Price from 4Q18 Bottom; Continue to Wait for M&A Action
Geo Energy Resources (GERL SP) reported weak 4Q18 results late last month. The reason for the 5M USD net loss in 4Q18 was mainly due to Chinese import restrictions for Indonesian coal in November and December last year. With the import quota removed as of January ICI4 coal prices have rebounded from +/-30 USD/ton late 2018 to 40 USD/ton this week.
Geo remains in deep value territory (3x EV/EBITDA) as the company still has over 200M USD+ in cash it raised from a 300M USD bond placing almost 18 months ago. While the CEO announced plans to organize a HK dual listing in 1H19 this cannot materialize unless management can execute on a significant acquisition opportunity it has been considering for the last twelve months. With Indonesian elections coming up next month the hope is that clarity on this potential transaction can be sorted by late 1H19.
While Europe is obsessed with Climate Change doomsday scenarios being shouted around by school-skipping teenagers, the reality is that three out of four of the most populated countries in the world (China, India and Indonesia) will remain heavy users of coal for decades to come. With cleaner coal technology being the key differentiator how much pollution is emitted.
My Fair Value estimate (Base case) remains 0.35 SGD or 89% upside. Please recall, Macquarie paid 0.29 SGD for a 5% stake in November 2018 and had warrants issued to it at 0.33 SGD.
Get Straight to the Source on Smartkarma
Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.