In this briefing:
- Metropolis Healthcare IPO – Fairly Valued, at Best
- The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
- Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
- Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
- India Consumption: More Signs of a Widening Slowdown
1. Metropolis Healthcare IPO – Fairly Valued, at Best
Metropolis Health Services Limited (MHL IN) (MHL) plans to raise around US$175m in its Indian IPO via a sell down of shares by the promoter and private equity owners. MHL is one of the largest diagnostic chains in the country.
In my previous insight, Metropolis Healthcare Pre-IPO Quick Take – Steady Performance but Growth Lagged Network Expansion, I analyzed MHL’s recent financial performance and compared it with its listed peers, Dr Lal Pathlabs (DLPL IN) and Thyrocare Technologies (THYROCAR IN).
In this insight, I’ll run the deal through our IPO framework and comment on valuation.
2. The Dollar IS the Story; Gold Confounds, A Brexit Rabbit Hole; EUR Punished
- The dollar IS the story
- EUR punished for negative yields
- Chasing Brexit down a rabbit hole
- Gold confounds
- Bitcoin at an interesting juncture
The fact that the dollar has strengthened despite the dovish turn at the Fed this year and the significant fall in US rates and bond yields has confounded many analysts.
3. Screening the Silk Road: (Small-)Mid Cap Free Cash Flow
In April 2018, we published a FCF screen with the sole aim of identifying potential names which could prove to be strong candidates in a Small-Mid Cap portfolio. We move to update this list with a strong bias to the mid-cap stocks appearing.
This screen performs well with markets where the value style is in favour. Given the market appears to be trending back to this style, we believe the Small-Mid Cap universe should capitalise on this over the next 12-months. We identify within the screen some high trading liquidity deep value candidates across the Asia Pacific universe.
Our updated 2019 list of names contains 17 stocks, with a more diversified spread of countries and sectors, compared to April 2018. A point to note is that basic material stocks have strengthened within the composition. Interestingly, the style of stock which has increased its presence amongst the list is the contrarian style, highlighting an opening up in value.
4. Climate Action – School Strikes Hit a Spot, Carbon Emitters Face Heat. Investors Take Note
On Friday, March 15th, an estimated 1.6 million students in over 120 countries (source: Time magazine) walked out of classrooms and took to streets demanding radical climate action. Climate change activism rarely grabbed headlines or wider public attention as it is doing now. Rising climate activism will continue to train the spotlight on industries/businesses associated with carbon-emission making it increasingly difficult for them to expand capacities or secure funding. Large institutional investors – sovereign funds, pension funds, insurance companies – have begun to incorporate climate risk into investment policy and are limiting exposure to sectors that directly contribute to carbon emissions – primarily coal, crude oil producers and power plants based on them. Expect sector devaluation; active investors may well look beyond juicy near term earnings and dividend yield.
Even as scientists and meteorological organisations keep warning of dire consequences unless concrete action is taken to limit carbon emissions to stall climate change, political establishment/regulators in most countries are in denial while others are doing little more than lip service. If so, should corporates care? even though businesses are the ones that play a direct role in escalating carbon emissions. With rising consumer awareness and activism, several industries associated with carbon emissions are already facing operational and funding challenges; we believe, it pays for all businesses to be above par on ‘climate action’ – it would be in their own self-interest, not just general good. And do Investors bother? Under the aegis of Climate Action 100+, an investor initiative with 320 signatories having more than USD33 trillion in assets collectively under management, they have been engaging companies on improving governance, curbing emissions and strengthening climate-related financial disclosures. It has listed out Oil & Gas, Mining, Utilities and Auto manufacturers as target sectors. Investors have already been making an impact – by vote or exit. It sure makes logical sense to effect positive change and minimise climate risk when you have a long term investment horizon.
In the detailed note below we
- discuss how rising consumer/investor activism and/or political/regulatory changes are posing challenges to key sectors –Coal, Oil & Gas, Automobiles/Aviation, Consumer goods – that are associated with carbon emissions.
- analyse how rising climate activism is negatively impacting growth prospects and valuation of companies in these sectors.
- highlight the opportunities for businesses to capitalise on changing consumer preferences for products that minimise carbon footprint and differentiate themselves by being on the right side of climate action.
- present a quick primer on climate change and lay down the key facts and data on climate change as presented by World Meteorological Organisation, NASA and IPCC.
However, the report does NOT discuss potential risks to businesses from the aftermath of Climate change. Unlike our recently released report Fast Fashion in Asia: Trendy Clothing’s Toxic Trails – Investors Beware that looked into sector’s environmental violations and attempted to estimate potential earnings/growth/valuation downside as leading textile players adopt sustainable practices, we believe the impact of unpredictable climate change poses a threat that is not easy to identify or quantify.
5. India Consumption: More Signs of a Widening Slowdown
- Bank lending to NBFCs has been flat since Oct-18 after rising by ~ Rs 1 tn in the previous 5-month period. Debt mutual fund holdings in NBFCs have declined 20% over Sep-18 to Feb-19. CP issuances by NBFCs have also fallen to a fraction of the size before IL&FS defaulted.
- This is percolating through the economy slowing down the flow of overall credit.
- 2-W channel inventories are nearly twice the normal level for some players
- M&HCV production has been cut 20-25% YoY in 4QFY19
- Tractor volume growth is likely to be in single digits in FY20
- Air conditioner and refrigerators are seeing steep discounting owing to large inventory build-up on delayed summer
- FMCG players indicate both rural and urban demand weakness including in the modern retail segment
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.
