Daily Indonesia: Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch and more

In this briefing:

1. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch
2. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables
3. Ramayana Lestari Sentosa (RALS IJ) – The Changeling – On the Ground in J-Town
4. Resource Export Earnings Repatriated / Sulawesi Flood / BTP Free / Tax IT / MRT / Electoral Agencies
5. Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship

1. Last Week in Event SPACE: Renault/Nissan, Bank Danamon, Kabu, Celgene, Intouch

Last Week in Event SPACE …

• The eventual unwind of tension may involve an increase in Nissan Motor (7201 JP)‘s stake in Renault SA (RNO FP) and a decrease in Renault’s stake in Nissan.
• After being in the works for two years (or more), a Mitsubishi UFJ Financial (8306 JP) / Bank Danamon Indonesia Tbk (BDMN IJ) deal has finally come to fruition. 
• Where there is smoke there is often fire. This smells like smoke in the rumoured negotiations between KDDI Corp (9433 JP) and Kabu.Com Securities (8703 JP).
• Bristol Myers Squibb Co (BMY US) talk up the Celgene Corp (CELG US) deal, but remain tight-lipped on regulatory filings. 

• Intouch Holdings (INTUCH TB) pops on rumours of a government-backed takeover of Thaicom Pcl (THCOM TB).

• Plus CCASS movements and expected upcoming events for key M&A transactions.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

Bank Danamon Indonesia (BDMN IJ) (Mkt Cap: $6.2bn; Liquidity: $3.1mn)

In December 2017, Mitsubishi UFJ Financial (8306 JP) launched a complicated three-step process to acquire up to 40%, then up to 73.8% (or more) in BDMN, five years after DBS’ aborted attempt to obtain a majority in the same bank. Mid-week, local papers announced the planned merger between BDMN and BNP with shareholder vote for both banks 26 March 2019 (record date 1 March) and effective date 1 May 2019.

• It looks like this is almost completely bedded down. MUFG has a good relationship with Indonesian regulators and it would not have arrived at this Step 3 without pretty clear pre-approval indicated. 
• The result is an effective Tender Offer Trade at IDR 9,590/share for the float of BDMN. With shares up 8% the day of the announcement, there was another 6+% left for payment in three months and a week which comes out to 25.4% annualized in IDR terms through the close. Travis thought this is an excellent return for the risk here.
• Indonesian takeover procedures generally require a Mandatory Takeover Offer procedure when someone goes over a 50% holding. But banks being bought by foreigners are a different category and bank takeovers are regulated by the OJK. The upshot is that if you tender, you will get the Tender Offer consideration. And if EVERY public shareholder tenders, MUFG will have to conduct a selldown of 7.5% within a very short period, and a selldown of 20% within 2 years or up to 5 years (a virtual IPO when it comes), in order to meet the free float requirements.

(link to Travis Lundy‘s insight: BDMN/BBNP Merger Leads to BDMN Buyout Arb)  

Propertylink Group (PLG AU) (Mkt Cap: $497mn; Liquidity: $2.3mn)

ESR has now declared its Offer for Propertylink “to be best and final“, and the Offer has been extended until the 28 February (unless further extended).  After adjusting for the interim distribution of A$0.036/share (ex-date 28 December; payment 31 January), the amount payable by ESR under the Offer is A$1.164/share, cash. The Target Statement issued back on the 20 November included a “fair and reasonable” opinion from KPMG,  together with unanimous PLG board support.

• The next key event is CNI’s shareholder vote on the 31 January. This is not a vote to decide on tendering the shares held by CNI in PLG into ESR’s offer; but to give CNI’s board the authorisation to tender (or not to tender) its 19.5% stake in PLG. 
• Although no definitive decision has been made public by CNI, calling the EGM to get shareholder approval and attaching a “fair & reasonable” opinion from an independent expert (Deloitte) to CNI’s EGM notice, can be construed as sending a strong signal CNI’s board will ultimately tender in its shares. According to the AFR (paywalled), CNI’s John Mcbain said: “We want to make sure when we do decide to vote, if we get shareholder approval, the timing is with us“. 
• Assuming the resolution passes, CNI’s board decision on PLG shares will take place shortly afterwards. My bet is this turns unconditional the first week of Feb. The consideration under the Offer would then be paid 20 business days after the Offer becomes unconditional. Currently trading with completion in mind at a gross/annualised spread of 0.8%/6.7%, assuming payment the first week of March.

(link to my insight: Propertylink – CNI Shareholders To Vote On ESR’s Final Offer)  

 Shinmaywa Industries (7224 JP) (Mkt Cap: $1.2bn; Liquidity: $0.5mn) 

The company announced a Tender Offer to buy back 26.666mm of its own shares at a roughly 10.5% premium to last trade.  That’s a big tender offer. It is ¥40bn and 29.0% of shares outstanding.  Shinmaywa prepared this well because they rearranged their holding grouping to be all held under corporate entities (in many situations, they hold under personal names). For some of us, that should have been a clue.

• The main purpose of this effort is to get rid of Murakami-san, but Travis’ back of the napkin suggests just a 25% gain for Murakami, which is small beer for an investor bullish on the company’s prospects. 
• The outright long prospects do not impress.  There are a lot of companies in the market with 3+% dividend rates and low PERs which are illiquid. The company will go into a net debt situation. That will likely cap future buybacks to the limit of spending this year’s net income. That would be big, but Travis expects with a high dividend, buybacks will be less likely. 
• Overall the business is OK, but it is unlikely to grow dramatically enough to warrant an ROE and margins which would make a price of 1.3-1.5x book appropriate in the near-term.  Travis expects the tender offer to go through, and expects the price to be a bit “sticky” at this level near-term.

(link to Travis’ insight: Shinmaywa Own Share Tender Offer at Premium)

New Sports Group (299 HK) (Mkt Cap: $233mn; Liquidity: $0.5mn)

Huarong-CMB network [HCN] play New Sports announced a cash or scrip offer, with the cash alternative of $0.435/share priced at a premium of 3.57% to last close. The Offeror (China Goldjoy (1282 HK) – another HCN play) has entered into an SPA to acquire 37.18% of shares out. Upon successful completion of the SPA, Goldjoy will hold 66.44% and be required to make an unconditional general offer for all remaining shares.

• The key condition to the SPA is Goldjoy’s shareholder approval. This should be a simple majority and the major shareholder, Yao Jianhui, has 41.9% in Goldjoy according to HKEx and page 23 of the Offer announcement.
• Despite the potential issues faced by New Sports, this is a very real deal, with financing in place for the cash option.

(link to my insight: Dubious Delisting Deals: New Sports, LEAP, China Singyes Solar)  

Kabu.Com Securities (8703 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

The Nikkei surprised everyone with an article saying KDDI Corp (9433 JP) was holding negotiations to acquire a stake of up to just under 50% in Kabu.com, which is the online brokerage entity of Mitsubishi UFJ Financial Group (8306 JP) with 1.1mn customers. 

• The idea is not a new one. The mobile telecommunications market in Japan is mature, and one of the few ways Type 1 telecom providers can grow is by adding content through the “pipes.” KDDI needs non-telecom revenue channels.  KDDI has a bank, and life insurance, and some investment in asset management channels. It needs more, and better. A broker with a bank attached is a pretty good way to get long-term investment and savings products to customers.
• Kabu.com is not the best one out there in terms of bang for buck. But KDDI already has a JV with kabu.com majority shareholder MUFG and another with kabu.com. If you could buy an online broker, you might choose to buy Rakuten or SBI, but you can’t. You have to buy the rest of the company with them.
• Kabu.com shares were bid limit up all day long after the Nikkei article and closed at ¥462, which is a 10+ year closing high.  You have to believe that KDDI is willing to pay a knock-out price to get this trade done. They may, but that is the bet. But Travis sees no impediment to the deal getting done.

(link to Travis’ insight: KDDI Deal for Kabu.com (8703 JP) Coming?)  

Kosaido Co Ltd (7868 JP) (Mkt Cap: $1.4bn; Liquidity: $3.7mn)

Printing and HR services company and funeral parlor operator Kosaido announced that Bain Capital Private Equity would conduct an MBO on its shares via Tender Offer, with a minimum threshold for success of acquiring 66.67% of the shares outstanding. The Tender Offer commenced on 18 January and goes through 1 Mach 2019. The Tender Offer Price is ¥610/share, which is a 43.8% premium to the close of the day before the announcement and a 59.7% premium to the one-month VWAP up through the day before the announcement. 

• While the pretense will be that the deal is designed to grow the funeral parlor business (which, given the demographics, should be a decent business over time), this is a virtual asset strip in progress. It is the kind of thing which gives activist hedge funds a bad name, but when cloaked in the finery of “Private Equity”, it looks like renewal of a business.

• It is a decent premium but an underwhelming valuation. Because of the premium, and its smallcap nature, Travis expect this gets done. If deals like this start to not get done, that would be a bullish sign. Investors will finally be taking the blinders off to unfair M&A practices.

• This is a small deal. It is meaningless in the grand scheme of things. But it is a deal which should not have been done at this price because better governance would have meant the stock traded at better than 0.4x book before the announcement. 

(link to Travis’ insight: Smallcap Kosaido (7868 JP) Tender Offer: Wrong Price But Whaddya Gonna Do?)  

Celgene Corp (CELG US) (Mkt Cap: $60.5bn; Liquidity: $762mn)

Bristol Myers Squibb Co (BMY US) announced earnings for 4Q18 this morning followed by a conference call. Most metrics beat street expectations but the withdrawal of its application for Opdivo + low-dose Yervoy for first-line (NSCLC) lung cancer patients with high tumour mutation burdens after discussions with the FDA weighed on shares of BMY today. But for arbs who have the CELG/BMY spread set up, the positive comments on the Celgene acquisition provided further assurance of BMY’s commitment to the deal.

• There was, however, no discussion, in the prepared remarks or the Q&A, of the status of antitrust filings (nor was the question asked in the Q&A). The U.S. Hart-Scott-Rodino antitrust filing should have been made with the FTC/DoJ by January 16^th, 2019 according to the terms of the merger agreement, although this has not been publicly confirmed. The EU Competition web site does not show a competition filing having been made, and I would not have expected one so soon after the announcement of the deal.
• Closing prices equate to annualised rates of return of ~20% / ~26.5%, respectively, by John DeMasi‘s calcs, which is very attractive.

links to
John’s insight: Bristol-Myers Beats the Drum for Celgene in 4Q18 Earnings Call)
ANTYA Investments Inc‘s insight: Bristol Myers Squib – Reaffirming Its View on Celgene Corp 

Renault SA (RNO FP) / Nissan Motor (7201 JP)

Travis succinctly summarised the ongoing saga of governance and control that is the Renault/Nissan Alliance and speculates on the next chapter.

• Carlos Ghosn is likely in more trouble. The release last Friday by Nissan and Mitsubishi makes clear that Ghosn effectively signed contracts to pay himself a very large sum of money from the funds of the Nissan-Mitsubishi Alliance treasury in ways which contravened the rules established for that Joint Venture.
• The other news was that French visitors to Tokyo allegedly informed Japanese officials of their intention to have Renault appoint the next chairman of Nissan (as apparently, the Alliance agreement allows) and of the French State’s intention to seek to integrate Nissan and Renault under the umbrella of a single holding company. This is, the French state seeking to intervene in the governance of Nissan. That’s a no-no according to the Alliance Agreement.
• Nissan CAN react to any Renault breach of Nissan’s governance by purchasing shares to render Renault’s shares voteless. It can, for example, purchase economic exposure to Renault shares in the form of a cash-settled derivative, where it had neither voting rights nor the access to obtain them. It can do so quickly enough to react to anything that Renault can do by surprise, but it would be a clear breach of the Alliance Agreement to do so quickly.
• Travis reckons Renault and Nissan will not deliberately blow up their Alliance – they will work through their issues slowly and painfully. This will cause uncertainty among investors. IF the two companies ever sort out their relationship and decide to merge, the combined entity is cheap. Very cheap. If they blow up their Alliance, they are both going to turn out to be expensive.

(link to Travis’ insight: Nissan/Renault: French State Intervention Continues)  

TOC Co Ltd (8841 JP) (Mkt Cap: $778mn; Liquidity: $1.3mn)

Earlier this week, TOC announced a ToSTNeT-3 Buyback, to buy up to 4.6mn shares or 4.49% of shares outstanding at ¥778/share. With this latest buyback, TOC has bought back 30% of shares outstanding in the past 14 months after selling a large asset before that. This has resulted in 49.5% of the votes held by the Ohtani family and their namesake companies, another 30% will be held by cross-holders who are loyal to the family, about 8-9% of the company will be owned by passive investors, and 11-13% of shares will be held by everyone else. 

• The company’s largest and most famous asset is a near-50-year-old building. There have been suggestions of redevelopment (discussed in more depth here).  The two family members controlling almost 50% of the shares (plus the New Otani Company parent) are 72 and 66yrs old respectively. A 10-year redevelopment project might outlast them. The project might be better off in other hands. 
• The company has very long-held real estate assets – some of which are fully-depreciated and have very low land price book values. The share price is trading below Tangible Book Value. The shares trade at roughly 8x EBIT, which is very inexpensive for deeply undervalued and still earning real estate assets.
• The stock is illiquid, trading US$1.25mm/day on a three-month average, and sometimes a lot less, but there is considerable asset backing to these shares. Travis would want to be long here. 

(link to Travis’ insight: Another Semi-BIGLY Buyback at TOC: STILL an MBO Candidate)  

Intouch Holdings (INTUCH TB) / Advanced Info Service (ADVANC TB)

Both Intouch Holdings (INTUCH TB) and Thaicom Pcl (THCOM TB) gained ~10% earlier in the week in response to rumours of a government takeout of Thaicom. I estimate the discount to NAV at ~23%, versus an average of 28%, around its narrowest inside a year. The implied stub is at its narrowest inside a year. It was a decent move, translating to a Bt15.2bn lift in Intouch’s market cap, ~4.5x the value of the holding in Thaicom. That alone would suggest Intouch had been overbought. 

• That the Thai State-run CAT Telecom may take over Thaicom has a ring of truth to it. The military/government uses Thaicom, the only satellite operator in Thailand, and perhaps it is not (finally) comfortable with Singapore’s indirect interest in Thaicom via Singtel (ST SP)‘s stake in Intouch. It is an election year.

• The rumoured price tag is Bt8.50/share or ~28% premium to the undisturbed price. Even a takeover premium north of 50% has no material impact on Intouch, as Thaicom accounts for 2% of NAV/GAV. However, selling Thaicom will further clean up what is already a very straightforward single-stock Holdco structure. 

• Optically Intouch has run its course in response to these Thaicom rumours – Intouch has denied any definitive approach/agreement – however, if a sale unfolds, this may help nudge the discount marginally lower from here.

• Should CAT buy out Intouch’s stake, would it be required to make an Offer for all remaining shares? As the stake is above one of the key thresholds, (that is, 25%, 50% or 75% of its the total voting rights) it would be required to conduct a mandatory tender offer. But CAT may be afforded a partial offer, if Thaicom shareholders approve.

(link to my insight: StubWorld: Intouch Gains On Possible Sale of Thaicom)  

Briefly …

Sanghyun Park recommended an Orion Holdings (001800 KS) unwind trade after Orion Corp (271560 KS)‘s mid-week underperformance. By my calcs, Orin is trading at a 49% discount to NAV against a one year average of 48%.
(link to Sanghyun’s insight: Orion Holdco Trade: Current Status & Trade Approach)  

Samsung Electronics (005930 KS)

With SamE’s1P discount to Common at 16.61%, the lowest since mid-November last year, Sanghyun recommends to go long Common and short 1P with a short term horizon.

(link to Sanghyun’s insight: Samsung Electronics Share Class: Close Prev Position & Initiate New One Reversely)  

• LEAP Holdings Group Ltd (1499 HK) announced an MGO at $0.1585/share vs. the last close of $0.39, but above Anthony Wong’s (the seller) in-price of $0.1236/share. Like Wong, this new Offeror has no experience in LEAP’s business. The Offeror is primarily a vehicle owned by Xu Mingxing, who has experience in blockchain technology. However, a more detailed overview of the Offeror can be found on page 14 of the HKEx link, which provides details of no less than 15 individuals with stakes into the Offeror.

• M1 Ltd (M1 SP)‘s deal price now declared FINAL. Closing extended by two weeks to February 18th.
• The major shareholder of Qianhai Health Holdings (911 HK) has entered into a SPA, the completion of which would trigger a mandatory conditional offer at HK$0.25/share, a 0.3% premium to last close.
• Xingfa Aluminium (98 HK) is currently suspended pursuant to the Code. China Lesso Group Holdings (2128 HK), the second largest shareholder, acquired its shares in April last year. Xingfa was also subject to a (failed) scheme in 2017. 

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

• Source: HKEx

2. 2019 Energy Market Themes & Stocks with Exposure: Focus on Oil, Refining, LNG, M&A & Renewables

We examine some of the key drivers of the oil price and on the whole we are relatively bullish as although we see some risk to demand growth forecasts in 2019, in the absence of a recession we think that supply has more room to surprise to the downside. Geopolitics and financial markets will play a huge role in prices. We think that US oil supply growth will be lower y/y in 2019, OPEC+ compliance with cuts will be high and maybe helped by unplanned disruptions and base production will decline more rapidly than forecast. Companies will accelerate the sanctioning of new projects in 2019 and also will increase exploration spending, despite a number of years of poor success rates – overall the trend should be positive for the offshore oil service companies. We expect strong LNG supply growth in 2019 to hit spot pricing but still expect a large number of projects to be sanctioned helping the LNG engineering and construction companies. It will be a very interesting year for the refining industry as new regulations limiting shipping sulphur emissions should lead to a spike in diesel and to some extent gasoline margins towards the end of the year, helping complex refiners. Major oil companies will continue to embrace renewables as investors continue to push for companies to plan for the energy transition.

The main stocks that we come out positive on are Hess Corp (HES US), Valero Energy (VLO US), TechnipFMC PLC (FTI FP), Kosmos Energy (KOS US), Transocean Ltd (RIG US), Golar Lng Ltd (GLNG US) and Galp Energia Sgps Sa (GALP PL).

We are more negative on Cenovus Energy Inc (CVE CN) , Royal Dutch Shell (RDSA LN) , Cheniere Energy (LNG US); Eog Resources (EOG US) and Ecopetrol SA (ECOPETL CB) . 

3. Ramayana Lestari Sentosa (RALS IJ) – The Changeling – On the Ground in J-Town

Ramayana Lestari Sentosa (RALS IJ) continues to upgrade its stores and bring in new tenants, such as cinemas and F&B such as Starbucks, as its closes loss-making supermarkets. A revamped store is expected to see a 20-25% sales enhancement. It will transform a further 30 stores in 2019, including cinemas into the mix. 

The company continues to see strong performance from its consignment and fashion sales, with the drop off in supermarket sales lessening and this business no longer losing money. 

Ramayana Lestari Sentosa (RALS IJ) strives to be the leader in providing fashion for the masses and continues to use celebrities to endorse its own brands.

It has decentralised sourcing of products and incentivised stores managers at the EBIT level rather than for sales. It has also introduced a strict process for discounting, which is enhancing profitability.

The company will introduce a further 20 new consignment brands in 2019 to help grow this side of the business and move up the value chain. Shoes are one of the most important growth categories. 

Ramayana Lestari Sentosa (RALS IJ) is in the midst of a significant metamorphosis, which could see the company truly realise the value of its nationwide franchise, and move up the value to become less reliant on Lebaran sales. It continues to transform its store portfolio, introducing more consignment vendors and complementary tenants into its stores to increase footfall. According to Capital IQ consensus, the stock trades on 18.3x FY19E PER and 17.3x FY20E PER, with estimated EPS growth of +9% and +6% for FY19E and FY20E respectively. These growth expectations look to be conservative given the positive direction that management is taking both on its merchandising, brands, and tenant mix. 

4. Resource Export Earnings Repatriated / Sulawesi Flood / BTP Free / Tax IT / MRT / Electoral Agencies

Politics: Corruption moved to the fore of campaign sparring, as National Mandate Party (Pan) founder Amien Rais accused President Joko Widodo of “crimes of omission”.  The attack may reflect mounting grounds for concern about the poll position of Pan, which risks suffering exclusion from the next parliament.  Prabowo Subianto and his campaigners continue to issue vague insinuations, rather than highlighting the plain fact that four active investigations are embroiling Widodo‑government ministries (Page 2).  Basuki Purnama left prison and asked to be called ‘BPT’.  Megawati’s cool treatment of the former Jakarta governor reflects her diffidence about championing pluralism (p. 3).   

Disasters: Flooding has killed dozens and displaced thousands in 10 districts of South Sulawesi, including Makassar.  The governor faults past management of watersheds (p. 4). 

Electoral System: Yet again, the State Administrative Court (PTUN) has contradicted the General Election Commission (KPU), putting the latter at odds with the Election Oversight Agency (Bawaslu) in a case pertaining to Oesman Sapta Odang (OSO), the Hanura chair who is speaker of the Regional Representatives Assembly (DPD).  Although OSO is disreputable, Hanura is tiny and the DPD virtually powerless, the case nonetheless poses risks for the KPU’s prestige and effectiveness (p. 5). 

Justice: The spiritual leader of the former terrorist organization Jemaah Islamiyah (JI), Abubakar Baasyir, has not yet won release.  He must first issue a written statement declar­ing loyalty to the Republic of Indonesia and the pluralist state ideology Pancasila (p. 7).

Policy News: The president finally enacted a long-planned regulation to require natural-resource exporters to recycle their foreign-exchange earnings through domestic banks.  Some coal producers complain that the move conflicts with the terms of their offtake-and-financing agreements.  But the measure holds promise for rectifying the tight onshore dollar liquidity that has long rendered the rupiah highly volatile (p. 9).  A new tax IT system is undergoing procurement, with full deployment targeted for 2023 (p. 11).

Jakarta: The March opening of the MRT – and all 13 stations – is on schedule (p. 12).

5. Monthly Geopolitical Comment: Too Early to Expect Lasting Improvements in US-China Relationship