Brief Industrials: ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default and more

In this briefing:

1. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default
2. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach
3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed
4. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook
5. Yellow Cake (YCA) – Great Idea, Wrong Time!

1. ­­Asian Credit Monitor: Infrastructure Leasing & Financial Services – INR Bond Default

We chose to study Infrastructure Leasing & Financial Services Ltd (ILFS)’s default case. The company is engaged in infrastructure development and financing activities in India. Since the start of June 2018, the company has defaulted on a series of payments, resulting in rating downgrades. More recently, in January 2019, ILFS’ affiliated company Jharkhand Road Projects Implementation Company failed to pay INR760m due to its lenders. This resulted in CRISIL downgrading the bonds to D, which amounts to junk status. ILFS is one of the most important companies in the Indian infrastructure space and this default indicates signs of worry for investors.

2. LG Corp Holdco/Synthetic Sub Trade: Current Status & Trade Approach

• LG Corp’s 4 listed major subs take up 90% of its holdings. This makes these 4 subs a suitable candidate for a synthetic sub. I synthesize them based on their respective value % in the holdings with their sum as 100%: LG Chem (40.74%), LG H&H (31.36%), LG Elec (16.95%) and LG Uplus (10.96%).
• On a time horizon of 120 days, the Holdco/Synthetic Sub price ratio is currently at the widest gap in favor of Holdco. On a 20D MA, Holdco is now above +1σ. The prices began to diverge since early last month mainly due to LG Uplus’ nearly 20% price loss.
• We are now seeing some recovery signals on Korea’s local telcos. It is unlikely that LG Uplus will continue this radical price divergence. I expect to see a mean reversion on the LG Holdo/Synthetic Sub price ratio at this point. I’d aim at -0.5σ for a 3.7~4% yield. For the sake of hedge, I’d trade the entire synthetic sub at the ratio of 40:30:18:12 rather than LG Uplus alone.

3. Largest Panalpina Shareholder to Other Shareholders: Get Stuffed

A bit over a week ago Klaus-Michael Kühne – chairman of the eponymous freight forwarding major Kuehne + Nagel International A (KNIN VX) showed up in the Handelszeitung newspaper saying that he/Kuehne+Nagel had no interest in Panalpina as it was “hopelessly overvalued” and the company did not want to either overpay, or undertake a “megafusion” (large M&A) because of the difficulty in integrating companies. 

This was more than a little confusing.

Less than a week after Panalpina Welttransport Holding (PWTN SW) had changed its mind about the validity of its corporate governance structure (asserted when three of the major shareholders had questioned it) and on 19 November issued a press release saying Peter Ulber would not stand for re-election at next May’s AGM, Swiss newspaper Finanz und Wirtschaft carried an interview with K&N CEO Detlef Trefzger, who said they were interested in pursuing tie-up talks. One investment bank – which has for years issued a list of likely takeover stocks in the sector – noted in response that K&N was on the lookout for transformational M&A.

Furthermore, K&N seemed like a decent fit. K&N is larger, but it needs scale in its weakest segment, which is Asian air cargo forwarding. Interestingly enough, that happens to be Panalpina’s strong point – that’s where it gets almost all of its OP. With K&N efficiency in Europe, and Panalpina branding and efficiency in Asia, it is a pretty great fit.

But Klaus-Michael Kühne indirectly controls 53% of K&N so one should take his opinion about the company quite seriously. So that left the DSV bid, which was in limbo. And the shares continued to trade above the €170/share proposed offer.

The New News

This morning, Panalpina offered a press release saying…

Panalpina confirms that the Ernst Göhner Foundation, Panalpina’s largest shareholder representing approximately 46% of the total share capital, informed the Board of Directors that it does not support the current non-binding proposal from DSV and that it supports Panalpina’s Board of Directors in pursuing an independent growth strategy that includes M&A.

According to its fiduciary duties the Board of Directors of Panalpina continues to carefully review the situation with its professional advisers. Further announcements will be made as appropriate.

The stock is down 7+% this morning, but is trading only 3% below DSV’s indicative offer, and 20.5% above where the stock was trading in mid-January before DSV’s indicative non-binding proposal. 

This doesn’t mean that there will be no deal, but it does mean there will be a lull unless someone else comes up with a more aggressive. 

At some point and some price, the fiduciary duty of the directors would almost certainly have to be “we should sell here.” It is obvious from this statement that for the Ernst Göhner Foundation, that price is higher, and perhaps materially higher.  If management wants to remain entrenched, and the Ernst Göhner Foundation is happy to entrench them, it may not matter what the directors would recommend because the Foundation would not need to sell the stake they have owned for almost 50 years.

The other info public today suggests this is perhaps an issue with non-economic inputs. And those are the toughest to fight against.

4. Last Week in GER Research: Softbank, TPG Telecom, Cstone Pharma, Ebang and Facebook

In this version of the GER weekly research wrap, we dig into the debt tender for Softbank Group (9984 JP) and assess the merger between TPG Telecom Ltd (TPM AU) and VHA. On the IPO front, we initiate on CStone Pharma (CSTONE HK) while we update on Ebang (EBANG HK) . Finally, we dig into the beat at Facebook Inc A (FB US) and assess whether there are further legs for the investment case. We also provide a list of upcoming catalysts for upcoming event-driven ideas. 

More details can be found below. 

Best of luck for the new week – Rickin, Venkat and Arun

5. Yellow Cake (YCA) – Great Idea, Wrong Time!

• Yellow Cake PLC (YCA LN) is a pure play on the uranium price
• Spot Price $28.90/lb U₃O₈ & L.T. Price remains $32/lb U₃O₈
• Share price trading at ~2% discount to NPV
• Despite recent production cuts, primary & secondary supplies cover world demand
• Est. surplus ~500ktU, representing six years of global primary production
• Global nuclear generation peaked in 2006
• Forecast world uranium demand to decline between 25% and 40% by 2050
• 1-year Target Price £1.98-2.02 ps NPV_4% assuming $24/lb U₃O₈
• 3-year Target Price £1.57-1.77 ps NPV_4% assuming $21/lb U₃O