Brief Industrials: Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town and more

In this briefing:

1. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town
2. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
4. The Mechanics of the Panalpina Vote

1. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town

A visit in Jakarta to the Blue Bird (BIRD IJ) office was well-timed as the company is close to the conclusion of two corporate actions, as well as an interesting extension to its relationship with Go-Jek Indonesia (1379371D IJ).

Both acquisitions are synergistic with its existing business and represent long-term opportunities rather than an immediate significant boost to earnings.

The company’s underlying fundamentals continue to improve with fleet utilisation up versus last year in 4Q18, as was the average revenue per taxi.

The company continues to see the benefits of its tie-up with Go-Jek, which will soon morph into something even more significant.

Blue Bird (BIRD IJ) remains an interesting way to play the rising levels of affluence amongst the rising middle classes in Indonesia. the company is close to completing two corporate actions including a new venture into the car auction business with Mitsubishi UFJ and the acquisition of an intercity bus company. It is also close to signing an extension and expansion of its relationship with Go-Jek, which will help to cement its position in the online ride-hailing space. Underlying fundamentals continue to improve both in terms of fleet utilisation and average revenue per taxi. According to Capital IQ consensus, the company trades on  14.9x FY19E PER and 13.7x FY20E PER, with forecast EPS growth of +16.2% and +8.9% for FY19E and FY20E respectively. The near-term completion of two corporate actions and an extension of its agreement with Go-Jek Indonesia (1379371D IJ) should provide positive catalysts for the share price coupled with improving ridership, average revenue per taxi, and fleet utilisation.

2. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

3. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

4. The Mechanics of the Panalpina Vote

This insight is a kind of public service announcement for investors looking at the Panalpina Welttransport Holding (PWTN SW) situation as it might affect the likely upcoming Extraordinary General Meeting that the Ernst Göhner Foundation requested of Panalpina, and to which Panalpina has acquiesced. The agenda item of the EGM requested is to implement a “One Share One Vote” system. 

Activist Cevian has come out against the proposal by the Ernst Göhner Foundation. This sounds counterintuitive except for one odd legal angle.

The Foundation’s ostensible goal is to ensure that the vote is “fair” so that Cevian and Artisan Partners can vote their full stake after having been capped at 5% for many years because of Article 5 in the Panalpina Articles of Association. The more cunning aspect of this is that, as per the Panalpina announcement…

In a letter addressed to Panalpina’s Board of Directors, minority shareholder Cevian had recently questioned the practice to fully admit EGF with all its voting rights at the Company’s shareholders’ meetings. Cevian took the position that the voting restriction of 5% must be applied to all shareholders and, hence the voting power of EGF must be reduced to 5%. An ad hoc board of independent directors (BoiD) consisting of five directors (without representatives of EGF and Cevian) and chaired by Thomas E. Kern, is currently evaluating the situation based on expert opinions submitted by each of EGF and Cevian and based on independent expert advice obtained by the BoiD.

The Foundation knows that their position may be legally weak, and their position could be capped at 5% rather than grandfathered. Indeed, the “independent expert advice” obtained by Cevian includes the opinions of “four leading Swiss stockbrokers” who had come to the conclusion that the Foundation had been unlawfully excluded from the 5% cap, according to this Reuters article on the 26th. The company states that the Ernst Göhner Foundation is and has been exempted from this rule because of “grandfathering” because it owned the shares before the implementation of the rule, but there is nothing in the Articles of Association which grants the EGF that exemption. The full Cevian press releases in English and German are available through their spokesperson and are attached below (at the bottom of the insight).

Another Reuters article discussed the situation, with quotes from Cevian, and added this tidbit at the end.

An ad hoc board of independent directors consisting of five directors, without representatives of EGF and Cevian…will review the proposal and decide how the voting on it will take place at the extraordinary general meeting,” spokeswoman Edna Ayme-Yahil said.

Investors should note…..

The last paragraph of Article 5 of the Panalpina Articles of Association says “No entries shall be made in the register of shareholders following the dispatch of the convocation to the Shareholders’ Meeting until the day after the Shareholders’ Meeting.” This is a little different than is the case for many large Swiss companies where they give the convocation and investors may subsequently register their shares.

In Panalpina’s case, if you are not registered by the time the company sends out the convocation, there is no requirement for the company to admit your shares to the register even if there is plenty of time to do so (though the Board can make exceptions to the entry restriction).

For investors interested in or concerned about the situation, there are measures which may be advisable to implement ASAP to ensure you can vote.