In this briefing:
- Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation
- Global Solar Energy Stocks Are Bottoming
- Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched
- UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E
- Recruit Holdings Reports Strong 3Q Results; Remains Expensive
1. Doosan Heavy & Doosan E&C Rights Offers: Situational Assessment & Offering Size Estimation
- Doosan Engineering & Construction (011160 KS) is considering a ₩400bil rights offer. At a usual 30% discount to the last closing price, this ₩400bil rights offer will issue a total 372M new shares. This is a 370% capital increase with a 79% share dilution. Per share allocation is 3.82.
- Doosan Heavy Industries (034020 KS) is left with no other option but to pursue its own rights offer as well. Considering Doosan Corp (000150 KS)‘s financial situation, Doosan Corp may be able to inject only about ₩100bil into Heavy.
- Factoring in this ₩100bil for a a 34.04% stake, we can estimate the size of Heavy’s rights offer at about ₩300bil. At a 30% discount to the last closing price, this ₩300bil rights offer will issue a total 45.5M new shares. This is a 35% capital increase with a 26% shareholding dilution. Per share allocation is 0.35.
2. Global Solar Energy Stocks Are Bottoming
In today’s report we highlight the following actionable solar energy names: First Solar (FSLR), SolarEdge Technologies (SEDG), GCL-Poly Energy (3800-HK), Meyer Burger Technology AG (MBTN-CH), Enphase Energy (ENPH), JinkoSolar Sponsored ADR (JKS), TerraForm Power (TERP), Beijing Enterprises Clean Energy Group (1250-HK), GCL New Energy (451-HK), and Viatron Technologies (141000-KR).
3. Minebea-Mitsumi Underpriced Tender for U SHIN (6985 JP) Launched
Three months ago, Minebea Mitsumi (6479 JP) announced that it would launch a Tender Offer for U Shin Ltd (6985 JP) and it would take just under three months until the approvals were received and it could officially start the Tender Offer process. It took a couple of weeks longer, as proposed by U Shin’s update on 30 January, which indicated anti-trust approvals had been received.
The background to the Tender Offer was discussed in Minebea Mitsumi Launches Offer for U-SHIN in early November.
My first conclusion in November was that this was the “riskiest” straight-out non-hostile TOB I had seen in a while.
This is a wide-open deal. The buyer owns 1 round lot. The largest holder is an activist. The deal is being proposed at not such a super-high multiple (8x forecast FY earnings for the year ending 31 December 2018) and 4.9x EV/EBITDA. It is 3.7-4.0x when taking into account the 67 different equity positions they held at the end of last year, some of which they have recently liquidated.
from (8 Nov 2018) Minebea Mitsumi Launches Offer for U-SHIN
In the interim, the activist dropped their position in half (necessitating a filing of a Large Shareholder Report for going below 5% – and they may have completely liquidated by now), and an investment bank has gone above 5% since then.
The financial advisory “valuations” at the time were more than questionable. A discussion of the valuation levels can be found in the previous insight (I don’t need to repeat them here, just go there).
Today, the company raised its OP and Ordinary Income forecasts for the year ended 31 December 2018, but lowered its Net Income forecast by 98.8% due to writeoffs at many overseas facilities. Then the promptly reported earnings (also only in Japanese) a few seconds later (only available in Japanese).
Op is now forecast to drop 2% in 2019 vs 2018, but the 2019 forecast is 11+% higher than the 2018 forecast was just yesterday. The forecast for Net Income is ¥99.35/share, putting the deal at <10x forecast PER. And even less if one considers that the cross-shareholdings could be reduced.
The New News
Today Minebea Mitsumi announced the launch of its Tender Offer, to commence tomorrow, at the same price as originally planned (¥985/share), and to run for 38 days.
This deal is still perplexing to me. It’s easy enough from an industrial standpoint. I mean, why not buy relatively cheap assets then see if you can cross-sell or assume some attrition. But for investors… I wonder why they put up with this.
4. UG Healthcare: Weak 2Q19 Driven by One-Off Issue, If 10% NPM Achieved in FY20 Trades at 4x FY20 P/E
UG Healthcare (UGHC SP) showed good topline growth (+15%) but very weak bottom-line performance (-73%) in the second quarter of FY19 (financial year ending June). Weak bottom-line results were caused by delays and cost overruns in opening its latest factory expansion.
While the latest results are a setback I remain a believer in the UG Healthcare story. The eventual goal of reaching 100M SGD in revenues and getting a 10% NPM remains unchanged by the end of FY2020. Should the target be achieved the company trades at 4x 2020 P/E. Competitors in Malaysia trade at mid-teens multiples (or higher) so UG should deserve a significant re-rating the coming two years. Fundamentally, nothing has changed to alter my bear case (0.24 SGD), base case (0.39 SGD) or blue-sky scenario (0.62 SGD) analysis. Liquidity remains an issue at less than 25K SGD/day.
5. Recruit Holdings Reports Strong 3Q Results; Remains Expensive
Recruit Holdings (6098 JP) reported its 3Q FY03/19 financial results on Wednesday (13th February). Recruit’s revenue and EBITDA were up 6.0% YoY and 11.1% YoY respectively in 3Q FY03/19. This was mostly due to 1) consolidation of the results of Glassdoor Inc. (the company which operates the employment information website glassdoor.com), 2) steady growth in Japanese staffing operations and 3) growth in beauty and real estate app users during the quarter, partially offset by slowdown in global recruitment activity.
Despite its strong 3Q results and steady topline and bottom line growth over the forecast period, at a FY2 EV/EBITDA multiple of 16.0x, Recruit doesn’t look particularly attractive to us. Recruit’s internet advertising business and employment business peers, Yahoo Japan (4689 JP) and Persol Holdings (2181 JP) are trading at FY2 EV/EBITDAs of 6.8x and 7.5x respectively.
| FY03/18 | FY03/19E | FY03/20E |
Consolidated Revenue (JPYbn) | 2,171 | 2,327 | 2,478 |
YoY Growth % | 11.9% | 7.2% | 6.5% |
Consolidated EBITDA (JPYbn) | 258 | 288 | 312 |
EBITDA Margin % | 11.9% | 12.4% | 12.6% |
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