In this briefing:
- Harmonic Drive: Measuring the Potential Downside Risk
- Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
- S&P 500 and S&P 600 Testing Resistance
- Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership
1. Harmonic Drive: Measuring the Potential Downside Risk
With Harmonic Drive Systems (6324 JP) having rebounded as much as 56% from its trough this year, risk-reward looks decidedly less attractive now. While we had been somewhat constructive on the name due to order looking like they have a hit bottom, a closer analysis of the breakdown of orders has us thinking that a potential rebound could underwhelm relative to the markets revenue expectations and that the stock’s premium multiple could leave it more vulnerable than more modestly priced peers.
2. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
Sunpower Group (SPWG SP) has seen an incredible transformation over the past 24 months. Since the entry of two respected PE funds (DCP and CDH) the company has de-emphasized its historical M&S business and pushed full throttle on its GI (Green Investments) portfolio.
The efforts of this shift to GI are now bearing fruit with FY18 revenues increasing by 66% to 3.26 billion RMB, EBITDA rising by 113.5% to 496 million RMB (15.2% EBITDA margin) and underlying NPAT rising by 87% to 268 million RMB. Most importantly, the quality and visibility of its cash flows have improved.
It is rare to find companies that give you 3-year NPAT forecasts but Sunpower did this with the issuance of its second CB late 3Q18. Instead of using stale sell-side consensus forecasts we now focus on these public forecasts to guide investors what Sunpower’s fair value is depending on the PE multiple that investors apply.
My Fair Value estimate of 1 SGD remains unchanged (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus).
3. S&P 500 and S&P 600 Testing Resistance
We believe the market is at short-term overbought extremes and is contending with resistance. Resistance levels we are monitoring include 2,810-2,817 on the S&P 500 and the 200-day moving average on the S&P 600 Small Cap index… see charts below. We would welcome some consolidation or a mild pullback which would be a healthy correction of the current extended market conditions.
In today’s report we highlight attractive Groups and stocks within Manufacturing and Technology: Construction Equipment, Industrial Rental Equipment, Data Storage Solutions & Devices, Small-Cap, and Software, Financial Mgmt. Solutions.
4. Korean Stubs Spotlight: Focus on Diverging Share Prices and Changes to Foreign Ownership
In this report, we provide the one year share price comparisons of the holdcos and the opcos in both table and chart formats as well as changes to the foreign ownership stakes of these companies YTD. Significant, rapid changes to the foreign shareholdings of these companies sometimes lead to opportunities in the holdco/opco pair trades.
Among these 30 pair of companies, five pairs in particular are interesting where the difference in their share prices have diverged significantly in the past year (by 30% or more). These five pairs of companies include the following:
- Hyosung Corp vs. Hyosung Advanced Materials
- BGF Retail vs. BGF Co.
- Doosan Corp vs. Doosan Heavy Industries Corp.
- Cuckoo Holdings vs. Cuckoo Homesys
- Orion Holdings vs. Orion Corp
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