In this briefing:
- ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!!
- Shinetsu Buyback – Maybe More Than It Appears
- Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
- IPH Goes Hostile on Xenith
- Toshiba: King Street Round Two
1. ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!!
ITD Cementation India Ltd (ITDCIL) is one of the few pure-play infrastructure execution companies left in India, in the last decade the entire infra space in India has diversified into debt funded asset heavy infra ownership which has led to tremendous value destruction. The company is engaged in the construction of marine structures, highways, bridges & flyovers, metros, airports, hydro-tunneling, dams & canals, water & wastewater segment, industrial structures, buildings and specialist foundation engineering projects with presence across India. IDTCIL receives technological support from its parent company Italian-Thai Development Public Company Ltd (ITDPCL). ITDPCL has a presence across the globe and has expertise in the airport, Mass Rapid Transit System (MRTS), high-speed bullet train projects, marine projects among others.
In the last 12 months, ITDCIL has grown at 24% with revenue at INR 25.9 bn. EBITDA and PAT stood at INR 3.34 bn and INR 1.18 bn receptively with EBITDA margin and PAT margin at 12.9% and 4.57% receptively. EBITDA margins contracted by 174 bps and PAT margin expanded by 109 bps. During the same period EBITDA grew by 9% and PAT increased by 62.4%.
The company’s order book as of Dec’18 stands at INR 95 bn with 45 bn order inflow between Jan’18 to Dec’18 its Book to Bill ratio is 3.73 times.
Drivers:
India is an infra deficit country. In 2015, India spent about 5% of GDP on Infra and this expenditure needs to cost about 8.5% (Climate adjusted investment under high growth scenario of 7.8% GDP growth) over 2016-2030 and estimated infra spending though 2030 is expected to be USD 5.5 tn. Per the Global Competitive Index, India’s infrastructure score had increased from 3.4 out of 7 in 2008 to 4.2 points out of 7 in 2017. Being the fastest growing among large economies and infra deficit country, India offers enough opportunities for investment in the infrastructure sector.
ITDCIL has proven expertise in urban infra ( especially metro rail) and marine structures which are seeing a huge impetus in India with almost all major cities either building or planning to develop metro rails and significant investments going into developing port infrastructures and inland waterways through the Sagarmala, river cleaning through Namami Gange among others. The Government of India (GOI) is expected to spend about INR 8 trillion through Sagarmala and INR 200 bn through Namami Gange. ITD Cementation India Ltd is expected to be one of the beneficiary due to its experience in metro and marine segment.
The company is expected to grow at 65% in FY19 (15-month financial year) and is expected to register EBITDA margin of 12.4% and Profit margin of 4.26% with EBITDA at INR 4.3 bn and Profit at INR 1.57 bn. The company’s shares at the current price of INR 132 are trading at a PEx 19.21x its TTM EPS, 19.12x its FY19F EPS (calculated for 12 months) and 16.31x its FY20F EPS. The company’s ROE and ROA for the previous financial year stood at 11.81% and 3.05% respectively.
2. Shinetsu Buyback – Maybe More Than It Appears
On 12 March 2019 after the close, Shin Etsu Chemical (4063 JP)announced a share buyback program to buy up to 14 million shares for up to ¥100 billion. If it bought all 14 million shares, that would be 3.3% of shares outstanding. Simultaneously, it announced a ToSTNeT-3 buyback of 11,001,100 shares at today’s closing price of ¥9,090/share which if all bought would complete the buyback program.
As I write, the shares are up 4-6% in thin trading in the ADRs.
There was some speculation across the Street there would be a buyback because of slowing earnings expectations and a surfeit of capital, which was itself important because of the company’s lack of recent history of buybacks (the last and only time the company has bought back shares (to date) was a repurchase of 3 million shares for ¥13.6 billion in late October 2008 when things were hairy (and cheap)).
The shares are down over the past year, but the price in the past few days is not dramatically at the low end of the range of the past six months or so.
There may be some information in the context and structure of this buyback which tells you something different than people’s first reaction.
3. Chiyoda: Minor Updates About the Major Capital Infusion, Cost Overruns and Upcoming Orders
The key point of interest for investors regarding Chiyoda Corp (6366 JP) continues to be details surrounding its upcoming capital raise. The company has, since early November when it incurred these losses, offered scant details regarding the structure of the capital raise, except to note that the components would include additional loans and equity from industrial partners and most likely, main shareholder Mitsubishi Corp (8058 JP).
We visited the company to gather as much information as possible on the potential structure of the capital increase and to update the order outlook and reasons for further cost overruns.
4. IPH Goes Hostile on Xenith
Iph Ltd (IPH AU) has gate crashed Xenith Ip (XIP AU)/Qantm Intellectual Property (QIP AU)‘s marriage of equals, submitting a proposal (by way of a Scheme) for Xenith comprising cash (A$1.28) and IPH shares (0.1056 IPH shares) or A$1.97/share, 23.3% above the implied QANTM merger consideration.
Last November, Xenith and QANTM , both leading providers of IP origination services in Australia, announced a merger via an all-scrip scheme of arrangement, whereby Xenith shareholders will receive 1.22 QANTM shares for every Xenith share, or an implied value of A$1.598/share. QANTM and Xenith shareholders would own 55% and 45% of the merged group with a then pro-forma capitalisation of A$285mn. Pre-cost synergies are estimated at A$7mn/annum at the end of year three.
Xenith’s board unanimously recommended the merger to its shareholders.
IPH did not blink and on the same day as the Xenith/QANTM announcement, lobbed an unsolicited, indicative, preliminary, conditional and non-binding cash & scrip proposal to acquire QANTM at $1.80/share (including a a A$0.05 dividend) by way of a scheme, or a 42% premium to last close.
QANTM’s board rejected the proposal due to its highly conditional nature, significant execution risk, and that the offer undervalued the company. IPH countered those claims, spurring QANTM to counter those countered claims.
On the 13 February 2019, IPH bought a 19.9% stake in Xenith at $1.85/share (or ~A$33mn) from institutional investors, and further added that is does not support the QANTM scheme and intends to vote against it. In response, both Xenith and QANTM announced that neither had received a proposal from IPH. Xenith’s shares increased 20.3% to close at A$1.69/share.
The provisional date for ACCC s clearance of the QANTM/Xenith merger is the 21 March. The provisional date for IPH/Xenith is the 2 May. The QANTM/Xenith Scheme meeting is scheduled for 3 April with a 24 April implementation date. IPH’s proposal has an indicative implementation date of mid-July.
IPH’s proposal currently offers an implied value of $1.98 (65% in cash) against $1.85 for QANTM’s all-scrip offer.
The key risk to IPH’s proposal is ACCC’s consent. IPH, QANTM and Xenith are the only three ASX-listed intellectual property companies. IPH is the oldest, and the largest (in terms of revenue). However privately owned companies collectively hold a larger market share – and growing – compared to the three listcos. It is not apparent a merger between either of these two listcos would lessen IP service competition in Australia.
With IPH’s blocking stake, the QANTM/Xenith scheme will fail. Xenith should engage with IPH.
5. Toshiba: King Street Round Two
Yesterday, King Street sent a letter to Toshiba Corp (6502 JP) CEO Nobuaki Kurumatani, applying pressure by threatening to nominate alternative directors to the company’s board. The full contents of the letter can be found here.
King Street’s requirements for the new board are stated as:
Among other things, the new Board must:
(i) ensure management applies rigorous financial discipline to capital allocation decisions, including use of excess cash, determination of optimal capital structure and capital expenditure return requirements;
(ii) drive management to re-examine Toshiba’s business portfolio with a critical eye on competitive position, sector landscape, synergies available and profitable growth prospects;
(iii) direct management to evaluate non-operating and underperforming businesses and assets (while respecting that Toshiba may need to be engaged in certain activities important to Japan’s national security interests);
(iv) ensure that management attains global peer profitability levels at each business segment based on projections supported by robust, bottoms-up analysis; and
(v) instill a culture of accountability and ownership at all levels of the organization.
By and large these demands amount to, “follow the instructions in our previous presentation“. That presentation, while thorough in some respects struck us as being naively optimistic, as we noted in Toshiba: King Street Assumptions Look Exceedingly Optimistic.
Travis Lundy also commented on the presentation in Toshiba: King Street’s Buyback Proposals Lack Required Detail and Toshiba: King Street’s Valuation Analysis Is… Punchy?
Given developments in the intervening time period including a sell-down of about 27% of King Street’s initial stake at a price of ¥3,925 (some 64% below the “well over ¥11,000” per share they feel Toshiba is worth) according to Bloomberg, and a downward revision to OP guidance from ¥60bn to ¥20bn, we feel that there is little reason to change our assessment.
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