Brief Industrials: McMillan’s Offer For Eclipx Wobbles and more

In this briefing:

1. McMillan’s Offer For Eclipx Wobbles
2. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown
3. Chalet Hotels IPO Review – Backed up into a Corner
4. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal
5. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

1. McMillan’s Offer For Eclipx Wobbles

Thirty minutes after Eclipx (ECX AU) guided down its FY19 NPATA figure, Mcmillan Shakespeare (MMS AU) announced that the first court meeting to be held on the 1st February – which would consider the Scheme documents that are sent to ECX shareholders – will be rescheduled. No new date was announced.

As to ECX’s FY19 guidance:

• FY19 NPATA (net profit after tax and before amortisation) is expected to be broadly flat vs. FY18.
• 1H19 is expected to ~40% of FY19 NPATA.
• Certain equipment finance exposure has emerged in 1Q19, which will result in expected provisions of A$2.3mn and an allowance for further provisioning of A$0.8mn.
• FY19 net profit is expected to grow versus FY19 but this is “due to the average corporate tax rate for FY18 being 25% compared to the estimated FY19 corporate tax rate of 29%.”

The key MACs (Material Adverse Effect) under the SIA, means a specified event, which is reasonably likely to have:

a material adverse effect on the business, assets, liabilities, financial or trading positions, profitability or prospects of ECX taken as a whole; OR

the effect that the value of the net tangible assets of ECX is reduced by at least A$13mn, measured against the net tangible assets stated in the ECX audited FY18 financial statements;

the effect that the value of the annual NPATA of ECX is reduced by at least 10% measured against the NPATA stated in EXC’s audited FY18 financial statements. (my emphasis)

That word may prove to be significant.

But at a 20% gross spread to terms (ECX is down ~19% as I type) and trading bang in line with its undisturbed price, prior to Sg Fleet (SGF AU)‘s August proposal, the negative news surrounding the NPATA guidance and the MACs appears fully priced in.

2. Ebang IPO Preview: Balance Sheet Indicators Point to a Significant Slowdown

Ebang (EBANG HK) is a Chinese designer of bitcoin mining machines which are sold under the Ebit brand. Ebang refiled its draft prospectus with HKEX on 20 December 2018, but the IPO plans of cryptocurrency related companies are in a state of flux. Last week, the CEO of the Hong Kong Exchanges and Clearing, said that companies seeking to go public in Hong Kong should show consistency in their business models, in response to questions about the IPO applications of Bitmain Technologies Ltd (1374554D CH), Canaan Inc. (CANAAN HK) and Ebang.

3. Chalet Hotels IPO Review – Backed up into a Corner

Chalet Hotels Limited (CHALET IN) is looking to raise up to US$234m in its upcoming IPO.

Chalet Hotels (Chalet) is an owner, developer, and asset manager of luxury hotels. The company has grown its revenue and EBITDA at 15.8% and 22.8% CAGR from FY2016 to FY2018. The growth has been driven by the consistent improvement of its average occupancy rate which in turn drove RevPAR higher.

However, the company is embroiled in litigation with Hindustan Aeronautics (HNAL IN) which could result in the company incurring significant costs. Along with the impending renewal of the licensing agreement in 2020 and 2021, there is much to be worried about the company’s near-term outlook and its highly leveraged balance sheet may leave the company backed up into a corner.

In this insight, we will look at the company financial and operating performance, compare hotels’ operating metrics to the industry average, and compare its valuation to other Indian hotel peers. We will also run the deal through our IPO framework.

4. Hyundai Heavy Holdco Trade: Long Holdco / Short HHI (30%) & SKI (70%) On Aramco Deal

• Korea’s local news outlet reported that Saudi Aramco agrees to buy a 15~20% stake in Hyundai Oilbank Co Ltd (1082Z KS) in a pre-IPO deal. Aramco has reported priced Oilbank at ₩10tril. Hyundai Heavy Industries Holdings (267250 KS) is currently at a 50% discount to NAV. Assuming no change in Oilbank’s ₩10tril value reaffirmed by Aramco, this is like a 6%p drop in two months.
• At this much holdco discount, I’d go long HHIH on the Aramco deal. This will make enough cash injection to Holdco. Oilbank’s ₩10tril valuation stays intact despite the recent de-valuation of the local peers on falling oil prices.
• Holdco is basically 70% Oilbank and 30% HHI. I’d first pick Hyundai Heavy Industries (009540 KS) for 30%. The HHIH/HHI duo is at 20D MA. But on 120D horizon, they are pretty closer to the lowest. For the other 70%, I’d short SK Innovation (096770 KS). SK Innovation has been less price corrected lately compared with S Oil. On a 20D MA, the HHIH/SK Innovation duo is close to -1σ.

5. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm

Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces. 

Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.

In this issue readers will find:

Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.