In this briefing:
- Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines
- Samsung Electronics Share Class: Current Status & Trade Approach
- Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting
- Pasona Non-Grata
- Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
1. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines
Last Week in Event SPACE …
- On a Risk/Reward basis, the arb is not very attractive at M1 Ltd (M1 SP)‘s current price.
- Pricing aside, Jangho Group Co Ltd A (601886 CH)‘s potential tilt for Healius (HLS AU) may get dinged by the regulator.
- DNO ASA (DNO NO) edges closer to completing its hostile offer for Faroe Petroleum (FPM LN).
- Unwind the Jardine Cycle & Carriage (JCNC SP) setup for those who entered at the recent low.
- Jardine Matheson Hldgs (JM SP)‘s outperformance of Jardine Strategic Hldgs (JS SP) is unjustified.
(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)
M&A – ASIA-PAC
M1 Ltd (M1 SP) (Mkt Cap: $1.4bn; Liquidity: $2.6mn)
Singapore telecom firm M1 announced on the 28th of December 2018 that Konnectivity Pte. Ltd. (a company jointly owned by Keppel Corp Ltd (KEP SP) and Singapore Press Holdings (SPH SP)) had made a Voluntary Conditional General Offer following the satisfaction of the pre-condition (IMDA approval) mentioned in the pre-conditional offer made in September.
- The offer is to buy a minimum of 16.69% of the total share capital of M1 at a price of S$2.06 in order to increase the collective holding of the acquirer and its related parties from the current level of 33.32% to 50+% of FD shares. The Offerors will buy all shares tendered if they get to a minimum of 50+%.
- The offer price of S$2.06 translated to a premium of 26.4% to the undisturbed price before the trading halt for the pre-conditional offer. At the time of writing, the stock is trading at S$2.08 which is higher than the proposed Offer Price, indicating the market is expecting a bump or an overbid.
- M1 has seen ~175mm shares traded since the initial announcement – all at prices above the proposed Offer Price of S$2.06. In that time, Starhub has popped and fallen back, and SingTel has fallen almost 10% to its lowest level in seven years.
- Clearly, there is expectation that either Axiata will counter or Keppel and SPH will raise the Offer to bring Axiata onside. Travis Lundy doesn’t see who would join Axiata in bidding for M1 at a price of 8+x TTM EBITDA when there is price competition to come. He thinks it more likely that a small kiss (perhaps even a decent bump to S$2.30 or even more) to the price is made by the Offerors SPH and Keppel to get Axiata over the line. However, he does not think the Offerors need to offer that much to dislodge retail shareholders if the IFA comes out and says “increased competition puts the dividend in danger“.
(link to Travis’ insight: M1 Offer Coming – Market Odds Suggest a Bump But….)
- Pricing looks off according to Arun George, at a 15% discount to peers on a CY2019 EV/EBITDA metric.
- Still, Healius is not without issues, having to pay a backpay bill to staff last year, bump salaries for workers at its Victorian pathology division, while also losing a lucrative national bowel screening contract in 2017.
Notwithstanding the price, as Healius is an owner of sensitive medical data, the FIRB would take a very close look at this transaction, especially one where the acquirer is a Chinese entity, given the recent rejection of the CKI/APA Group (APA AU) deal and Huawei’s 5G.
(link to Arun George ‘s insight: Healius (HLS AU): An Unattractive Bid)
Thanachart Capital (TCAP TB) (Mkt Cap: $1.8bn; Liquidity: $4.5mn)
As the merger between TMB and Thanachart gets a nudge from the Ministry of Finance and could be finalized this month, Athaporn Arayasantiparb, CFA tackles the obvious questions – what price and what benefits?
- Based on his estimates, the potential improvements in ROE from the merger and potential divestment of Thanachart’s 19% stake in MBK, he thinks it justifies a Bt11.1/sh premium or Bt64.25/sh. Anything above that would feasibly be value destroying.
- In terms of benefits, Thanachart has a higher ROE than TMB and appears smaller but better managed. The merger would allow TMB to re-enter the securities business (more cross-selling), enlarge its asset management franchise, and scale up the deposit base for both banks.
(link to Athaporn’s insight: Reality Check 2019: What Premium Does Thanachart Deserve from TMB’s Takeover?)
Nexon Co Ltd (3659 JP) (Mkt Cap: $11.4bn; Liquidity: $33mn)
Reportedly Nexon’s founder Kim Jung-Joo and other related parties plan to sell their 98.64% stake in NXC Corp, which owns a 47.98% stake in Nexon. Nexon has a market cap of $11.6bn but the rumoured price tag for the 47.98% take is $8.9bn implying a significant management premium.
- Given the size of this acquisition, the two leading Korean game companies including NCsoft Corp (036570 KS) and Netmarble Games (251270 KS) are not expected to bid. Douglas Kim believes the leading contender to buy Nexon right now is likely to be Tencent Holdings (700 HK).
(link to Douglas’ insight: Korea M&A Spotlight: Nexon’s Founder Plans to Sell; Will Tencent Buy Nexon?)
M&A – EUROPE
Faroe Petroleum (FPM LN) (Mkt Cap: $721mn; Liquidity: $5.5mn)
Initially launched as a voluntary conditional Offer late November, DNO ASA (DNO NO) crept over 30% in Faroe this week and is now required to launch an MGO. The Offer price remains the same at GBP 1.52/share, however, the acceptance condition falls to 50% from 57.5% previously.
- Faroe’s pushback on the Offer – that the 21% premium offered to pre-announcement price is only “about half the average premium paid on all UK takeovers over the last 10 years” – is disingenuous. DNO built a 27.68% stake in a matter of days back in April 2018, clearly telescoping that a full-blown Offer was a possibility (although denying it at the time). The unaffected price prior to the acquisition of that stake should be used as a reference point for the current Offer. This translates to a 44.8% premium.
- DNO has 43.1% in the bag, close to the 50% needed. There are investors (like Cavendish, holding 1.38%) who side with Faroe saying that the Offer is too low. With shares trading through terms, my bet is that DNO may need to kiss this offer, say 5-10%, to get it over the line.
(link to my insight: DNO Closes In On Faroe)
STUBBS/HOLDCOS
Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)
Curtis Lehnert recommends closing out the set-up trade, now that he sees the stub having reverted to its long-term average level. Since his recommendation, the trade has made a notional gain of 5% in a two and a half month time span. As an aside I back out a discount to NAV of 21%, off its recent low of ~28% in early Nov, and compares to a 12-month average of 19%.
(link to Curtis’ insight: Jardine C&C (JCNC SP): Close the Stub Trade)
Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)
Back in September, I discussed in StubWorld: Matheson Unloads JLT, Unwind Takara that Matheson may use the net proceeds of £1.7bn (US$2.2bn) from selling its 40.16% stake in Jardine Lloyd Thompson Group P (JLT LN) into Marsh & Mclennan Cos (MMC US)‘s Offer, towards increasing its stake in JS, as there was/is still some room before the maximum 85% ownership level was reached. This is what happened (or at least a token amount of the proceeds), with Matheson buying ~2.5mn shares in Strategic for ~US90mn in early October. Matheson now holds a little less than 84% by my calculation – the group unhelpfully states it holds 84% without going into decimal places.
- After touching a 17-year low ratio level of 1.41x (JM/JS) last September, that has blown out to 1.83x, having closed the year at 1.89x, a two-and-a-half year high, and compares to the long-term average of 1.7x.
- Strategic continues to trade “cheap” at ~44% discount to NAV, adjusted for the cross-holding. The spread between Matheson and Strategic is around its widest inside a year. Furthermore, as Matheson increased its stake, Strategic also acquired shares in Matheson earlier last year. Both elevate the cross-holding, which in principle you would expect the two companies to become even more closely aligned.
- I’d recommend buying into Strategic for its attractive NAV discount and further share acquisitions from Matheson.
Stub Wrap
Using a basket of 40 Holdcos I constructed, the average NAV discount in 2018 steadily widened throughout the year. Elsewhere:
- Passive, tech-related and illiquid Holdcos widened most; while cross-border and property Holdcos were the best of the worst.
- Illiquid, property, and passive Holdcos’ underperformance (or widening) was more pronounced in the first half. Tech Holdcos primarily widened in the second half.
- Worst performers (discount widening): In absolute % terms, United Co Rusal Plc (486 HK) and Asm International Nv (ASM NA) roughly shared the largest moves; while Dah Sing Financial (440 HK), First Pacific Co (142 HK), Genting Bhd (GENT MK) and Pasona Group (2168 JP) are trading at or near their 52-week wides and 52-week low prices.
- Best performers (discount narrowing): China Conch Venture Holdings Ltd (586 HK) is the only Holdco in positive territory; while Japan Post Holdings (6178 JP) is trading closest to its narrowest level in the last 12 months.
(link to my insight: StubWorld: A 2018 Review In Charts)
Briefly …
Nong Shim Holdings Co (072710 KS)‘s 32.72% stake in Nongshim Co Ltd (004370 KS) accounts for ~70% of its NAV. Sanghyun Park backs out a current discount to NAV of 54%, a 2-year low. Using his numbers, I see the Holdco at 2STD to the 12-month average. The problem is the parent’s liquidity or lack of it.
(link to Sanghyun’s insight: Nongshim Holdings Stub Trade: Time for Holdco To Catch Up)
SHARE CLASSIFICATIONS
Ke Yan, CFA, FRM looked at the southbound flow for the month of December. Shandong Gold Mining Co Ltd (1787 HK) topped the list of Southbound inflow amongst the big cap names, followed by Shanghai Fosun Pharmaceutical (Group) (2196 HK) and Guangzhou Baiyunshan Phrmcl Hldgs (874 HK). In the mid-cap space, Yichang Hec Changjiang Pharm (1558 HK) saw a big increase of holdings by mainland investors, followed by Greentown Service Group (2869 HK), Fullshare Holdings (607 HK) and Beijing Tong Ren Tang Chinese Medicine (3613 HK).
(link to Ke Yan’s insight: Discover HK Connect: Mainlanders Were Buying Pharma and Property Managers in December)
OTHER M&A UPDATES
Takeda Pharmaceutical (4502 JP) announced that the Royal Court of Jersey had sanctioned the Shire Scheme.
- The Barrick Gold (ABX US) / Randgold Resources (RRS LN) Scheme is now effective.
CCASS
My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions. These may be indicative of share pledges. Or potential takeovers. Or simply help understand volume swings.
Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.
Name | % change | Into | Out of | Comment |
37.41% | Ever Joy | CCB | ||
29.27% | BNP | Kingston |
- Source: HKEx
2. Samsung Electronics Share Class: Current Status & Trade Approach
- I initiated SamE short Common/long 1P trade on Nov 29. This trade delivered the highest yield on Dec 13 at 4.55% with Nov 29 as the reference date. We are now slightly below +1 σ.
- Common/1P relative price gap should get narrower. Price wise, 1P discount started at 19.81% on Nov 29 and reached the lowest at 16.38% on Dec 13. It reverted back to 18.69%, down 1.12%p. Market cap wise, Common/1P ratio is still higher than Nov 29. This suggests 1P’s catching up job isn’t over yet.
- Div yield difference is still at a record high for 1P. CJ Corp (001040 KS)‘s recent class B pref issuance should be another plus. It will play in favor of those ownership transfer related prefs. I’d continue to hold onto this position until we move into March OGM cycle.
3. Chengdu Expressway (成都高速) IPO Review – Well-Managed but Unexciting
Chengdu Expressway Company Limited (1785 HK) is looking to raise US$112m in its upcoming IPO.
The expressways that CEC operate are integral in Chengdu’s transport network. The expressways have been upgraded and expanded consistently over the past three years which has led to an increase in traffic and toll revenue. However, in terms of valuation, CEC will likely trade at a valuation closer to small expressway peers which implies a 10% downside.
In this insight, we will look at the company’s financial and operational performance, toll payment model, and compare its valuation to Hong Kong-listed expressway peers. We will also run the deal through our IPO framework.
4. Pasona Non-Grata
PASONA NON-GRATA
![](https://static-prod.smartkarma.com/images/media/000/074/451/original/2019-01-03_11-03-09.png?1546481000)
Source: Japan Analytics
ROUND TRIP – Temporary staffing company Pasona (2168 JP)‘s shares have completed a year-long ’round trip’ after reaching Overbought territory one year ago following the launch of an ‘engagement campaign’ by the activist investor, Oasis. In May 2018, the company took advantage of its elevated share price to sell 2.3m shares (of which 2m were Treasury Shares), prompting a sharp correction in the share price. In recent months, the shares have languished as the company’s business performance has begun to deteriorate, reaching an 18-month low of 1,008 on 25th December, before rebounding 12% to close the year at ¥1,126.
HOLDCO DISCOUNT – According to the Smartkarma HoldCo Monitor, Pasona has the largest ‘ListCo as a % of Market Cap’ percentage at 365%, and the second-largest ‘Discount to Net Asset Value’ (78%) of the 77 companies that are tracked. With Pasona’s interim results due to be released on Friday 11th, January, the Insight will look at the company’s recent business performance, offer some guidelines for valuing the company and make two stock-specific recommendations. The format follows that of our recent Insight on GMO Internet.
5. Selamat Sempurna (SMSM IJ) – Truly Industrious – On the Ground in J-Town
Indonesia has a shortage of good quality industrial companies but Selamat Sempurna (SMSM IJ) is most certainly an exception to this rule, with a track record of consistent long-term growth and strong corporate governance. After a slower 1H18 due to seasonal factors, the company saw a very strong performance in 3Q18, which looks set to continue into 2019.
A company visit in Jakarta revealed that it continues to focus on growing its higher margin heavy-duty filter revenues, with an ongoing emphasis on growing its export business.
Selamat Sempurna (SMSM IJ) should be a beneficiary of the US-China Trade War given much lower tariffs for Indonesian produced filters versus those from China. It has already seen a marked pick-up in enquiries from potential US customers.
Its domestic filter business continues to see strong growth, especially heavy-duty filter sales, which are benefitting from demand from commercial vehicles and heavy equipment demand, with higher unit costs and replacement rates in this space.
The company’s body-maker division is seeing even higher rates of growth than filters and decent visibility, with demand coming from heavy equipment customers such as United Tractors (UNTR IJ).
The company should be a beneficiary of the imposition of B20 standards for Indonesia, which will require companies to change filters more regularly.
It was also recently granted ISO14001:2015 Environmental Management System, which should be positive from an environmental and ESG perspective. This is important for its US and European sales in the long-term.
Selamat Sempurna (SMSM IJ) continues to be one of the few attractive industrial companies in Indonesia, with a very strong long-term record on sales growth and profitability. Its domestic filter business continues to see strong growth, with a significant tailwind from its body-maker division. It is also focused on growing both its export sales and at the same time its higher-margin heavy-duty filter business. According to Bloomberg Consensus Estimates, the company trades on 12.4x FY19E PER and 10.9x FY20E PER, with forecast EPS CAGR of 15% for FY19E and FY20E respectively.
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