In this briefing:
- SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability
- Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
- China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
- TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave
- Doosan Bobcat – Negative on the North American Housing Market Turning Downwards
1. SEAFCO (SEAFCO TB): Solid Backlog, Solid Profitability
- Sales on an upward trend, good core profit return, and earnings on an upward trend relative to its sector
- Well-positioned to win some upcoming bids for public and private projects such as the MRT Purple Line, expressway, and high-speed train to boost earnings moving forward, net profit up by 134% in 3Q18 YoY
- Strong backlog of public and private projects amounting to around Bt3bn to help sustain revenue growth, 104% in 3Q18 YoY
- Trades below Thai Industrials at 19CE* 4.1x PB, offers much higher ROE, and a solid balance sheet
- Risks: Delay in construction, volatility in raw materials prices
* Consensus Estimates
2. Renesas: Visit Suggests Utilisation Rate Rebound Could Take Longer Than Sell-Side Expects
We visited Renesas Electronics (6723 JP) this week to discuss progress on inventory reduction and its likely ramp of utilisation rates/wafer throughput, as well as to gather further details on the IDT acquisition and its long -term strategy. On the whole, we continue to like the long-term picture, consider the stock to be undervalued and believe investors with long time horizons should be looking at the stock on the long side. However, our discussions suggested to us that while production cuts to reduce inventory should be completed this month or at worst in 1Q2019, a ramp in utilisation rates could take longer than is implied by consensus.
3. China Tower: Changing Our View to Positive. Low Cost Expansion Should Generate Better Returns
At the time of the IPO we were quite negative on China Tower (788 HK) prospects. However, in recent calls and meetings our view has changed and become more constructive. Chris Hoare now believes that China Tower is managing to generate co-location growth outside the Master Services Agreement (MSA) and at a much lower level of capital intensity (perhaps up to 50%) than indicated in the IPO. Management has also proven to be more open to shareholders than expected and with lower capex, higher FCF generation we upgrade to a BUY with a HK$1.60 target price. The stock has started to move as the market has begun to understand the more positive outlook. It will be interesting to see if China Tower is allowed to retain these benefits long term.
Summary China Tower forecasts:
4. TRADE IDEA – Toyota Industries (6201 JP) Stub: Riding the Automation Wave
If ever there was a stub business that is poised to capitalize on global trends of factory automation, automated logistics handling and electric vehicle prevalence, it is that of Toyota Industries (6201 JP). In August, I took an in-depth look at the major businesses of Toyota Industries and concluded that the market was not giving the company credit for the global leadership it has established in the forklifts and automobile A/C compressor businesses, nor for the progress it has made in the logistics equipment business. While the market’s oversight appeared to have corrected in September and October as the discount to NAV contracted from 34% to 25%, the trend has since reversed and the discount is back at trough levels of 35%. In August, I implied that this would be a good trading opportunity. Today, I explicitly recommend going long the stub.
In this insight I will cover:
- A market-neutral trade setup
- A review of the core unlisted businesses
- Alternative data used to gauge performance in the core business
- Risks of the trade
- A recap of ALL my stub trade ideas on Smartkarma, including track record of performance
5. Doosan Bobcat – Negative on the North American Housing Market Turning Downwards
We believe that the consensus earnings estimates of Doosan Bobcat Inc (241560 KS) are likely to revised down by 10-15% in the next 6-12 months, negatively impacted by the faster than expected downturn in the North American housing construction market. Currently, Doosan Bobcat stock price is at 32,900 won. We expect 15% or more downside risk on this stock over the next 6-12 months.
The US is the biggest market for the company. The US housing starts is an important indicator for the company since the US housing starts has a big impact on the demand for compact construction equipment. You could see from the charts below that US housing starts has been on a strong rebound since 2009. However, since early part of this year, there are signs that the US housing starts is beginning to soften and turn down.
Home prices are starting to decline in the US – Most recently in 3Q18, the median sales price of houses sold in the US was $325,700, down 3.6% from the peak of $337,900 in 4Q17. The list of cities/regions with recent declining home prices in North America are as follows: Vancouver (Canada), Manhattan, NYC, Seattle, WA, San Francisco, CA, San Diego, CA, Toronto (Canada), and Los Angeles, CA.
