In this briefing:
- Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
- KDDI Tender Offer for Kabu.com (8703 JP) Decided
- Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
- Fanuc Bullish Trade Points off of Base Line Support
- Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
1. Tokyo Kiraboshi Financial Group (7173 JP): Red Dwarf
Tokyo Kiraboshi Financial Group (7173 JP) (TKFG) progresses from bad to worse, and its stock price is behaving accordingly. Amidst volatile trading, the share price is gradually sinking back towards the 52-week intra-day low of ¥1,454 that was reached on Christmas Day 2018 before closing that day at ¥1,504. 3Q FY3/2019 (9 months to 31 December 2018) consolidated results represented a decline of over 56% YoY at the recurring profit level, with net profits down 34% YoY after tax adjustments. On a quarterly basis, Q3 (October-December 2018) net operating profits collapsed 96% to just ¥66 million, while recurring profits fell 68% YoY to just ¥565 million with a small net loss of ¥9 million as a result of lower fee income and sharply higher credit costs. Hardly a ‘glittering’ performance.
Trading on a forward-looking price/earnings multiple of 11.7x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.19x, TKFG is expensive compared to peer regional banks. Indeed, adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues raises the annualised PER to over 19x: roughly twice that of peer banks. TKFG’s RoA and RoE ratios are woefully low at 0.09% and 1.71% respectively, loan growth has shrunk to just +0.5% YoY, deposits have fallen alarmingly (down 4.5% YoY), and the overhead ratio has shot up to 95% in Q3. Yet, despite all these ‘red flags’, TKFG still managed to attract an aggregate foreign ownership of 17.4% as of 31 March 2018 (the most recent data publicly available): a strange choice. Caveat emptor (may the buyer beware) !
2. KDDI Tender Offer for Kabu.com (8703 JP) Decided
Today after the close, KDDI Corp (9433 JP) announced its intention to conduct a Tender Offer for Kabu.Com Securities (8703 JP) through a made-for-purpose SPC. The deal is not terribly different in scope than the one discussed in KDDI Deal for Kabu.com (8703 JP) Coming? about two weeks ago.
The Tender Offer is to purchase a minimum of 45,758,400 shares at ¥559/share, which is a 5.67% premium to today’s close and a 46.3% premium to the undisturbed price of 23 January 2019. Obtaining the minimum would get the combination of KDDI and MUFJ Securities (which currently holds 52.96% of the shares outstanding, and will not tender) to 66.67% which would allow the combination to do a Two Step Squeezeout, which KDDI states in the document that it intends to do.
Anti-trust and regulatory approvals are required, and KDDI expects that the Tender Offer will commence in late April. This looks pretty easy as a deal, with few impediments. A rival bid is unlikely in the extreme, KDDI has a headstart with the shares of MUFG Bank which have committed to the deal.
There are a couple interesting aspects to this deal, and KDDI made several other announcements simultaneously which taken together show some of the extent of KDDI’s plans.
3. Robotics Earnings: Nabtesco and HDS Results Strong; Still No Reason to Own Fanuc
Following a long period of weakness, robotics related stocks are displaying stronger performance recently as 3Q results have come in weak, but generally done so with management reassurances that this is the bottom.
Company | Peak to Trough Performance | Trough | Performance Since Trough |
-52.8% | 26 Dec | +18.6% | |
-58.5% | 4 Jan | +24.7% | |
-58.9% | 26 Dec | +35.4% | |
-65.8% | 4 Jan | +41.3% |
We had been negative on the sector for some time before turning more constructive in mid January following Yaskawa’s earnings. We concur with the general messaging that this is the bottom based on our analysis of order levels for the companies and regional trend breakdowns. We do not expect a particularly sharp rebound in orders and sales in the near future and believe there is still some risk of these stocks returning toward the lows over the course of the year. However, we believe that the next significant move should be upwards and longer term investors should be looking for entry timings.
4. Fanuc Bullish Trade Points off of Base Line Support
Fanuc Corp (6954 JP) shows increasing signs of a basing process and opportunities on weakness.
Macro retracements display clear synergy with the low at 15,570, suggesting this is a key low.
Use weakness back toward base line support to buy for a medium term rise to press on outlined resistance targets.
Risk lies with the signs of rally fatigue in the near term tactical cycle as the daily RSI fails to confirm recent highs that are knocking on pivotal resistance at 19,000 that acts as the immediate make or break level.
Pivot levels, action points and targets are outlined.
5. Stake in Quadric.io Following Renesas; Denso Attempts to Keep Chip Makers Close to Achieve AD Aims
It was reported last Thursday that Denso Corp (6902 JP) through its wholly-owned subsidiary NSITEXE, Inc. acquired a stake in quadric.io, a fabless semiconductor start-up company based in Burlingame, California. It seems that the company has begun its planned investments for 2019. Last year, Denso increased its stake (from 0.5% to 5%) in chipmaker- Renesas Electronics (6723 JP) to support its progress of ADAS and related technology. We also mentioned in our insight, Denso Prepares for the Future; Investments in Tohoku Pioneer EG Following JOLED and ThinCI, that Denso has been making a series of investments to prepare itself for being the leading software solution provider alongside its hardware expertise, supporting its change in business model. Last year, NSITEXE invested in ThinCi, its partner, since 2016, in the development of a Data Flow Processor (DFP) designed to help autonomous vehicles make quick decisions in complicated and fast-evolving situations. Denso/NSITEXE’s investment in quadric.io has a similar goal. The investment in quadric.io is said to help the start-up in its development of edge processing units (EPUs), which are high-performance semiconductors that could be used as a foundation for enabling automated driving technology.
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