Brief Thailand: StubWorld: Hang Lung’s Implied Stub At Extreme Levels and more

In this briefing:

1. StubWorld: Hang Lung’s Implied Stub At Extreme Levels
2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps
3. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY
4. GPSC To Proceed With Glow Takeover, But At What Price?

1. StubWorld: Hang Lung’s Implied Stub At Extreme Levels

This week in StubWorld …

• Hang Lung (10 HK) has lagged 57.6%-held Hang Lung Properties (101 HK) after announcing full-year results, resulting in the implied stub touching 2 STD away from the average.
• An update on Intouch Holdings (INTUCH TB)‘s stub investments via its venture capital arm, InVent.

Preceding my comments on HLG and Intouch are the weekly setup/unwind tables for Asia-Pacific Holdcos.

These relationships trade with a minimum liquidity threshold of US$1mn on a 90-day moving average, and a % market capitalisation threshold – the $ value of the holding/opco held, over the parent’s market capitalisation, expressed in percent – of at least 20%.

2. Oil Exploration: We Expect a Resurgence in 2019 Pointing to Strong Performance for E&Ps

We see oil exploration making a comeback in 2019, as drilling spending sees an increase and on the back of encouraging well results year to date. Already in 2019 there have been 4 high impact discoveries in the UK, South Africa and Guyana. Given the need of companies, especially the majors, to replenish their portfolios, there will still be a number of frontier, high impact wells being drilled. The areas where we see material exploration wells being drilled this year are Guyana, US GoM, Mexico, Brazil the Eastern Mediterranean and West Africa.

If there is some exploration success, the pure-play exploration companies will be good performers, especially those that have exposure to several wells that could be material relative to their size. A pick up in drilling will also be positive for the offshore drilling companies and seismic names. We look at the merits and pitfalls of investing in exploration, performance in 2018, outlook for 2019, the debate over exploring for resource versus buying it, how the economics of exploration have improved and the impact of the time value of money. 

3. EPG: Revenue from Auto Parts and EPP Buoyed Earnings to Grow YoY

EPG reports FY3Q19 net profit of Bt225m (+24%YoY,-14%QoQ). The FY9M19 result was in line with and accounts for 69% of our full-year forecast.

• A YoY increase in earnings was mainly caused by sales contribution from automotive segment (+28%YoY). While a QoQ fall in earnings was due to a seasonal drop in sales of thermal insulators segment and narrow gross profit margins due to rising raw material costs.
• We maintain our positive outlook toward its FY19-20E earnings driven by growth in every business units: 1) sales recovery from EPP segment (22% of total sales in FY9M19) from changing its product mix toward more on food packaging; 2) revenue contribution from Flexiglass after acquired it during FY1Q19, and, 3) consistent sales growth for Aeroflex (28% of total sales)

We maintain our BUY rating  with the target price of *Bt10.40 derived from its 2-years average trading range of 25xPE’19E.

*We make no changes to forecast, recommendation, and target price at the time of result announcement.

4. GPSC To Proceed With Glow Takeover, But At What Price?

Global Power Synergy Company Ltd (GPSC TB) announced on the 20 June last year an intention to acquire 69.11% of Glow Energy Pcl (GLOW TB) from Engie SA (ENGI FP) at Bt96.5/share (reduced to Bt94.892/share subsequent to an interim dividend of Bt1.608), valuing Glow at US$4.4bn or 2.86x P/B. Once the acquisition was approved, the remaining 30.89% of shares would be subject to a mandatory tender offer.

The key issue raised at the time was that the transaction would give GPSC a monopoly on power purchase agreements in Map Ta Phut, Thailand’s largest industrial park.

Despite what appeared to be a non-issue from an anti-trust point of view (as discussed in Anti-Trust Should Be A Non-Issue In The GPSC/Glow Deal), on 11 October 2018 the Energy Regulatory Commission (“ERC”) notified the public of its decision not to give its approval for the transaction. Glow’s shares declined ~6% on the news.

An appeal to reconsider ERC’s decision was dismissed on 14 December.

After an announcement alluding to multiple interests for Engie’s stake, on the 27 December Glow announced that ERC has resolved to approve the merger with GPSC, provided Glow sells its Glow SPP1 plant before or at the same time as the merger. A number of conditions were also attached to some of the remaining power plants.

No price has been disclosed for the 69.11% stake in Glow, ex the SPP1 plant.

The current upside is (at best) 6.8% to an indicative offer price Bt95.86, assuming Glow can sell SPP1 at the same multiple under GPSC’s initial offer and GPSC continues to assign the same multiple to Glow even after the sale of SPP1. That would appear a stretch. However, SPP1 is estimated to account for just ~5% of Glow’s energy output and revenue. And media are reporting Engie itself may acquire the plant, which should smooth and expedite the completion of the transaction.