Brief TMT & Internet: Earthport the Winner as Mastercard/Visa Jostle For Position and more

In this briefing:

1. Earthport the Winner as Mastercard/Visa Jostle For Position
2. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech
3. Tesla – Shanghai Surprise
4. Dreamtech: Trying for an IPO Again at a Lower Price
5. UMC – Major Highlights of 4Q18 Earnings

1. Earthport the Winner as Mastercard/Visa Jostle For Position

Mastercard Inc Class A (MA US) has a made a £233mn Offer to take over cross-border payments firm Earthport plc (EPO LN), trumping Visa Inc Class A Shares (V US)‘s offer late last month by 10%.

EPO’s board has recommended Mastercard’s Offer to its shareholders. Visa’s Scheme meeting, initially scheduled for the 21 February, has been adjourned.

Mastercard’s £0.33/share offer compares to Visa’s £0.30/share tilt, and represents a 340% premium over EPO’s undisturbed price of £0.075/share.

The Offer is conditional on 75% of EPO’s shareholders accepting with 13.08% of shares outstanding in the bag.  Mastercard will move to cancel the shares on AIM if it achieves 75%.

EPO’s shares increased to £0.282 following Visa’s offer, but currently trades at ~£0.37, 12% above the latest offer, suggesting a higher bid is likely, or at least expected. 

Cross-border payments are an estimated US$30tn business and both credit card giants are registering higher annual growth and billions of dollars in fees. EPO is a drop in the ocean for Mastercard (US$205bn market cap) and Visa (US$297bn).

Arguably this deal could run significantly higher – the question is how desperate these two players are towards buying now as opposed to building.

And it’s not just small transactions in the payment industry getting attention, after Fiserv Inc (FISV US)‘s announcement earlier this month it would merge with First Data Corp (FDC US) in a US$22bn transaction, and Paypal Holdings (PYPL US)‘s US$2.2bn acquisition of Sweden’s iZettle last year.

2. U.S. Equity Strategy: Market in Wait-And-See Mode; Upgrading Tech

The S&P 500 has paused just below logical resistance at the downtrend, and we believe the equity market is in wait-and-see mode for incremental information on a variety of issues including trade talks, Fed action and earnings.  Meanwhile, We are upgrading equal-weighted Technology to overweight. Our equal-weighted Tech Sector has surged to the top of our RSR ranks due to broad-based strength in semiconductors last week. Solar stocks are another Group that is emerging as leadership. In today’s report we highlight attractive small-cap Technology stocks, as well as selection of key stocks (MSFT, AMZN, GOOGL, V, NFLX, and ADBE) and subsectors (semis, biotech, and homebuilders) which are all up against logical price resistance.

3. Tesla – Shanghai Surprise

Tesla Motors (TSLA US) stock is in a tailspin, again. Closing at $297 today, the stock is down 11% ytd, well off its high last August at $379 and trailing even 2018’s comparatively tepid average of $316. Tesla bondholders have remained wary, with the benchmark 5.3% senior notes still hovering near 86 where they’ve traded since last September after plunging more than 10 points versus the beginning of 2018.

Investors are spooked as more Wall Street analysts have slashed their formerly ambitious estimates for Tesla’s fourth-quarter and 2019 revenue, profit, and cash flow primarily due to what they now identify as lower than expected demand and profitability for Model 3. The thing is, Tesla has been signaling escalating troubles for months as I have warned in “Great Magic Trick Tesla; Now Do It Again” which digested Tesla’s “miracle” third quarter and “Tesla: Down to the Wire” which reviewed the frantic close of the fourth quarter). 

So while it’s interesting that market estimates are collapsing toward my previously below-consensus estimates–and even I lowered my already cautious 2019 numbers–I’m concerned about other potentially quake-worthy news affecting performance for 2019 and beyond which we are not getting from Tesla.

With little more notice than a tweet,CEO Elon Musk popped into Shanghai, China, in early January for a showy groundbreaking ceremony to launch Tesla’s new multi-billion dollar Gigafactory 3 which reportedly will be capable of doubling Tesla’s current production capacity. Even more surprising, Musk projected Model 3 production will begin there before the end of this year–less than eleven months from now.

Yet three weeks later we still have no idea how much this mega-plant will cost, or whether Tesla has “funding secured” to pay for it–and these may not even be most troubling facts investors don’t have.

Whatare Musk, and Tesla, and Tesla’s banks, and Musk’s China-based financiers not telling us about Shanghai Giga 3? I suspect the answers may come with potentially nasty surprises.

Read more for Bond Angle analysis.

4. Dreamtech: Trying for an IPO Again at a Lower Price

• In October 2018, Dreamtech Co Ltd (192650 KS) first provided its initial IPO prospectus but due to difficult market conditions, it withdrew its IPO last year. Dreamtech is trying to complete its IPO again this year for a listing in March. Established in 1988, Dreamtech makes modules and sensors for smartphones, auto vehicles, home appliances, and health care products. 
• The bankers have reduced the IPO price range to 11,000 won to 13,000 won (from 13,400 won to 16,700 won previously). The mid-point of the IPO price range has been reduced by 20% versus its first try at the IPO in 4Q18. 
• The bankers used 15 companies including SEMCO and SimmTech as comparable companies to Dreamtech. The average P/E of the comps is 14.6x (based on the annualized net profit in 1Q-3Q18). The bankers then took the annualized net profit of Dreamtech in 1Q-3Q18 and applied this P/E multiple which resulted in an implied market cap of 540.5 billion won or implied price of 17,286 won. After applying an additional 24.7% – 36.3% IPO discount, this resulted in the IPO price range of 11,000 won to 13,000 won. 

5. UMC – Major Highlights of 4Q18 Earnings

United Microelectronics Corp (2303 TT) (UMC), the fourth largest foundry company globally, reported its 4Q18 earnings after market close yesterday. UMC reported disappointing results with sales of 35.5 NT$ billion, which was down 3% YoY and 3.7% lower than the consensus. It also reported EPS of NT$ (0.14). The Street had been expecting a positive EPS of $0.11. United Microelectronics Corp (2303 TT) shares are down 5% following its poor 4Q18 earnings. 

In 4Q18, wafer shipments declined 5.2% QoQ and utilization rate was also lower at 88%, compared to 94% in 3Q18 and 90% in 4Q17. The company blamed the poor results mainly due to the weak demand for smartphones and crashing demand for cryptocurrency mining machines.

According to UMC, it expects the entire global foundry market growth to be flat this year. The company has already started to observe inventory correction within the entire semiconductor supply chain starting 4Q18. It expects the inventory correction is likely to last more than 1Q19.