Daily TMT & Internet: Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines and more

In this briefing:

1. Last Week in Event SPACE: M1, Healius, Thanachart, Faroe, JCNC, Jardines
2. Samsung Electronics Share Class: Current Status & Trade Approach
3. Gold: Trade Agreement Could Change the Bullish Narrative
4. Pasona Non-Grata
5. Weimob IPO Valuation: Optically Cheap

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)

• 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?)  

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)  

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) 

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)  

• 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.

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.   

• 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. Gold: Trade Agreement Could Change the Bullish Narrative

INVESTMENT VIEW:
The same macro factors which knocked more than a third off Apple Inc (AAPL US)‘s share price have lifted Gold (GOLD COMDTY) prices by nearly 10% since Sept-18.  However, we believe the market narrative could swiftly reverse if the US and China reach a trade agreement in the coming weeks.  We would look to press our short on Gold…and even go long Apple. 

4. Pasona Non-Grata

PASONA NON-GRATA

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. Weimob IPO Valuation: Optically Cheap

Weimob.com (1260480D CH) is a combination of a SaaS software and an adtech (targeted marketing) business which has started book building to raise gross proceeds of $108-135 million. According to press reports, Weimob is being viewed favourably by investors as it is being offered at a “cheap” valuation of 18-23x 2019 P/E.