Brief Value Investing: WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF and more

In this briefing:

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF
2. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals
3. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)
4. Dhanlaxmi Bank- Free from the PCA Stranglehold
5. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

1. WABCO Confirms Being a Takeover Target of The Private German Auto Parts Maker, ZF

Last morning the listed brake supplier, Wabco Holdings (WBC US) confirmed that it is in takeover talks with one of the leading auto parts suppliers in Germany, ZF Friedrichshafen AG. Following the news of being possibly bought by a private company, WABCO’s stock surged almost 10% during the day, reaching USD130.5 by the day’s close.  This positive market reaction for WABCO was purely based on its confirmation about having preliminary takeover discussions with its rival company, ZF. There were no further details released on the possible deal price or about the plans that either company has after the takeover. Further, ZF in a news report stated that no decision has been taken yet and that it was the preliminary discussions that were being done. However, we do note the following:

• ZF is known to have made such strategic acquisitions in aiding the long-term development of the company. A similar strategic move was made by ZF back in 2015, when it took over TRW Automotive Holding to expand its exposure to sensors and electronic components.
• In June last year, ZF stated in a news report that it is not prioritising interest in brake suppliers, as its focus is to pursue investments in developing components to support next generation technologies and reported its plan to further invest more than EUR12bn into e-mobility and the autonomous driving field. This could indicate that WABCO takeover discussions may involve reasonable price discipline from ZF, and we would note that ZF had previously desired to acquire Wabco for about €6-8bn. However, we believe that the buyout does look attractive for both companies, especially for ZF, given the possible synergistic effects that could support ZF’s next gen technologies.
• In the last go around, ZF had just completed its acquisition of TRW and the balance sheet made a further large acquisition difficult. Now, much of the additional debt from the TRW has been digested and although levering up again could place considerable financial pressure on ZF in the short term, the company’s history makes up believe that it has the capability to handle any such pressure once synergies kick-in and restore its balance sheet in short order.

2. Banco Do Brasil (BBAS3) – Capital Contributions from Potential Non-Core Disposals

• Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
• Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
• The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
• We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1

3. Sunpower: Excellent FY18 Results; Strong Outlook for FY19. Fair Value Remains 1 SGD (70% Upside)

Sunpower Group (SPWG SP) has seen an incredible transformation over the past 24 months. Since the entry of two respected PE funds (DCP and CDH) the company has de-emphasized its historical M&S business and pushed full throttle on its GI (Green Investments) portfolio.

The efforts of this shift to GI are now bearing fruit with FY18 revenues increasing by 66% to 3.26 billion RMB, EBITDA rising by 113.5% to 496 million RMB (15.2% EBITDA margin) and underlying NPAT rising by 87% to 268 million RMB. Most importantly, the quality and visibility of its cash flows have improved.

It is rare to find companies that give you 3-year NPAT forecasts but Sunpower did this with the issuance of its second CB late 3Q18. Instead of using stale sell-side consensus forecasts we now focus on these public forecasts to guide investors what Sunpower’s fair value is depending on the PE multiple that investors apply.

My Fair Value estimate of 1 SGD remains unchanged (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus).

4. Dhanlaxmi Bank- Free from the PCA Stranglehold

Dhanlaxmi Bank (DHLBK IN) share price has surged by 10% today on the back of RBI move to take it out of Prompt Corrective Action (PCA) following improvement in its financial ratios. We have mentioned in our earlier reports (please click here, here and here) about the helplessness of the bank as it couldn’t lend due to restrictions from RBI.

Now as the grip is loosened, Dhanlaxmi can resume lending activities and improve its financial ratios without adding any new capital in the near term.

We analyze the implications post PCA through this report.

5. Procurri: Exit DeClout, Enter Novo Tellus. Company Remains Highly Undervalued at 4.4x 2018 EV/EBITDA

Procurri Corporation (PROC SP) released FY18 results which showed the company growing revenues to 220M SGD (+21% vs FY17), EBITDA to 19.7M SGD (+185% vs FY17), PBT to 10.1M SGD (vs 2.3M loss in 2017) and a small net profit of 5.3M SGD which was artificially low because of an astronomical 47% tax rate. The high tax rate should reverse in 2H19 which would show the reported profitability of Procurri improve substantially. 

Procurri remains deep value trading at just 4.4x 2018 EV/EBITDA and 0.4x 2018 EV/Sales. If we adjust the FY18 net profit figure(assume 30% tax rate vs 47%) the shares trade at a P/E multiple of just 13x.

The shareholder register of Procurri has seen a dramatic change YTD with multiple announcements on SGX. The most significant development is the entry of Singapore PE fund Novo Tellus acquiring a 29.6% stake on 19/2/19. Consequently this means that the biggest corporate overhang on Procurri (read: the control by Declout Ltd (DLL SP) ) is now almost over with their stake reduced to 17% from 47% previously.

Given the well-publicized track record of Novo Tellus at SGX listed Aem Holdings (AEM SP) the question is if Novo Tellus sees another multi-bagger in the making?

While a “10-bagger” type return like AEM is unlikely at Procurri, doubling the market cap from 90M to 180M SGD would not be impossible as Procurri continues to grow in FY19 and the depressed multiple expands modestly.