Last Week in Event SPACE (22 July 2017)

236 Views22 Jul 2017 22:19

SUMMARY

No mangalores last week, no krakens this week. But more on Global Logistic Properties Ltd (GLP SP) and those non-conditional regulatory approvals; the latest on the Toshiba Corp (6502 JP) narrative, Cuckoo Electronics Co Ltd (192400 KS) is the newest Korea holdco conversion play, and an uninspiring privatisation offer for Future Land Development Holdings Ltd (1030 HK).

(Market capitalisation and liquidity discussed below are in US$. Liquidity is assessed on a 3-month average)

In M&A World

Pranav Rao followed up on his insight discussing the scheme offer, with a field trip to GLP’s office to inspect the Implementation Agreement (IA), which inconveniently is not on line.
- New information, as expected, was thin on the ground, although the IA did state GLP needs to pursue the courts should the Scheme meeting not be convened or the Scheme is not sanctioned.
- In addition, our call with management suggests that the fact the scheme is not conditional on regulatory approvals was actuated upon by professional legal advice, while the SIC signed off on the announcement. Although a deal of this nature is rare to not be conditional on regulatory approvals, it is what it is. Therefore the timeline to completion should be accordance with past scheme precedents.
- Pranav estimates a November-end payment and recommends an entry level of $3.32-33.

M1 Ltd (M1 SP) (Mkt Cap: $1.3bn; Liq: $4.6mn)

No krakens. Not even a ripple. Travis Lundy discussed talks concerning the 61% stake sale in M1 had been abandoned. Judging by the wording in the announcement, bids fell short of the seller’s ( Axiata Group Berhad (AXIATA MK), Keppel Telecommunications & Transportation Ltd and the Company) expectations.
- The stock is down 10% from this announcement. Starhub Ltd (STH SP) though, remained relatively unaffected. Both stocks have chunky dividends and high payout ratios, which may support pricing, but there’s not a lot of positive sentiment to drive these stocks forward.
  - Toh Zhen Zhou has been all over Starhub – his recent piece on the negative impact of Pay TV, is worth a read.

Pranav discussed Future’s chairman’s privatisation offer at $3.30/share by way of a scheme, pricing for which appears underwhelming. The chairman holds ~73% so a blocking stake is 2.695% of issued shares.
- The bulk of Future’s earnings are sourced from its 67.1% held Future Land Holdings Co Ltd (601155 CH). That stake is worth US$4bn vs. FLD’s Mkt cap of US$2.3bn. (Reminds me of the successful VGO for Great Wall Tech (74 HK) back in 2013/2014, where the majority of its NTA and earnings were sourced from PRC listcos.)
- Put another way, Wang (the chairman) is paying US$656mn for the privatisation, but his book value gets a US$1.7bn boost into the (now) direct stake into FLH. Not a bad trade.
- Trading tight at $3.18 – the offer is final.

This relatively clean scheme detailed a possible special dividend (3rd bullet point, last sentence), one that would capitalise on the franking credit balance in accounts.
- I assumed the maximum amount of that dividend would correspond with retained earnings or ~$0.13/share. That assumption has now been confirmed from my discussions with management.
- As Tavis discussed in Skilled Group Ltd (SKE AU) in regards to franking credits: "Foreign investors have seen the spread tighter ... on a gross basis ... as domestic investors may be buying the spread tighter because of the franking credits (and to whom they are worth how much is always a question - for SFs and SMSFs it is likely half of the face value. For domestic corporations, one might say the full amount when comparing themselves to foreign corporate holders)"

Sanghyun Park Park discussed the latest Korean holdco conversion, home electronic appliance maker Cuckoo, which is expected to be spun off on 1 Dec 2017, via a two-step process. Sanghyun provided a helpful chart of this spin-off and the process involved.
- Compared to recent holdco conversions, Cuckoo’s urgency is not apparent with the major shareholder (Koo Bon-hak & affiliates) holding 58.6%. That 16.8% of treasury shares will further consolidate the % holding by Koo, but is by no means an urgent catalyst for doing so,
- Sanghyun backs out a ballpark NAV of ₩1.6tril. That’s around 10% upside to the current price.

Great Eagle Holdings Ltd (41 HK) (Mkt Cap: $3.8bn; Liq: $1.1mn)

I flagged Great Eagle’s bifurcation earlier in the week and a mild correction unfolded.
- CREIT continues to trades marginally below its 52-week high, touched earlier this week. Shares have run up after Savills publicly discussed a price tag of $24.5-$26bn for the Langham Place office building in Mongkok, 3x the value assessed by Knight Frank 6 months earlier. That looks idealistic. I feel CREIT has downside from here.

Toshiba Corp (6502 JP) (Mkt Cap: $10.6bn; Liq: $244mn)

Twist & turns continue as Travis addressed Greenlight’s investor letter asserting a ¥400/share value for Toshiba; and his companion (for this week) piece delved into the California Court case. Sanghyun also touched on SK Hynix Inc (000660 KS) 's obsession with Toshiba.
- That ¥400/share looks overly optimistic and one way to achieve that number is via a wholesale liquidation as per Mio Kato, CFA's We Examine the Value Of “New” Toshiba as Bain Enters the Picture and WDC Scuffle Threatens Financing.
- Toshiba is not an outright short, more a tilt to negative. Even if Western Digital Corp (WDC US) & Toshiba put aside their pettiness, that ¥2-2tn sale proceeds from the memory sale are factored in. Still out there are possible contingent liabilities arising from Westinghouse's bankruptcy and the prospect of delisting. It's not a stock to be comfortable going long.