Last Week in Event SPACE - BGF, Yakult, Celltrion, Linde, CPALL

Last week, BGF Co Ltd (027410 KS) is a short, if you can source borrow; a positive tilt on the Danone sale in Yakult Honsha Co Ltd (2267 JP), yet risks remain on the increase in float; it's too early to call a sell on Celltrion Inc (068270 KS)'s ahead of its KOSPI 200 inclusion; the ACCC turns sour on the Mg Unit Trust (MGC AU) / Saputo Inc (SAP CN) deal; Linde AG (LIN GR) & Praxair Inc (PX US) are allegedly unloading US$8bn of US & European assets ahead of regulatory approvals; a potential banking license appears baked into CP All PCL (CPALL TB)'s share price, while Charoen Pokphand Foods Pub (CPF TB)'s complicated cross-border structure does it no favours. Plus CCASS movements.

BGF Co Ltd (027410 KS) (Mkt Cap: $369mn; Liquidity: $12.5mn)

Buying BGF Retail Co Ltd (282330 KS) at Friday's closing price of ₩169,000, tendering it and shorting BGF at ₩12,350, generates an attractive 4.39% gain, before trade cost/stock loan interest. Easy money it would seem.

• But, and there has to be a but, short selling has been falling even as the spread edges up. Sanghyun Park points out the loaned stock balance reached nearly 6.6mn shares (worth ₩83bn) on Friday. Since the Jan 12 re-listing, this ~6mn level seems to be the ceiling for the number of stocks that can be loaned for BGF. This could mean the downward pressure on price may be mitigated over the next few days.
• It is possible Hong Seok-jo will continue to press down BGF's price to discourage other BGF Retail shareholders from tendering. Or perhaps keep BGF's price as low as possible so he can minimize the inheritance tax for his two sons.
• Still, if you can borrow BGF shares, do so and short them.

links to Sanghyun's insights:
BGF & BGF Retail Stock Swap - Status Update
More Calculations on BGF & BGF Retail Stock Swap Event Trades.

Yakult Honsha Co Ltd (2267 JP) (Mkt Cap: $12.3bn; Liquidity: $50.6mn)

Mio Kato, CFA is sticking to his guns and tilts positive on the Danone sale, despite the risks from a large increase in float previously raised in Travis Lundy’s note Danone To Sell Down Yakult Stake - It's a Big Deal.

• Mio believes the deal appears to be well supported by valuations relative to the company's history, while there is some potential for supportive sell-side upgrades.
• For longer-term investors, he believes that as long as your macro outlook on Asia in general and China and Indonesia, in particular, is constructive, the offering is a good opportunity to pick up strong growth prospects at a relatively reasonable price. Yakult's OPM in Asia almost hit 35% in the last quarter compared to a company-wide OPM of 15%, suggesting that continued growth in that region could result in much faster profit growth than is currently being priced in.

(link to Mio's insight: Yakult: 50% Fewer Calories)

Celltrion Inc (068270 KS) (Mkt Cap: $43bn; Liquidity: $552mn)

Sanghyun estimates ₩1.13tn worth of passive money will newly flow into Celltrion around the time when Celltrion joins the KOSPI 200, which is Mar 8. The question is on timing. Celltrion share price has been on a tear since Feb 20, having gained ~22% as active funds (presumably) moved ahead of local passive funds, knowing that local passive funds would wait till the last minute.

• What would this mean for short selling hunters? Sanghyun suggests staying low on that front as many active funds continue to build their position in Celltrion. Short selling has in fact been pretty quiet.
• Sanghyun would buy Celltrion even at this price and unload it immediately after the inclusion event is completed (Mar 9).

(link to Sanghyun's insight: Celltrion's Mar 8 KOSPI 200 Inclusion Event Update)

Lee Metal Group Ltd (LEE SP) (Mkt Cap: $147mn; Liquidity: $0.2mn)

The CCS has put out an announcement regarding BRC Asia Ltd (BRC SP)'s takeover of Lee Metal Group Ltd (LEE SP) and the associated competition concerns. According to the announcement, the overlap in the operations of the two companies is in the supply of four products; but further states that the market for these products is highly competitive and that buyers find it easy to change suppliers. The public consultation will run until 15 Mar. Currently trading at a gross/annualised return of 2.14%/9.44% (before comms/other costs) to the S$0.42/share offer from BRC.

(link to my insight: Lee Metal: Priced to Steel)

Mg Unit Trust (MGC AU) (Mkt Cap: $357mn; Liquidity: $0.4mn)

The ACCC has expressed concerns about the Saputo-Murray Goulburn deal, specifically how the combined processing capacity of Saputo’s Allansford plant and Murray Goulburn’s Koroit plant would have over two-thirds of the raw milk processing capacity in the south-west Victoria/south-east South Australia region. Conceivably Saputo and Fonterra – the other large player in the region - could lower prices to farmers if Saputo acquired Koroit. The ACCC’s response was not wholly unexpected after dinging MGC’s tilt for Warrnambool in 2010.

• There are willing buyers out there for the Karoit plant, MGC’s largest processing facility, such as Australian Consolidated Milk, Bega Foods and Burra Foods. That’s an okay outcome for MGC, but not Suputo. And perhaps not for farmers either, as Saputo is generally viewed as managing their farmers well.
• MGC has 8 processing plants in Australia - 6 of which are in Victoria. Koroit has processing capacity of 1bn litres but actual utilisation is considerably lower, a figure that is not provided. The “two-thirds” quoted by the ACCC is assessed on the 1bn capacity of both the Allansford and Koroit plants against the overall market capacity of 3bn litres.
• It’s a delicate situation. A failed Saputo deal could snowball into impairment losses for MGC and a loss of credit support. The ACCC is will make its final decision on March 29.

Linde AG (LIN GR) (Mkt Cap: $41bn; Liquidity: $22mn)

CTFN discussed how clients of industrial gas providers Linde and Praxair are increasingly worried about the companies' planned merger and continue to voice their opposition with Brazilian antitrust regulator CADE.

• This is a complex merger, one in a market already concentrated before. Praxair is the market leader and the merger will enable substantial market power in certain markets.
• CADE has sent out requests to fifty or sixty parties with responses calling for remedies aimed at avoiding abusive price increases, and/or the divestment of assets or plants of either merging parties in the areas with highest market concentration.
• In a move to appease regulators, there are media reports that Linde and Praxair have commenced the sale of European and U.S. industrial gas assets to the tune of US$8bn.

(link to CTFN's insight: Linde-Praxair Antitrust Review Faces Mounting Complaints from Brazilian Clients)

Charoen Pokphand Foods Pub (CPF TB) / CP All PCL (CPALL TB)

CPF is trading at multi-year lows vs. CPALL, while the discount to NAV of ~42% compares to a 12-month average of ~26%.

• As Athaporn Arayasantiparb, CFA points out, there is no shortage of literature on CPALL's overvaluation, currently pegged at 33x PER and 20x EV/EBITDA for FY18E, against a domestic basket of 12x and 10x respectively; or 14x and 9x for a larger global basket. CPF itself trades at 16x PER & 13 EV/EBITDA.

• But the market seems to ignore valuations for Thai big cap players – just like PTT PCL (PTT TB) and Airports Of Thailand Pcl (AOT TB). There is also considerable excitement surrounding Thailand's Ministry of Finance ("MOF")'s reportedly warm reception to the idea of CPALL entering the banking business. Athaporn believes this just adds around ~Bt8/share, equating to a fair value of Bt86/share vs the street target price of Bt89 and change. It closed at Bt84.75 on Friday.
• CPALL looks fully priced and the upside from a potential banking license appears baked in. Yet CPF's stub ops are a complicated cross-border structure, displaying declining margins at the stub level (deconsolidating out Cp Pokphand Co Ltd (43 HK) & Charoen Pokphand Enterprise (1215 TT), plus stripping out CPALL's contribution), with no obvious catalyst to the upside. Arguably both stocks could track lower from here. CPALL more so.