Last Week in Event SPACE: Jardine Matheson, Vedanta, Cromwell, Cardinal, Taubman, Mediawan

Jardine Matheson Hldgs (JM SP) / Jardine Strategic Hldgs (JS SP)

JMH took a two-and-a-half month break from buying back its own shares - from the 13 March to the 26 May. It is quite possible, given the stratospheric JM/JS ratio, management held back until some sense of normalcy returned. JM has now bought back 7.9mn shares at a cost of US$418mn since it resumed buybacks in September 2019. Apart from the shares acquired on the 12 March, which were purchased by Jardine Matheson International Services, a wholly-owned subsidiary of JMH, all other shares have been cancelled.

• The simple ratio was at 1.90x (at the time of the insight) against a ~10-year average of 1.71x. The longer-term average (as far back as CapIQ goes) is 1.8x. The JM/JS ratio has been reverting to its mean since the 19 March, and it could be argued this will continue.
• However, JM received US$2.2bn from its sale of Jardine Lloyd Thompson Group P (JLT LN) in 2018, leaving ~US$1.8bn to continue buying back shares in itself. It is all but restricted from buying more shares in JSH on account of the public float. The average ratio since buybacks resumed last year is 1.86x, and 1.99x since the resumption (again) late May. The positive newsflow is with JMH from hereon. Recent buying suggests management considers current levels to be optimum.
• Separately, the NAV discount spread is ~15.5% against a one-year average of ~17%. I see JM at a 33% discount, which is historically wide. In Jardines: Holy Bargain Basements!, this was a clear Long JSH/ Short JMH trade. I would look to reverse that trade here.

Jardine Cycle & Carriage (JCNC SP) / Astra International (ASII IJ)

Astra is up 23% in the past month, against ~7% for JCNC, resulting in the discount to NAV at ~22%, a multi-year low. The implied stub of S$3.74, at the time of the insight, compares to the long-term average of S$2.89.

• Angus Mackintosh continues to like Astra as a recovery play and a key proxy for Indonesia's economic rebound going into FY21. Just last week, Astra was trading on 9.7x FY21E PER versus its 5-year average of 14.1x forward PER. I see the consensus FY21E at 10.1x.
• Given Astra accounts for 91%/74% of NAV/GAV, this appears a simple mean reversion play, as JCNC plays catch-up to Astra's recent outperformance. A portion of that outperformance likely hinged off the recent sale of its stake in Bank Permata (BNLI IJ) to Bangkok Bank Public (BBL TB), netting the company ~IDR16.5bn - see Travis Lundy's most recent insight: Permata Transaction Complete - Now For The Mandatory Takeover. Look to set up the stub at these levels.

(link to my insight: StubWorld: Matheson Buybacks As Ratio Mean Reverts; JCNC Looking Cheap)

Vedanta Ltd (VEDL IN) (Mkt Cap: $5.5bn; Liquidity: $42mn)

Because of the way that Indian Delisting Offers work (see Travis' and Janaghan Jeyakumar's guide here), and the way opportunistic take-private situations work in general, it helps to have an opportunity. The stock price falling by half is a pretty good one. The way this could unfold is a little complicated, involves the possible use of the Delisting Rules as yet untried, and there are discrete risk points (including Q2 earnings) between here and there.

• The company wrote down 22% of the book value of its non-Hindustan Zinc assets. Because the oil price fell. The oil price is up 60% since that write down. Other commodity prices are up since the fiscal year end. Zinc +10%. Silver +25%. Lead +7%. Copper +17%. Aluminium +4%. Iron ore +30%. All the commodity inputs are doing well at the start of this fiscal year from where they were written down to or indicated as of end-March. As India comes off lockdown, volumes will pick up. None of this is negative for the company given where things were on 31 March.
• The company took a tax hit on dividends it did not receive, then took the dividend after the balance sheet photo. That impacted the stock price of the main asset - Hindustan Zinc. Even at the lowest combined de-constructed (pro-forma) EBITDA in years, the combined entity trades on a pro-forma basis of about 3x EBITDA. Going to 4x would get the stock price to INR 150/share.
• The promoter is cunning, and has been skillful in squeezing out minorities in other businesses. One expects that some of the combination above was an exercise of some of that skill (COVID-19 perhaps not, but the writedowns, the timing of the tax hits, of the special div from Hindustan Zinc, the timing of the Delisting Proposal, etc.)
• The question is whether investors are willing to sell at all. If they are willing to sell, but only at a high price, can the Promoter wear them down to INR 147.57? If not, what is the likelihood the Promoter accepts a higher price? Where does this fall if it breaks? This deal is "risky" because if it breaks because investors want to get INR 200 and the Promoter will only pay INR 150, it could fall post-deal. But how far? If we know Vedanta is willing to pay INR 150 in a counter-offer, do the shares need to drop sharply from where they are now? Travis Lundy thinks not. If we think the RBB offer will be too high, and Vedanta will counter, Travis'd buy to a 20% discount to that counter. There is still a lot of room from here to there. Minimum counter is INR 147.57.
• For weeks the other Vedanta Resources funding story has been about how it would raise money to buy out Vedanta minorities. The story has long been a US$2.5bn loan and perhaps offering terms to existing bondholders to lower covenants, but details were thin on the ground. The loan construct - which may involve a large HZL dividend - may affect things more than Travis had thought. It doesn't change things overall, just potentially jiggles the timing.

• Pay attention to your tax regime and possibilities if you are long Hindustan Zinc. The next div could mean INR 9-10/share of Hindustan Zinc in terms of withholding - a full 5% of your position value. And there is no way around it with India-listed futures.

Back on the 16 March, CDV announced the receipt of a non-binding Offer from Nord Gold SE (Nordgold) at A$0.45775/share. Nordgold held 19.9% of shares out having acquired 16.4% from Goldfields Limited. In a 30 March update, CDV said it had entered into a confidentiality agreement with Nordgold and had also provided due diligence. There has been no further update. On the 18 June, CDV recommended a takeover Offer from Shandong Gold Mining Co., Ltd. (1787 HK) at A$0.60/share, a 75.5% premium to CDV's 20-day unaffected VWAP, and a 31.1% premium to Nordgold's proposal.

• This will see OZL take 100% control of the West Musgrave project, Australia's largest undeveloped nickel-copper project. OZL currently has a 70% interest in the project. CZI's board, holding 4.3% of shares out, recommend the Offer. Major shareholders with an additional 13.1% also support the transaction. This deal is expected to be put to the vote in late September, with a potential conclusion in early October.
• With 94% of the consideration (using OZL's last price) in OZL shares, this is a bet on OZL. OZL shares are flat YTD and are trading at their fair value price, according to street consensus. OZL is a A$3.5bn company, therefore the issuance of 6.4mn new shares under this transaction (~2% of shares out) is not a big deal. Current trading a shade below the implied terms at A$0.165/share. This looks a punt around the initial indicative terms of A$0.16. But this is not a particularly liquid arb play. The big question is - what is Caspin worth? Perhaps a couple of cents is my estimate.

Mediawan (MDW FP) (Mkt Cap: $0.4bn; Liquidity: $1mn)

The Korea Exchange will announce the results of the December 2020 review of the Korea Stock Exchange Kospi 200 Index (KOSPI2 INDEX) in November. The constituent changes will be effective from 11 December 2020 and the rebalancing trades will need to be done at the closing auction on 10 December 2020. At the current time, Brian sees nine stocks being added to and deleted from the index with another three stocks as very close adds and deletes. Depending on where SK Biopharmaceuticals (BIO SK) lists and the average market cap post 15 trading days, there could be a change in the KOSPI2 as early as September. KOSPI200 Rebalance Preview - Positioning Begins for December.