Last Week in Event SPACE: Sharp, TPG, Aveo, Wheelock Props, Es Con, Foster, ASM Int'l

Last Week in Event SPACE ...

• It looked like a block trade in Sharp Corp (6753 JP), but it did not smell like one
• TPG Telecom Ltd (TPM AU)'s pro-forma MergeCo EV/EBITDA multiple of 10.3x, assuming some synergies, is on the high side
• REIT-like Aveo Group (AOG AU), trading at 0.6x P/B, would benefit from a privatisation by Mulpha International (MIT MK)
• There's a chance that the deal for Wheelock Properties (S) (WP SP) gets bumped before the offer's first close this week
• There will be an uridashi in Es Con Japan (8892 JP) but not a normal one.
• On an ex-ante basis, you would not want to be short shares of Foster Electric (6794 JP) vs any reasonable comp or hedge
• The semiconductor equipment industry looks a hold here ahead of next quarter numbers as Asm International Nv (ASM NA) trades at an extreme level to ~25%- held Asm Pacific Technology (522 HK)

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events - or SPACE - in the past week)

Sharp Corp (6753 JP) (Mkt Cap: $15.3bn; Liquidity: $33mn)

Mizuho Securities announced it would purchase on Monday 27 August a 6.87% stake in Sharp (voting rights basis) to "meet the needs of an existing shareholder" but did not identify the seller. The press release on the Mizuho Securities webpage noted a purchase of 341,000 votes (i.e. 34,100,000 shares).

• It looked like a block trade, but it does not smell like one. There was not enough volume trading in the first two days after a 34mm share block trade for this to be one. And it does not look like it was pre-positioned. If it is not a block trade, it is likely a financing trade for the "seller" who, by selling, has effectively posted collateral for funding their position.
• The company has said that it intends to buy the Class A shares back out of existing funds. That is bullish. That would mean no overhang and the true number of shares out is 531mm existing + 79mm shares from the remaining Class Cs. That gets us to 610mm shares, which would be about the best result Sharp shareholders could hope for.
• If execs are confident of their forecasts and therefore of pulling this rabbit out of this hat (especially getting TV branding rights back in a few years, and pursuing IoT and home services), they would not sell. Travis didn't think they did and reckoned they borrowed money against their position and that the selloff the last two days on the news is overdone.

(link to Travis' insight: Sharp Seller "Needs" May Not Be What You Think)

Foster Electric (6794 JP) (Mkt Cap: $360mn; Liquidity: $5mn)

Foster announced (Japanese only) a large stock buyback 3,750,000 shares, 14.5% of shares out less Treasury shares - to be conducted on-market from 3 September 2018 to 31 March 2019.

• Travis expects the shares to outperform as the buyback constitutes a significant portion of undisturbed volume - even more when you consider the restrictions placed on buyback programs by the Cabinet Order. He would want to be long the shares, and would buy any short-term dip not caused by serious fundamental issues.

(link to Travis' insight: Foster Electric Announces YUUUGE Buyback)

BOJ Tapering?

On 31 July 2018, the BOJ issued a Monetary Policy Statement which addressed its Qualitative and Quantitative Monetary Easing policies with Yield Curve Control. Since then, there have been questions about whether the BOJ has been stepping back from ETF purchases. The BOJ has only bought ETFs three times in the past six weeks, and the 3-month rolling average of negative performance of TOPIX in the morning session where the BOJ does not subsequently buy ETFs in the afternoon has gone from -0.10% at the end of the year (2017) to -0.25% now.

• In order to get the average buying pace down to the target pace when it has recently been above, the BOJ would be required to buy less, and that could happen by buying less frequently (i.e. using a wider trigger on average). Recently the BOJ has been running well ahead of pace, so a drop-off in short-term pace is expected.
• The BOJ has clearly stated its ability to increase or decrease the policy amount of ETF buying depending on market conditions - i.e. how well the market is accepting of a lowering of risk premia.
• Travis does not expect we have seen nearly enough evidence to suggest the BOJ has started to stealth taper on ETF buying. It would take the combination of wider triggers for longer AND use of wider triggers when the longer-term run-rate was below the Policy Rate of ¥5.7trln/yr for "regular" ETF purchases AND a weaker market environment (i.e. risk premia going up).

(link to Travis' insight: JAPAN PASSIVE: BOJ Tapering ETF Buys? Not So Fast)

Es Con Japan (8892 JP) (Mkt Cap: $517mn; Liquidity: $5mn)

Es Con Japan announced a strategic tie-up with Chubu Electric Power Co (9502 JP) (and an uridashi), and the planned change in the significant shareholder. Unlike normal uridashi, which are offered to a broad group of investors, this uridashi will be offered to one investor - Chubu - which will buy 32.08% of the shares outstanding, (Y1,150/share, a 60% premium to last trade), which is structured to get around the tender offer rules.

• Es Con Japan is seeing a change of minority control. Eventually, it could lead to Chubu EPCO taking a majority stake.
• Chubu EPCO is buying something expensive, partly because Es Con does a lot of business in Chubu and partly because it was for sale.
• This likely changes very little for the business fundamentally. There will be no index changes. If punters chase this one higher, consider shorting.

(link to Travis' insight: Es-Con Japan (8892 JP) Uridashi Means Chubu EPCO Buying 33%)

TPG Telecom Ltd (TPM AU) (Mkt Cap: $5.8bn; Liquidity: $12.5mn)

TPG and Vodafone Hutchison Australia Pty Ltd ("VHA") announced a merger of equals whereby TPG shareholders would own 49.9% of the merged entity and VHA shareholders 50.1%, creating a company with a pro-forma enterprise value of some A$15.0bn, revenue of A$6.0bn+, EBTIDA of A$1.8bn, and Operating FCF of A$0.9bn. This combination was predicted by New Street Research in TPG Telecom Will Be a 4th Australian Operator, Or (More Likely) Merge with VHA to Create a Large No3 in July 2017.

• There will be operational synergies and cross-selling opportunities. There will be financial synergies as the enlarged ListCo will have an investment grade rating; will not spend the A$600mm TPG had expected to spend on mobile capex; and will be able to use the VHA's tax losses derived from prior expenditures (and losses).
• Travis believes that 10x on a pro-forma ex-spinoff and special div basis is on the high side. There will be some tax benefits to the merger which will help on a net basis, but on a pure valuation basis, comps in developed markets across Asia trade at 5-7x, and Australian rates are not low, comparatively speaking, and Australia remains a mature market.
• The abrupt decision to take the relationship to the next level is a tacit recognition of the current competitive intensity in the mobile market, even before the entry of a new challenger. While a combined Vodafone-TPG will be a formidable entity, the status quo of just three mobile operators is still better for competitive dynamics than having an aggressive, price-led challenger such as TPG according to Morningstar.

links to:
Travis' insight: TPG and Vodafone-Hutchison Merger of Equals Proposed - This One Goes To 11
Morningstar's insight: More Than Friends as TPG Telecom and Vodafone Answer Each Other's Calls.

Aveo Group (AOG AU) (Mkt Cap: $988mn; Liquidity: $3.5mn)

Aveo is trading at a ~40%+ discount to its P/B and an even higher % discount to peers. As the only pure-retirement-play in Australia, with almost REIT-like qualities, arguably it should trade at or above its book value, as do peers.

• An overhang on the share price is the ongoing class action suit instigated late last year in regards to perceived overbearing tactics geared towards depressing the future sales price of retirement homes. Although Aveo is not alone in these aggressive retirement resident agreements.
• The crossover in management, with Seng Huang Lee holding chairman titles in both Mulpha International (MIT MK)(Aveo's largest shareholder) and Aveo, raises the spectre of connected transactions. Aveo has stated it has met all its continuous disclosure obligations and follows strict corporate governance procedures. But the very presence of Lee insinuates the interests of Mulpha and Aveo are not aligned and that the Aveo stake is just another investment.
• This should change. Either Mulpha reduces down (or sells out entirely) its investment in Aveo; or a more practical solution, Mulpha privatises Aveo. The Lee family, Mulpha's controlling shareholder, has the financial clout to make this happen. I would also look to own Mulpha, which is simply cheap (>80% of assets are property-related), and given its low liquidity, a public listing serves little purpose.

(link to my insight: A Case for Privatising Aveo)

Wheelock Properties (S) (WP SP) (Mkt Cap: $1.9bn; Liquidity: $3.6mn)

The shares have not traded at or below the Offer Price since launch. It would take about 28.4mn shares to block the compulsory squeezeout of minorities and that traded on Day1 and Day2 post Offer Announcement. However, the delisting rules allow the promoter to vote, so if they are inclined to delist and the promoter gets to 90.01% at the close of this offer, they can force delisting. To block delisting would take 119.656mm shares, and so far 111.05mm shares have traded.

• The Offer is light. The offer, on the current schedule, closes 7 September, but the Offer is not final. The IFA has said it is "fair, reasonable, but not compelling." "Fair" and "reasonable" are perhaps a matter of semantics. While not explicit, "Compelling" is probably 20-30cts higher.
• Travis sees a strong chance that the deal gets bumped. The IFA basically told investors to sell in the market rather than take the offer and the market bid continues to be strong.

(link to Travis' insight: Wheelock Properties - Not Trading Like It Wants To Go at S$2.10)

Briefly ...

BWX Ltd (BWX AU)(Mkt Cap: $387mn; Liquidity: $2.44mn)

There is no deal from Bain yet. Lower results and slightly slower growth than previously expected suggests the possibility of a bid coming in lower than A$6.60. Bennelong (19.4% holding) had previously said that the A$6.60 bid was "opportunistic" but Travis tends to disagree. All in, Travis reckons the Reward vs Risk is skewed to the upside, and with the goal of the Board being to make themselves look good no matter what happens with Bain. The interim goal on a Bain walkaway would be to make the company pretty for another try in a year or two.

(link to Travis' insight: BWX Near Pre-Bid Lows - Risk Reward Now Skews Better)

Eighteenth Bank (8396 JP) (Mkt Cap: $553mn; Liquidity: $1mn)

The prior weekend, J. Brian Waterhouse covered the Japan Fair Trade Commission approval of the Eighteenth Bank (8396 JP) and Fukuoka Financial Group (8354 JP) integration extremely well in his piece Eighteenth Bank (8396 JP): 18th Nervous Breakdown.

• Taken on a pure PBR basis, Eighteenth Bank at 0.38x vs 0.66x for FFG, is cheap. Taken on an earnings basis, Eighteenth Bank is rich (the Forecast EPS ratio (using management forecasts for each bank) is about 0.38x).
• The Share Price Ratio is up sharply from 3mos & 6mos ago, but is below peaks seen early in the life of the planning of this integration in 2016-2017. Travis would be a buyer of Eighteenth Bank on any significant weakness below the 0.52 ratio level but doesn't feel confident it will be much higher than where it is now.

(link to Travis' insight: Eighteenth Bank (8396 JP) Integration with FFG (Finally) Approved - Ratio Undecided)

ESR-REIT (EREIT SP) (Mkt Cap: $608mn; Liquidity: $1mn)

The EGMs for both ESR-REIT (EREIT SP) and Viva Industrial Trust (VIT SP) were held and both sets of shareholders approved the merger. REIT investors who must own ESR-REIT for portfolio purposes would be advised to switch into VIT at the current price or just tighter to achieve a slight pickup vs benchmark. As an arb, the borrow is difficult still, though the short time left means exorbitant borrow rates may be palatable if one can trade the spreads well.

(link to Travis' insight: ESR-REIT and VIVA IT Unitholders Approve Their Merger)

Asm International Nv (ASM NA) / Asm Pacific Technology (522 HK)

With ASM Int'l trading at an extreme level to ~25%- held ASMPT, is now the time to go long WFE?

• The sell-off in semiconductor equipment plays over the past 3 months (>30% in most cases) appears overdone and is creating a buying opportunity across the board. The sector as a whole is up about 5% in the past 3 weeks, but it is too early to tell if this will be sustained. Semiconductor fundamentals are strong through end of the year, suggesting all semi stocks are moving into buy territory once again.
• All in, the semiconductor equipment industry looks a hold here and investors would be best served waiting until next quarter numbers to get a sense of whether the industry has reached a bottom.

Takara Holdings (2531 JP) / Takara Bio Inc (4974 JP)

Takara is trading at a discount to NAV of 35%, a 12-month low, while the simple ratio (2531/4974) is at a four and a half year low. The stake in Takara Bio accounts for 90% of Takara's market cap.

• On balance, Takara's share price appears to have overshot to the downside following its 1Q19 results.
• Growth is mainly driven by Bio, not the stub ops. However, the stub ops are growing, and are profitable overall. I would look to set up a Long Takara, Short Bio at these levels on a stub ratio of 0.367x; or possibly hedge out the stub's beverage ops via shorting Bio and Suntory Beverage & Food (2587 JP) and/or Kirin Holdings (2503 JP) on a 70/30 split, given Bio comprises around 66% of Takara's NAV.
• A word of caution: although Takara appears geared for a short-term reversal, the recent selldown is not apparent.

(link to my insight: StubWorld: The Demand for ASM Intl's Front-End; Takara's Spending for Spending's Sake)

HDC Holdings (012630 KS) (Mkt Cap: $650mn; Liquidity: $18.5mn)

In a series of reports, Sanghyun Park discussed the HDC tender spread which hovered around the 7-8% level for a good portion of the week.

(link to Sanghyun's (most recent) insight: HDC Tender: Two Ways of Playing This Event)

Defactostandard Ltd (3545 JP) (Mkt Cap: $72mn; Liquidity: $0.2mn)

This should be somewhat well-prepared, because of the signalling last month at the latest, but it still represents 3-9 days of recent ADV.

• It is a tiny-cap TOPIX inclusion, will not get analyst coverage, and will not see dramatically higher float in the near-term. It needs to keep plugging away at its story. The stock is not overly expensive, there will likely be an additional TOPIX upweight in April next year

(link to Travis' insight: DeFacto Standard (3545 JP) TOPIX Inclusion Event)

My ongoing series flags large moves in CCASS holdings over the past week or so (~10%), 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.