Last Week in Event SPACE: Shimachu, Cathay, Nexon/Familymart, KWG Living, Tata Consultancy, Sun Art

Cardinal Resources Ltd (CDV CN) (Mkt Cap: $0.4bn; Liquidity: $2mn)

After 6 weeks of radio silence, Nordgold has matched Shandong Gold Mining Co., Ltd. (1787 HK) A$1.00/share for the Aussie gold miner. The question is - does Nordgold's improved Offer constitute a higher competing offer? Shandong says yes. Nordgold says no. One of these statements is wrong. Personally, Nordgold's statement makes more sense. This could head to the Takeover's Panel for a ruling on "Competing offer".

• The fact Nordgold matched Shandong's offer and is quibbling over takeover semantics indicates the Offer price of $1.00 is full. Still, Nordgold's matching Offer is an astute move - it is now back in Shandong's court whether to bump or not, providing Nordgold the luxury of matching, or exceeding a revised Offer, or simply tendering - and not have to take the lead in making bid increments.
• Cardinal is currently trading A$0.02/share through Shandong/Nordgold's Offers, on the expectation Nordgold/Shandong reloads. My IRR calcs indicate there may be more upside from here. If you are already in, then continue to ride out the end game of this competitive bidding situation. Otherwise, buy a spread or two above terms on the expectation one of the competing players reloads.
• UPDATE 1: Cardinal announced that shareholders holding 19.38% of shares out intend to accept Shandong's unconditional off-market Offer by 30 October - provided there no superior proposal emerges, or Shandong extends its Offer (currently expected to close on the 30 October, unless extended).
• UPDATE 2: Nordgold has now lodged an application with the Takeovers Panel concerning “the clear and unambiguous interpretation” of Shandong’s Last and Final Statement.

(link to my insight: Cardinal Resources: Nordgold's "Competing Offer")

Japan's largest Office REIT NBF announced a ¥140bn (~US$1.3bn) follow-on equity offering on 9th October 2020 and Janaghan Jeyakumar provided a brief introduction to the background of the REIT and its offerings history in Nippon Building Fund (8951 JP) REIT Offering: Take It. As mentioned in that insight, the pricing date was expected to be between 20th and 22nd of October 2020 (pricing is normally on the first day in the pricing period). NBF has now announced the Issue Price to be ¥527,240/unit, which translates to a 2.00% discount to the closing price of ¥538,000. This can be considered a standard discount that we typically see in most J-REIT follow-on equity offerings (2.00%-2.50%). HOWEVER, NBF's Unit Price has declined steeply in recent weeks resulting in a sharp drop from the undisturbed level.

• NBF's previous offerings have historically performed well against peers and the Index in the weeks and months following the placement. On a TSEREIT Index-adjusted basis, over a period of 90 days from the pricing date, the average return has been +6.5% with all previous seven offerings ending positively when compared against the Issue Price.
• CAVEAT: The sector outlook for Office REITs remains bearish. The social distancing measures introduced in response to the COVID-19 pandemic has encouraged the "work-from-home" and the future demand for large/premium office spaces remains a large question mark.
• Janaghan recommended that investors Buy the Offering. If you did not, or you want to add more, the historical pattern of NBF secondary offerings and peer-relative performance suggests buy on any weakness vs today's closing price. While there is ongoing suspicion about the nature of office work in future, buying NBF vs other Office REITs looks like a good idea here.

On the 4th of October, Tata Consultancy made an announcement to the Exchange to the effect that its Board would on the 7th of October consider a buyback. On the 7th, the Board announced that it had approved a proposal to buy back up to 53,333,333 shares for an aggregative amount of INR 16,000 crore or INR 160 billion (US$2.18bn), which is 1.42% of shares out. It looks small, but there have been two previous buybacks which were worth looking at when they came around. They were 1.99% and 2.85% and were done at similar premia. The structure of these buybacks was different than the structure of the Wipro Ltd (WPRO IN) buybacks discussed in How Indian Buyback Offers Work - The Wipro Example. That first insight is worth a read to know how they work.

• This is another Buyback Offer - like Wipro. But it's not like Wipro. This one is much more interesting for arbitrageurs. It is likely to be a true partial tender offer with an expected pro-ration well in excess of the statutory minimum of just under 5% and the headline pro-ration of ~1.2% for institutional investors. Travis expects a proration in the 20-60+% range. This creates a skew. One is long 100% of the upside and one suffers less on the downside (20-60% less) in near-space.
• If you are long Tata Consultancy Services shares and want to remain long, consider buying extra shares here and tendering if the shares do not move, and enjoying the excess profitability if they go up between now and mid-January 2021.
• If you are long on a passive basis, consider replacing some of your cash position (assuming you run cash at 97% of the portfolio and futures for 3% to keep cash on hand) with a position in TCS because that position will earn a minimum pro-ration. If the stock goes up, that is a high-quality problem. If it goes down, absolute are minimum pro-ration is likely to be about 4.5-5.0% and is more likely to be 20-60%. If the stock is at or near the Offer Price when the Offer Period is nearing its end, sell all your shares in the market if you can rather than take pro-ration risk.

Back on the 14 August 2020, Straits Trading announced its 1H20 results, which showed a 62.9/87.5% decline yoy in EBITDA and EPS, due in part to lower average tin prices and lower sales quantity of refined tin; and the knock on-effects from COVID-19 to its hospitality operations. Tin prices are up 38% since the March low and 10% since 30 June. There are signs of life in the hospitality front, with talk of bubble travel between countries, which may indicate operational losses have troughed. But of more interest is STR's 22.06% stake in ARA Asset Management. STR added 1.1% in May of this year. There is talk of IPO'ing ARA, some four years after it was taken private.

• STR's stake in ARA, based on its recent stake increase, is worth around the same as its current market cap - indicating the market is assigning almost zero value for the remaining real estate, hospitality segment, and the 54.8% stake in Malaysia Smelting Corp (SMELT MK), and stake in Suntec REIT (SUN SP).
• Illiquid, depressed pricing, with a potential major catalyst in the pipeline, this appears ripe for Tecity to take the company private.
• Update: Straits will issue at par S$200mn worth of notes maturing on Oct 29, 2025. The notes will be issued under Straits S$500mn multicurrency debt issuance programme.