Last Week in Event SPACE – SK Telecom, Hitachi Kokusai, Samsung, Softbank, Swire

This week, a thorough analysis of SK Telecom (017670 KS)'s expected carve-up; KKR ups its offer for Hitachi Kokusai Electric Inc (6756 JP) as Elliott ups its stake; the gravid departure of Samsung Electronics Co Ltd (005930 KS)'s CEO; an improved regulatory track for Sprint Corp (S US)'s merger is positive for Softbank Group Corp (9984 JP); and Swire Pacific Ltd (19 HK) buckles under its oil exposure, touching an all-time low against Swire Properties Ltd (1972 HK).

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

Event

SK Telecom (017670 KS) (Mkt Cap: $19bn; Liquidity: $36.7mn)/
SK Hynix Inc (000660 KS) (Mkt Cap: $59.9bn; Liquidity: $263.7mn)

Sanghyun Park and Douglas Kim deployed a pincer movement this week on SKT expected restructuring. Sanghyun's latest iteration discussed SKT’s relative valuations, but also the material net purchasing by local institutions of SKT and SK Holdings Co Ltd (034730 KS), which combined, accounted for "24.5% of the total amount of their entire net purchase in KOSPI the previous week."

• In a follow-up to his report, SK Telecom - Benchmarking Alphabet to Potentially Create SK Tomorrow, Douglas provided a thorough sensitivity analysis of the implied valuations of SK Tomorrow ("Intermediate Holdco") and SKT ("Opco") post a company split structure.

• Assuming SK Tomorrow is formed, SKT would shift the revenue and operating costs associated with SK Planet and the related businesses from SKT to SK Tomorrow; leaving the mobile & fixed line services revs, costs etc with SKT.
• Douglas arrived at a base case EV valuation for SKT (pro-forma) of ₩27.9tn, applying 5x EBITDA. And ₩12.1tn for SK Tomorrow using a NAV methodology.
• Together this results in a market cap of ₩32.9tn, 53% higher than SKT's current market cap of ₩21.5tn. “On a per-share basis, the upside target price would be ₩408,000, compared to the current share price of ₩267,000 for SKT, over a one year period. “

• One nagging issue is the creation of the double discount via the two intermediate holding companies (SK Tomorrow and SK Innovation). It’s a legitimate concern, and only partially diminished by arguing the two holding companies may have greater proficiency in M&A.

link to insight:
Sanghyun's: SK Group Restructuring - More Data Analysis (Relative Valuations)
Douglas's: SK Tomorrow & SK Telecom’s Implied Valuation Analysis Post Split

Samsung Electronics Co Ltd (005930 KS)(Mkt Cap: $311bn; Liquidity: $510.9mn)

Sanghyun discussed Vice Chairman and CEO Kwon Oh-hyun's - one of the founding and core members of Samsung's memory chip empire - surprise announcement he will not extend his current tenure in office, which expires in March 2018.

• The official line is Kwon is making way for the future of SamE, but Sanghyun repudiates that statement as Kwon continues to maintain numerous important positions in SamE, including Samsung Display's OLED business.
• So what gives? Sanghyun believes Kwon will assist in heir-apparent Lee Jae-yong’s early release. But of greater significance, Kwon's resignation may usher in or accelerate Samsung’s restructuring. Although Kwon stepping down generates uncertainty, Sanghyun believes this is the time to increase a position in SamE.

(link to insight: Samsung Electronics CEO Kwon Resignation - Intentions & Ramifications)

Lotte Shopping Co (023530 KS) (Mkt Cap: $6.9bn; Liquidity: $28.1mn)

Subsequent to the official launch of the Lotte Holdco late in the week, Sanghyun made an adjustment to the brand royalty income estimate.

• His revised NAV of ₩4.771tril vs. ₩5.171tn previously (both with a 30% discount on the investment assets), backs out a 0.98x PBR, pretty much in line with the average PBR of Korea's 10 largest holdcos.

(link to insight: Lotte Group Restructuring Part 9 - Official Launch of Lotte Holdco)

M&A

Hitachi Kokusai Electric Inc (6756 JP) (Mkt Cap: $2.9bn; Liquidity: $15.8mn)

Travis Lundy discussed KKR’s take it or leave it ¥2,900 tilt (vs. the original offer price of ¥2,503) for 48.3% of Kokusai. As part of the deal, Kokusai will acquire Hitachi's 51.7% stake at ¥1,870/share.

• The offer is priced at 15x EPS on newly revised forecasts, higher than say Lam Research Corp (LRCX US). Hitachi thinks the price is Ok. And Kokusai’s board is cool with it. Elliott, holding 8.59% (filing), where it has consistently purchased shares at ¥2,900 and above in the past month, presumably will NOT be OK with this price.
• Bear in mind KKR could purchase one-third of the minority shares plus one share, and together with Hitachi, hold 66.7% of the vote, and move towards squeezing out minorities. By KKR going for "majority of minority", it serves to mollify potential future criticism if the deal goes through.
• If there’s more in the tank on the thin film depo business, this could probably get done at a higher level. Currently trading through the Offer Price at ¥3,065. Will KKR bump? Travis doubts it.

(link to insight: KKR TOB for Hitachi Kokusai at ¥2900 - Again a Matter of Take It Or Leave It.

Mantra Group Ltd (MTR AU) (Mkt Cap: $910mn; Liquidity: $8.9mn)

Three days after Pranav Rao discussed Accor SA (AC FP)’s A$3.96/share indicative, non-binding offer, a binding offer emerged. That’s some exceptional, no-nonsense due diligence on Accor's part.

• With a number of larger shareholders reducing their holdings in Mantra, the 20% premium looks priced to complete. Pranav does not foresee any regulatory hurdles, which are conditions to this scheme.
• The opening of the data room was not on an exclusive basis, so the emergence of another bidder cannot be ruled out.
• Trading tight on account of the fully franked dividend of A$0.235/share embedded in the offer price.

(link to insight: Mantra Group: A Binding Agreement Arrives, Perhaps Too Soon.

Softbank Group Corp (9984 JP) (Mkt Cap: $97bn; Liquidity: $432mn)

Pelham Smithers addressed the anticipated finishing touches on the Sprint Corp (S US) /T Mobile US (TMUS US) merger, an announcement of which could take place at the end of October, coinciding with quarterly earnings.

• As to an exchange ratio for the all-stock deal, “TMUS' German parent, Deutsche Telekom (DTE GR), is said to be comfortable with a no-premium deal, and while Softbank's (9984 JP) CEO, Masayoshi Son, would like to do better than that, he is playing with a very weak hand.” Indications are for a zero-premium Sprint / TMUS merger offer.
• Pelham also elaborated on Makan Delrahim‘s appointment to the head of the anti-trust division at the DoJ on the 27 September. Calling him pro-deal is probably a stretch, yet his confirmation is still a considerable nudge to the pro-camp compared to William Barr's tenure as the anti-trust AAG four years ago, when Son last pitched a merger to Washington.
• All in, Pelham expects the merger to receive shareholder and DOJ/FCC approval, which should be positive for Softbank, “as its ownership of Sprint has tended not to be well received by investors”.

(link to insight: Sprint (S US) - Bloomberg Claims Deal Close, Democrats Move to Impede Deal With T-Mobile)

Select Harvests Ltd (SHV AU) (Mkt Cap: $287mn; Liquidity: $1.6mn)

Pranav discussed SHV rejecting Abu Dhabi Authority’s ("ADIA") $5.85/share indicative, non-binding proposal. SHV further added that in addition to completing a $45mn institutional placement, it will bolt on a non-underwritten share purchase plan for a further A$20mn.

• FIRB may have an issue with ADIA's offer as the acquisition involves acquiring agricultural land where there has been recent opposition. ADIA has received FIRB approval in the past such as the purchase of TransGrid.
• The offer values SHV at 12.4x FY19 EV/EBITDA, exceeding ASX peers. Of note, California accounts for 80% of global production, and the 2014 drought there in 2014 resulted in record almond prices, with a +ve knock-on effect to SHV. The counties affected by the current fires have little almond production.

(link to insight: SHV: Almond in the Rough?)

City Developments Ltd (CIT SP)(Mkt Cap: $8.5bn; Liquidity: $16.3mn)

Morningstar discussed City Developments Ltd (CIT SP) (“CDL”) acquiring the remaining 35% stake of Millennium & Copthorne Hotels (MLC LN) it does not already own, at £5.525/share cash, or a 22% premium to the one-month VWAP.

• There’s minimal strategic uptick from the transaction given CDL’s various board seats on M&C, including a common Chairman of both boards. However the deal will give CDL full control of M&C's hotel portfolio, and future development thereon, plus streamline the corporate structure.
• Morningstar has a fair value of S$12 against a closing price of S$12.64 on Friday.

(link to insight: City Development Seeks to Privatise Majority-Owned Millennium and Copthorne)

Stubs/Holdcos

Swire Pacific Ltd Cl A (19 HK)(Mkt Cap: $14bn; Liquidity: $11.9mn)/
Swire Properties Ltd (1972 HK) (Mkt Cap: $20.4bn; Liquidity: $7.1mn)

Swire's 23% discount to NAV is at a 12-month low, while a simple Bloomberg GRT (19 HK/1972 HK) is at the lowest level since Prop’s Dec 2012 listing, as Pac's ingravescent oil exposure filters through.

• Pac’s discount to NAV has historically traded tight, around a single digit %. Historically, stub ops tonked along, and it was not uncommon for beverage & marine op headwinds to be largely (and erroneously in my opinion) ignored as the perceived impact on NAV was considered marginal.
• The marine ops were viewed as a pseudo-hedge to Cathay, a validation proven incorrect when oil prices tanked, siding Cathay with massive hedging losses, while marine ops continue to back peddle as charter and utilisation rates decline.
• According to Swire’s 2017 interim report, (page 29) four of its 31 AHTS’s and one of the 9 PSVs are cold stacked – basically, moored, shutdown, with only watchmen onboard. There is some debate as to whether these vessels should ever be shut down as the long-term effect is not clear. Day rates for cold stacked still run US$15k/day for some vessels.
• 3 AHTS’ and 1 PSV were sold during the 1H for a combined loss of HK$19mn. Back of the envelope, perhaps 15% off book value. I’ve simply taken a 20% haircut to the book value of the vessels in my NAV.
• Beverages is interesting, yet not particularly exciting. The headline profit of HK$1.785bn in 1H17 comprises $1.423bn of non-recurring items. Stripping those out translates to a 7.7% lift yoy.
• On balance, this is probably worth setting up a small Long/Short position at these levels. Cathay can be hedged out. Yet there is no evident catalyst at the stub level, while marine ops could still surprise on the downside with further vessel write-downs as AHTS rates continue to decline.