Last Week in Event SPACE – Toshiba, AWE, Sharp, Nisshinbo, Toray

Last week, the mechanics of index inclusions on Toshiba Corp (6502 JP)’s ¥600bn placement and short-swing profit disgorgement liability; AWE Ltd (AWE AU) is re-energised after the latest tilt; Sharp Corp (6753 JP)'s squeezalicious-ness comes to a head; Nisshinbo Holdings Inc (3105 JP)'s BIG buyback; and coming to grips on Toray Industries Inc (3402 JP)'s falsified data admission.

Events

Toshiba Corp (6502 JP) (Mkt Cap: $10.6bn; Liquidity: $94.9mn)

Travis Lundy delved into the index implications from Toshiba's ¥600bn placement. As there is no lock-up restriction on investors, the inclusion could happen very shortly after the placement of the shares becomes effective. The key variable is Effissimo, as the 320mn placed to them increases its position to 11.34%. That stake may no longer be considered float, as it makes Effissimo eligible for short-swing profit disgorgement liability.

• The MSCI inclusion may involve 6-8% of float, or 137-182mm shares to buy. Or 118-157mm shares to buy, depending on the treatment of those 320mn shares. The FTSE inclusion means a purchase of 2-3% of float, or 45-68mm shares to buy. Or 39-59mm shares to buy, depending on the 320mn shares.
• The big trade is Topix with a purchase of 13-15% of 6.336bn shares (Effisimo will no longer be “restricted”) or 823-950mn shares. This will probably take place in 10-12 months, but possibly as soon as 7-8 months.
• Travis’ summary: “If there is heavy selling into the index inclusion event, I would use that opportunity to buy shares in Toshiba as the combination of the Equity Raise, the Westinghouse BK resolution, the tax effects therein, and the sale of TMC shares will leave Toshiba quite well capitalized, and somewhat cash-rich. Toshiba will also be in a place to conduct further restructuring.”

(link to Travis' insight: Toshiba Capital Raise - Index Implications)

Nisshinbo Holdings Inc (3105 JP)(Mkt Cap: $2.5bn; Liquidity: $25mn)

On Wednesday after the close of trading, Nisshinbo Holdings Inc (3105 JP) announced a ¥20 billion buyback program, or up to 15mn shares (8.59% of shares out – but more under REAL World Float™) from 5 December 2017 to 22 March 2018. This constitutes a significant portion of the undisturbed volume.

• Travis doesn’t expect that 15mn number will be reached as the stock price moves up. He would be long the shares and would buy any short-term dip not caused by serious fundamental issues.

(link to Travis’ insight: Another BIG Nisshinbo Buyback - This Time ~8.6% of Shares)

Omron Corp (6645 JP) (Mkt Cap: $13bn; Liquidity: $59mn)

Omron Corp (6645 JP) announced a small Secondary Offering of ¥20bn vs. its ¥1.5tn market cap. But perhaps there is a pattern developing as banks find good reasons to start unwinding more crossholdings to shore up forecast profit declines this year. And the tax changes on dividends the last few years make it less attractive to hold those crossholdings; while it is becoming increasingly difficult to justify such holdings under the Corporate Governance Code

• Oman looks expensive-ish on a 12x EV/EBITDA vs. a recent average of mid-single digit. While the company is trading at a discount to the peer average in EV/Sales and EV/EBITDA terms, stripping out Fanuc Corp (6954 JP) and Yaskawa Electric Corp (6506 JP) from the average puts Omron at the top end of the range of other peers.

(link to Travis’ insight: A Tiny Omron (6645 JP) Offering - What’s Behind It?)

Yamaha Corp (7951 JP) (Mkt Cap: $7.3bn; Liquidity: $30.5mn)

Yamaha Corp announced an accelerated block offering to sell 8mn shares of Yamaha Motor Co Ltd (7272 JP). With no real affiliation other than its namesake, Travis views the unwind of this corporate cross-holdings as good news in the corporate governance department.

• Yamaha Motors owns 5.23% of Yamaha Corp and potentially Yamaha Corp could target a similar level of cross-holding.

• Yamaha Corp is not overly cheap, but it is still cash-rich, and the company has shown it is trying to improve returns to shareholders.

(link to Travis’ insight: Yamaha Sells Yamaha Motors Stake - Not Bad News, But Limited Good News)

Toray Industries Inc (3402 JP) (Mkt Cap: $15.5bn; Liquidity: $65.3mn)

SC Capital discussed the revelations that Toray had falsified data on its tire cord products sold to tire makers and auto parts suppliers. Not ideal news, however following its 5.3% decline on the news, SC believes this is a good opportunity to buy the stock.

• Toray’s management said the impact on overall profits will be minimal. And, more curiously, there were no illegalities in the incident.

• With FY17 & FY18 PER of 16.5x & 14.9x, based on consensus estimates, and a five-year average PER of 18x, SC believes the shares look undervalued.

(link to SC’s insight: Toray (3402) Falsifies Tire Cord Data--Buying Opportunity)

Link REIT (823 HK) (Mkt Cap: $19.7bn; Liquidity: $34mn)

Morningstar discussed Link REIT's HK$23bn mall sale – the largest of its kind in Hong Kong. The disposal price was more than 50% above the book value, which was based on the latest valuation in September 2017. Morningstar has raised its fair value estimate to HH$64 from HK$55. Shares closed at $70 on Friday.

(link to Morningstar’s insight: Link REIT’s Disposal at a Better-Than-Expected Price)

M&A

AWE Ltd (AWE AU) (Mkt Cap: $323mn; Liquidity: $1.1mn)

AWE received an unsolicited, non-binding and conditional proposal from China Energy Reserve and Chemical Group ("CERCG ), a Chinese state-owned enterprise, at a price of A$0.71/share.

• The proposal comes a year and a half after an A$0.80/share tilt by Lone Star Funds, which was covered by Arzish Baaquie here. Further afield, Senex Energy Ltd (SXY AU)made a merger approach in Dec 2013 at $1.44/share. Both approaches were rejected by AWE's Board.
• On the regulatory front, FIRB's green light on DUET Group (DUE AU) and the sale of Alinta Energy suggest a slight relaxation in FIRB's view of Chinese investment in Australia. More importantly, sifting through AWE's assets, Pranav does not see anything to suggest any strategic importance or concerns.
• Based on data for 17 Australian energy-related transactions in our database, Pranav estimates the median PBV multiple is 1.8x, indicates CERCG's offer is slightly better than precedents.

(link to Pranav’s insight: AWE: Third Time Lucky?)

Qualcomm Inc (QCOM US)(Mkt Cap: $96.5bn; Liquidity: $734mn)

Arun George believes it will be hard for Qualcomm’s board to reject Broadcom's proposal of terminating the NXP acquisition in return for an attractive standalone bid for Qualcomm.

• Qualcomm’s core licensing business faces an uncertain future. And the latest tender results highlight NXP shareholders’ reluctance to accept Qualcomms’ offer, with acceptances at 2.4%, down from 17% in March. NXP last traded at US$114.78 vs. Qualcomm’s $110 offer price.
• Arun believes Broadcom’s rumoured second bid of $77/share values standalone Qualcomm at an EV/Revenue of 4.9x. This multiple is in line with the median takeout EV/Revenue of 5x for major semiconductor M&A deals since 2015.

(link to Arun’s insight: A Clever Move to Call Qualcomm’s Bluff)

Integral Diagnostics Ltd (IDX AU) (Mkt Cap: $250mn; Liquidity: $0.6mn)

On Wednesday, Capitol Health Ltd (CAJ AU) announced its intention to launch an off-market takeover offer for Integral Diagnostics Ltd (IDX AU) at an implied takeover price of A$2.46. Merger talks have been in the pipeline for over a year.

• It’s a heavily conditional deal, not the least being the 90% acceptance condition – which Capital has the option to waive. Pranav believes the offer price is light, and a change in the terms to include more cash might appeal to shareholders and Integral’s management.

(link to Pranav;'s insight: Read more: Integral Diagnostics/Capitol Health - Picture Imperfect

Axalta Coating Systems Ltd (AXTA US) (Mkt Cap: $7.6bn; Liquidity: $115mn)

My insight had a 24-hour shelf-life before talks between Axalta and Nippon Paint collapsed. Just one week after the companies announced they were in discussions.

• Nippon Paint’s alleged cash offer for Axalta was $37 per share (US$9.1bn deal value), but Axalta wanted more.

(link to my insight: Axalta/Nippon Paint ... By Numbers)

Topix Inclusions

Sharp Corp (6753 JP) (Mkt Cap: $16.9bn; Liquidity: $45mn)

Sharp's reassignment to the TSE1 effective December 7th was announced on Thursday. This event triggers inclusion into the TOPIX Index, which Travis estimates will take place on 30 January 2018.

• The TSE1 reassignment was well flagged but potentially occurred later than expected. It still means passive buying of some 16-20% of the available float, at a minimum.
• Travis tilts bullish in the near-term because he does not believe that 20% of the float is pre-placed. There’s probably some pre-positioning but not enough to mean the net flow pressure is to be ignored. And the return to the TSE1 will likely elevate its "investability" status

(link to Travis’ insight: The Saga of Squeezalicious Comes to A Head - Sharp Returns to the TSE1)

Soliton Systems Kk (3040 JP)(Mkt Cap: $332mn; Liquidity: $3.5mn)

Soliton Systems will join the TOPIX Index on the close of the second to last day of December 2017 (28 December 2017). Volume has picked up dramatically and the inclusion is 2x ADV assessed on the past 10 days volume.

• It’s small-cap IT play. Currently trading at 13x trailing 12mth EBITDA & 50x forecast earnings. Which looks like an overshoot. But it has had significant revenue growth the last two years. We won't know projections for next year until well after the inclusion event.

(link to Travis' insight: Soliton Systems (3040) TOPIX Inclusion Trade Flying, Offering Launched).

Mynet Inc (3928 JP)(Mkt Cap: $136mn; Liquidity: $3.1mn)

Mynet, a smartphone app developer, and TSE announced that the stock would enter the TSE First Section on December 1st. This event triggers inclusion into the TOPIX Index and is expected to occur on 30 January 2018.

• It would appear this event has not been well-flagged. The company has had good earnings from gaming apps in the past, but this year's OP is set to be down slightly and NP down a lot. Assuming the losses aren't to be repeated, this stock won't be overly expensive on next year's earnings if sales and OP remain stable.
• Near-term, it may be a good buy, but if you cannot buy until above ¥2000-2200, this looks less attractive. There may be overhang above ¥2000, around the possible in-price of margin positions estimated by Travis. The stock closed at ¥1873 on Friday.

(link to Travis’ insight: Mynet (3928) TSE1 Promotion & TOPIX Inclusion)

SERAKU Co Ltd (6199 JP) (Mkt Cap: $105mn; Liquidity: $0.7mn)

Back in October, then-MOTHERS-listed small-cap IT infrastructure business SERAKU Co Ltd (6199 JP) announced (J-only) an equity offering of 1.2mm shares. This was accompanied by an announcement (J-only) that the company had applied to the TSE to be reassigned and the TSE had decided that as of the 20th of November, it would list either on the TSE Second Section or TSE First Section.

• Travis is on the fence on this one. More a buy-on-dip situation. Volume and positioning indicators are mixed, and it’s trading at 32x Aug-2018 EPS. But as a small cap, with significant revenue growth the last two years, it will hit someone's radar screens.

(link to Travis’ insight: Seraku (6199 JP) Smallcap TOPIX Inclusion Set for End-December)

Kyushu Leasing Service Co (8596 JP) (Mkt Cap: $230mn; Liquidity: $0.5mn)

On the 16th, the leasing company announced the TSE had reassigned the stock effective December 8th. The TSE1 reassignment triggers inclusion into the TOPIX Index with the inclusion event on 30 January 2018. The not-so-good-news is that Kyushu announced (also on the 16th) a secondary share offering of 2.156mm shares from five shareholders, plus a greenshoe of 323,000 shares from one of the five. The stock tanked 18% in two days on the news, and has stayed there since,

• Optically Kyushu looks inexpensive at 8x March 2018 forecast EPS but other finance companies like JACCS, Orient, and Fuyo General Lease trade at similar levels but they are not growing nearly as quickly. It is not a very liquid stock.
• Kyushu has almost zero foreign ownership, and almost zero domestic economic-investor presence in the register, so all of the TOPIX holding and any foreign holding which comes from the TSE1 presence needs to be bought starting now. There is simply no institutional presence in the stock to speak of at all. That will change.

(link to Travis’ insight: Kyushu Leasing (8596 JP) - Offering and TOPIX Inclusion)

Stubs

Hang Lung Group Ltd (10 HK) (Mkt Cap: $4.9bn; Liquidity: $3mn)/
Hang Lung Properties Ltd (101 HK) (Mkt Cap: $10.6bn; Liquidity: $14mn)

The current discount to NAV is 26%, having rebounded off a 12-month low of 28% on Wednesday. For a very clean, single stock holdco structure, this NAV discount still appears too wide.

• HLG announced it had monetised a property at the parent level last week, selling a commercial building to HLP for $225mn or $10,400/sq.ft. That price seems okay, especially considering the building endured a 108-hour blaze (repeated twice for effect in the announcement) last year.

• Though a positive transaction for HLP, further monetising only serves to clarify what is already a very clean holdco structure.

(link to my insight: StubWorld - Set-Up & Unwind Extremes: Hang Lung, Swire, AVIC)

Pasona Group Inc (2168 JP) (Mkt Cap: $738mn; Liquidity: $4.1mn)/
Benefit One Inc (2412 JP) (Mkt Cap: $1.8bn; Liquidity: $4.3mn)

Back in October, I mentioned Pasona’s 49.04% consolidated stake in Benefit One was worth 157% of its market cap. That % is now 123% after Pasona's 40% share price increase, including Friday's 15% jump.

• There's around ¥11bn of net debt (or ¥264/share) – or ¥19bn including prefs at the parent level. Shares closed at ¥1994 on Friday. And there are earnings losses at the parent level. Pasona still looks attractive here; just less so.