Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p><em>Part I of this Two-Part Insight is called <a href="https://www.smartkarma.com/insights/what-to-do-with-the-alpine-alps-ratio-part-i-this-one-went-to-11-and-beyond" target="_blank">What To Do With The Alpine/Alps Ratio Part I: This One Went to 11! And Beyond!</a> and it went through the evolution of <a href="https://www.smartkarma.com/entities/2704" target="_blank" data-smartkarma-citation="entities:2704:1">Alpine Electronics Inc (6816 JP)</a> and <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-smartkarma-citation="entities:12001:1">Alps Electric Co Ltd (6770 JP)</a> forecasts since the deal was announced with the WRONG RATIO.</em></p><p>The Alpine/Alps Exchange <em>Wrong Ratio</em> was wrong before Alpine and Alps revised their March 2018 forecasts upward in October 2018 as discussed by <a href="https://www.smartkarma.com/profiles/840" target="_blank" data-smartkarma-citation="accounts:840">David Blennerhassett</a> in <a href="https://www.smartkarma.com/insights/alps-deal-for-alpine-not-fair-oasis-is-right" target="_blank" data-smartkarma-citation="insights:14832">Alps Deal for Alpine Not Fair - Oasis Is Right</a> and <a href="https://www.smartkarma.com/insights/alpine-alps-earnings-revisions-moooar-value-for-alpine" target="_blank" data-smartkarma-citation="insights:14881">Alpine &amp; Alps Earnings Revisions - Moooar Value for Alpine</a>. It was <em>More Wrong</em> in January when they upped forecasts even more. And the ratio is <em>Even More Wrong</em> now - laughably so - that full year results out show the March 2018 forecast Alpine / Alps De-Consolidated OP ratio outperformed the reference levels - used by the Independent Financial Advisors of the two companies to determine the ratio originally - by 95%. And that the companies now forecast a similar ratio for March 2019 OP 115% higher than the reference used.</p><p>It would be difficult to argue this is not a material difference. </p><p>A chart of the two stocks shows Alpine is now trading 25% through terms (the red line). Investors appear unwilling to sell Alpine down to where the implied ratio is. As the other insight suggests, that's probably supremely reasonable. The implied ratio is an Adjusted (for cross-shareholdings) EV/EBITDA ratio of ~0.2x. As it is, the current price gives an EV/EBITDA ratio for March 2019 more like 1.8x. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/904/original/20180428_AlpsAlpineChart.png?1524926283" class="editor-image img-responsive" data-smartkarma-image-id="50904"></figure><div style="text-align: left;" class="content-caption">source data: Bloomberg, company filings, Travis Lundy</div><p></p><h2>This is a Situation Which Should Make ALL Minority Investors Unhappy</h2><p>But those investors have to make their objections public. If they do not, then any and all letters one might write to management get lost in the ether. The press will not ask management what outsiders have written unless it is done publicly. The press right now does not seem to know that there is more than one owner who objects.</p><h2></h2><h2>Where To From Here?</h2><p>Read on.</p>

Part I of this Two-Part Insight is called What To Do With The Alpine/Alps Ratio Part I: This One Went to 11! And Beyond! and it went through the evolution of Alpine Electronics Inc (6816 JP) and Alps Electric Co Ltd (6770 JP) forecasts since the deal was announced with the WRONG RATIO.The Alpine/Alps Exchange Wrong Ratio was wrong before Alpine and Alps revised their March 2018 forecasts upward in October 2018 as discussed by David Blennerhassett in Alps Deal for Alpine Not Fair - Oasis Is Right and Alpine &amp; Alps Earnings Revisions - Moooar Value for Alpine. It was More Wrong in January when they upped forecasts even more. And the ratio is Even More Wrong now - laughably so - that full year results out show the March 2018 forecast Alpine / Alps De-Consolidated OP ratio outperformed the reference levels - used by the Independent Financial Advisors of the two companies to determine the ratio originally - by 95%. And that the companies now forecast a similar ratio for March 2019 OP 115% higher than the reference used.It would be difficult to argue this is not a material difference. A chart of the two stocks shows Alpine is now trading 25% through terms (the red line). Investors appear unwilling to sell Alpine down to where the implied ratio is. As the other insight suggests, that's probably supremely reasonable. The implied ratio is an Adjusted (for cross-shareholdings) EV/EBITDA ratio of ~0.2x. As it is, the current price gives an EV/EBITDA ratio for March 2019 more like 1.8x. source data: Bloomberg, company filings, Travis LundyThis is a Situation Which Should Make ALL Minority Investors UnhappyBut those investors have to make their objections public. If they do not, then any and all letters one might write to management get lost in the ether. The press will not ask management what outsiders have written unless it is done publicly. The press right now does not seem to know that there is more than one owner who objects.Where To From Here?Read on.

What To Do With The Alpine/Alps Ratio Part II:  Where To From Here?

<p><em>This is Part I of two insights published simultaneously. It deals with the Exchange Ratio and where it might go. Part II deals with the trading outcomes and timing. </em></p><p>What seems ages ago, at the end of July 2017, <a href="https://www.smartkarma.com/entities/12001" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/entities/alps-electric-co-ltd&amp;source=gmail&amp;ust=1509426720765000&amp;usg=AFQjCNEZW64uHapsqFGKcaIG4n9zKxRQyg">Alps Electric Co Ltd (6770 JP)</a> and <a href="https://www.smartkarma.com/entities/2704" target="_blank" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.smartkarma.com/entities/alpine-electronics-inc&amp;source=gmail&amp;ust=1509426720766000&amp;usg=AFQjCNFbQhcxEmEeYvf_o1D99nzfMWXQQA">Alpine Electronics Inc (6816 JP)</a> announced Alps would acquire Alpine through a share swap some 17+ months hence. </p><h2>Fair? I think Not.</h2><p>At the time, the "fair value" as analyzed by Alps' and Alpine's financial advisors mashed the numbers of management forecasts and assets and came to a "fair ratio" range which was... suspect. Management interpreted that to mean because they had ticked certain procedural boxes, a Scrip Exchange Ratio of 0.68 shares of Alps for every share of Alpine was appropriate.</p><p>Investors took exception, including Oasis Management, who built their stake to 9+%, rolled out a website, wrote letters, made presentations, and made a decent case to the public.</p><p><a href="https://www.smartkarma.com/profiles/840" target="_blank" data-smartkarma-citation="accounts:840">David Blennerhassett</a> wrote an insight at the end of October lambasting the two firms' calculations in <a href="https://www.smartkarma.com/insights/alps-deal-for-alpine-not-fair-oasis-is-right" target="_blank" data-smartkarma-citation="insights:14832">Alps Deal for Alpine Not Fair - Oasis Is Right</a> suggesting the ratio was wrong. He noted the fair value for Alpine when counting Alpine's prodigious non-operating financial assets implied <em>a fair value for Alpine required a ratio 30-60% higher. Read it! There is a lot of detail there.</em></p><p>This was followed a day later after H1 earnings results, and revisions, showed Alpine doing far better than its own management forecasts on which the ratio was based. He wrote <a href="https://www.smartkarma.com/insights/alpine-alps-earnings-revisions-moooar-value-for-alpine" target="_blank" data-smartkarma-citation="insights:14881">Alpine &amp; Alps Earnings Revisions - Moooar Value for Alpine</a> which suggested that in addition to missing assets, the management-blessed earnings forecasts were also off.</p><h2>Q3 Results - Alpine Goes to 11</h2><p>Q3 results came out at the end of January and market observers could note that Alpine's OP forecast for the year went from 9bn yen to 11.</p><p><em>Every good movie buff knows what that means.</em></p><p><iframe src="https://www.youtube.com/embed/KOO5S4vxi0o" width="840" height="473" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen="allowfullscreen"></iframe></p><p></p><p>Alps' full-year OP forecast rose from ¥67.3bn to ¥71bn on a consolidated basis, but that included the ¥2bn jump at Alpine so on a standalone basis (ex-Alpine, ex-Alps Logistics) the change was considerably less impressive.</p><p>With Q3 results came the hint that the companies were thinking of reviewing the terms. This caused some general excitement among investors who looked at the situation and saw a bump coming. On February 27th this year, the two companies announced a technical change in the post-acquisition structure, but no change in the financial terms. However, in the meantime, a global "risk off" move in tech and weakness particularly in the Apple supply chain had left Alps shares reeling (down 25% from November highs when the announcement was made). </p><h2>Annual Results</h2><p>The two companies announced annual results on April 26th after the close.</p><ul><li><strong>Alpine's interim results and full-year forecasts saw significant steps upward all year long. </strong></li><li>Alps' revenue forecasts rose as well, matching Alpine's forecast growth, but not its OP growth.</li><li>Alpine beat street OP forecasts strongly (by 17.8%), and its Mar2019 OP forecast, while lower than its 2018 results (despite the fact that the sales forecast is a full 8% higher) is above the street consensus and just 4% below the high Street estimate.</li><li>Alps beat street consensus on OP by just over 1%, then guided March 2019 revenue well below consensus and offered a consolidated OP forecast below the lowest estimate on the Street. </li><li><strong>If you look at Alps on an implied parent basis (i.e. stripping out revenue and OP from Alpine and Alps Logistics), it did even worse,</strong> and the forecast is to go back to March 2016 levels this next year. </li></ul><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/881/original/Screen%20Shot%202018-04-27%20at%2010.00.14%20PM.png?1524838098" class="editor-image img-responsive" data-smartkarma-image-id="50881"></figure><div style="text-align: left;" class="content-caption">data sources: company filings, capIQ consensus estimates, Travis Lundy</div><p></p><h2>Visualizing the Evolution of Earnings and Forecasts Post Ratio Determination</h2><p>The ratio was wrong to start with.</p><p>It has become wronger since.</p><p>To visualize the evolution of Street Consensus revenue and OP forecasts, along with the company forecasts, I have in the charts below created a ratio of Alpine Consensus Revenue divided by Alps Implied Parent Consensus Revenue, and done the same for OP. I have added dots for the same numbers using company forecasts.</p><p>The idea is that if one measures Alpine as a standalone business, and Alps as a standalone business, and the evolution of the ratio of those businesses, one can then look at an adjusted EV/EBITDA comparison (where both are adjusted by holdings in other businesses and financial assets (assuming that Alpine's non-cash financial holdings can be deducted from a standard EV as can Alps' non-cash financial holdings, including its stake in Alps Logistics. More on that below.</p><div style="text-align: left;" class="content-caption"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/892/original/Screen%20Shot%202018-04-28%20at%202.46.03%20PM.png?1524898015" class="editor-image img-responsive" data-smartkarma-image-id="50892"></figure><div class="content-caption">data sources: company filings, capIQ consensus estimates, Travis Lundy</div><p></p></div><p></p><h2>But Friday, Despite a HUGE Beat Thursday, Alpine (6816 JP) Shares Fell 0.5%.</h2><p>That was because Alpine fell 8% to a new 18-month low. And it may not be done. </p><p>Alpine shares were trading 16.4% through terms as of the close of Thursday. As of Friday they were trading at 25.7% through terms. </p><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/050/883/original/Screen%20Shot%202018-04-27%20at%2011.15.02%20PM.png?1524842361" class="editor-image img-responsive" data-smartkarma-image-id="50883"></figure><div style="text-align: left;" class="content-caption">data source: Bloomberg, Travis Lundy</div><p></p><h2>And Has Alpine's Asset Base Suffered Since The Deal Announcement?</h2><p>When David Blennerhassett broke down the <em>Value of Alpine</em> by its non-operating assets (at that point some ¥42.4bn of listed shareholdings, ¥14bn of shareholdings in Neusoft affiliates, and ¥53.3bn of net cash (not to mention another ~¥14bn of other net short-term assets financed by equity).</p><p>The value of the shareholdings is up. The net cash is up. We can assume the attributable value of Neusoft affiliate stakes is higher, but we'll say no change. The pile of other net receivables and short term assets funded out of equity has grown this year by about ¥6.5-7.0bn on a net basis. Assuming the growth in net liquid assets and receivables are worth nothing, the other liquid non-operating financial assets are worth ¥1656.8 per Alpine share now vs. ¥1590/share in October. </p><p>If you make appropriate adjustments to a Treasury-share-adjusted market cap, that gives you an Enterprise Value just over ¥31.5bn yen. That is against an EBITDA of ¥20.8bn this past year, and a company forecast which looks like it would get to ¥20.2bn this year. </p><p>The current share price, which is 25% through terms, suggests a trailing TTM (adjusted) EV/EBITDA of 1.62x.</p><p>At the 0.68 ratio and Alps' Friday closing price of ¥2428/share, the (adjusted) TTM EV/EBITDA would be 0.21x.</p><p>Raising the exchange ratio 30% given Alps' recent underperformance would also be light. It would get you to an Adjusted TTM EV/EBITDA of 1.85x. </p><div class="content-highlight"><p><strong>Clearly the ratio as it stands is not appropriate. Clearly raising it 30% would still be inappropriate. It needed a 30-60% raise when Alps shares were much higher. </strong></p><p><strong>Alpine management supporting the concept of a 0.2x EV/EBITDA ratio is ludicrous. Ticking the procedural boxes did not make it fair then. It does not make it fair now.</strong></p><p><strong>Shareholders in Alpine who have not made their voices known have an opportunity. </strong></p><ul><li><strong>The shareholder vote has some interesting items on the proxy.</strong></li><li><strong>And any serious shareholder would look at this and see that a company is in play. </strong></li></ul><p><strong>The timing is weird. The stock is cheap, but there are temporary risks. If you think there is a chance the special div gets passed, you don't want to buy now. If you think it does not (and admittedly I think the chances are low), then the stock is still very cheap here, even 25% through terms.</strong></p></div><p>This insight is split into two parts. It is too long otherwise. </p><ul><li>Part I discusses the different way of looking at potential "fair" ratios and how far off those fair ratios are from the current ratio. </li><li>Part II discusses the trading issues. </li></ul>

This is Part I of two insights published simultaneously. It deals with the Exchange Ratio and where it might go. Part II deals with the trading outcomes and timing. What seems ages ago, at the end of July 2017, Alps Electric Co Ltd (6770 JP) and Alpine Electronics Inc (6816 JP) announced Alps would acquire Alpine through a share swap some 17+ months hence. Fair? I think Not.At the time, the "fair value" as analyzed by Alps' and Alpine's financial advisors mashed the numbers of management forecasts and assets and came to a "fair ratio" range which was... suspect. Management interpreted that to mean because they had ticked certain procedural boxes, a Scrip Exchange Ratio of 0.68 shares of Alps for every share of Alpine was appropriate.Investors took exception, including Oasis Management, who built their stake to 9+%, rolled out a website, wrote letters, made presentations, and made a decent case to the public.David Blennerhassett wrote an insight at the end of October lambasting the two firms' calculations in Alps Deal for Alpine Not Fair - Oasis Is Right suggesting the ratio was wrong. He noted the fair value for Alpine when counting Alpine's prodigious non-operating financial assets implied a fair value for Alpine required a ratio 30-60% higher. Read it! There is a lot of detail there.This was followed a day later after H1 earnings results, and revisions, showed Alpine doing far better than its own management forecasts on which the ratio was based. He wrote Alpine &amp; Alps Earnings Revisions - Moooar Value for Alpine which suggested that in addition to missing assets, the management-blessed earnings forecasts were also off.Q3 Results - Alpine Goes to 11Q3 results came out at the end of January and market observers could note that Alpine's OP forecast for the year went from 9bn yen to 11.Every good movie buff knows what that means.Alps' full-year OP forecast rose from ¥67.3bn to ¥71bn on a consolidated basis, but that included the ¥2bn jump at Alpine so on a standalone basis (ex-Alpine, ex-Alps Logistics) the change was considerably less impressive.With Q3 results came the hint that the companies were thinking of reviewing the terms. This caused some general excitement among investors who looked at the situation and saw a bump coming. On February 27th this year, the two companies announced a technical change in the post-acquisition structure, but no change in the financial terms. However, in the meantime, a global "risk off" move in tech and weakness particularly in the Apple supply chain had left Alps shares reeling (down 25% from November highs when the announcement was made). Annual ResultsThe two companies announced annual results on April 26th after the close.Alpine's interim results and full-year forecasts saw significant steps upward all year long. Alps' revenue forecasts rose as well, matching Alpine's forecast growth, but not its OP growth.Alpine beat street OP forecasts strongly (by 17.8%), and its Mar2019 OP forecast, while lower than its 2018 results (despite the fact that the sales forecast is a full 8% higher) is above the street consensus and just 4% below the high Street estimate.Alps beat street consensus on OP by just over 1%, then guided March 2019 revenue well below consensus and offered a consolidated OP forecast below the lowest estimate on the Street. If you look at Alps on an implied parent basis (i.e. stripping out revenue and OP from Alpine and Alps Logistics), it did even worse, and the forecast is to go back to March 2016 levels this next year. data sources: company filings, capIQ consensus estimates, Travis LundyVisualizing the Evolution of Earnings and Forecasts Post Ratio DeterminationThe ratio was wrong to start with.It has become wronger since.To visualize the evolution of Street Consensus revenue and OP forecasts, along with the company forecasts, I have in the charts below created a ratio of Alpine Consensus Revenue divided by Alps Implied Parent Consensus Revenue, and done the same for OP. I have added dots for the same numbers using company forecasts.The idea is that if one measures Alpine as a standalone business, and Alps as a standalone business, and the evolution of the ratio of those businesses, one can then look at an adjusted EV/EBITDA comparison (where both are adjusted by holdings in other businesses and financial assets (assuming that Alpine's non-cash financial holdings can be deducted from a standard EV as can Alps' non-cash financial holdings, including its stake in Alps Logistics. More on that below.data sources: company filings, capIQ consensus estimates, Travis LundyBut Friday, Despite a HUGE Beat Thursday, Alpine (6816 JP) Shares Fell 0.5%.That was because Alpine fell 8% to a new 18-month low. And it may not be done. Alpine shares were trading 16.4% through terms as of the close of Thursday. As of Friday they were trading at 25.7% through terms. data source: Bloomberg, Travis LundyAnd Has Alpine's Asset Base Suffered Since The Deal Announcement?When David Blennerhassett broke down the Value of Alpine by its non-operating assets (at that point some ¥42.4bn of listed shareholdings, ¥14bn of shareholdings in Neusoft affiliates, and ¥53.3bn of net cash (not to mention another ~¥14bn of other net short-term assets financed by equity).The value of the shareholdings is up. The net cash is up. We can assume the attributable value of Neusoft affiliate stakes is higher, but we'll say no change. The pile of other net receivables and short term assets funded out of equity has grown this year by about ¥6.5-7.0bn on a net basis. Assuming the growth in net liquid assets and receivables are worth nothing, the other liquid non-operating financial assets are worth ¥1656.8 per Alpine share now vs. ¥1590/share in October. If you make appropriate adjustments to a Treasury-share-adjusted market cap, that gives you an Enterprise Value just over ¥31.5bn yen. That is against an EBITDA of ¥20.8bn this past year, and a company forecast which looks like it would get to ¥20.2bn this year. The current share price, which is 25% through terms, suggests a trailing TTM (adjusted) EV/EBITDA of 1.62x.At the 0.68 ratio and Alps' Friday closing price of ¥2428/share, the (adjusted) TTM EV/EBITDA would be 0.21x.Raising the exchange ratio 30% given Alps' recent underperformance would also be light. It would get you to an Adjusted TTM EV/EBITDA of 1.85x. Clearly the ratio as it stands is not appropriate. Clearly raising it 30% would still be inappropriate. It needed a 30-60% raise when Alps shares were much higher. Alpine management supporting the concept of a 0.2x EV/EBITDA ratio is ludicrous. Ticking the procedural boxes did not make it fair then. It does not make it fair now.Shareholders in Alpine who have not made their voices known have an opportunity. The shareholder vote has some interesting items on the proxy.And any serious shareholder would look at this and see that a company is in play. The timing is weird. The stock is cheap, but there are temporary risks. If you think there is a chance the special div gets passed, you don't want to buy now. If you think it does not (and admittedly I think the chances are low), then the stock is still very cheap here, even 25% through terms.This insight is split into two parts. It is too long otherwise. Part I discusses the different way of looking at potential "fair" ratios and how far off those fair ratios are from the current ratio. Part II discusses the trading issues. 

What To Do With The Alpine/Alps Ratio Part I:  This One Went To 11! And Beyond!

Japan

ALPS LOGISTICS CO., LTD., a subsidiary of Alps Electric Co., Ltd., is a trucking and courier transportation company that works closely with Alps Electric. The Company also provides warehousing and storage services,  Alps Logistics distributes and sells various personal care goods and packaging materials as well.

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Alps Logistics (9055 JP)

What To Do With The Alpine/Alps Ratio Part II: Where To From Here?

Part I of this Two-Part Insight is called What To Do With The Alpine/Alps Ratio Part I: This One Went to 11! And Beyond! and it went through the...

Travis Lundy

What To Do With The Alpine/Alps Ratio Part I: This One Went To 11! And Beyond!

This is Part I of two insights published simultaneously. It deals with the Exchange Ratio and where it might go. Part II deals with the trading...

Travis Lundy

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