Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

Cross Asset Strategy

<p><strong>What is the key question?</strong> Are we at the start of another 12-year bull market in value stocks? That's the duration of the last period when the value style of investing out performed growth in the Asia Pacific region.</p><p><strong>What is the evidence?</strong> Over the last 12-months, the balance between growth and value reversed the dominance that growth has held for much of the last 10-years. Whilst in Q1 2021, we remained cautious about a full declaration that the trend is reversing, we feel that the process is indeed underway and that a multi-year reversal is in progress. This is not just positive for value investors, but increasingly so for Small-Mid Cap investors.</p><p><strong>Why read this screening note? </strong>Q1 2021’s screen performance trumped the market delivering relative outperformance of 26.2%. Of the 27 names presented, 18 stocks delivered positive share price performance with an average increase of 21%, whilst the remaining 9 stocks declined 9.4 %. </p><p><strong>What is presented? </strong>56 names appear in our Q3 2021 Asia Pacific list providing plenty of opportunity for investors. The average EV/FCF multiple of 5.2x in Q3 2021 compared to 6.3x in Q1 2021 and 5.6x in Q2 2020. The average Free Cashflow multiple on equity is 4.6x in Q3 2021 versus 4.2x in Q1 2021.</p>

What is the key question? Are we at the start of another 12-year bull market in value stocks? That's the duration of the last period when the value style of investing out performed growth in the Asia Pacific region.What is the evidence? Over the last 12-months, the balance between growth and value reversed the dominance that growth has held for much of the last 10-years. Whilst in Q1 2021, we remained cautious about a full declaration that the trend is reversing, we feel that the process is indeed underway and that a multi-year reversal is in progress. This is not just positive for value investors, but increasingly so for Small-Mid Cap investors.Why read this screening note? Q1 2021’s screen performance trumped the market delivering relative outperformance of 26.2%. Of the 27 names presented, 18 stocks delivered positive share price performance with an average increase of 21%, whilst the remaining 9 stocks declined 9.4 %. What is presented? 56 names appear in our Q3 2021 Asia Pacific list providing plenty of opportunity for investors. The average EV/FCF multiple of 5.2x in Q3 2021 compared to 6.3x in Q1 2021 and 5.6x in Q2 2020. The average Free Cashflow multiple on equity is 4.6x in Q3 2021 versus 4.2x in Q1 2021.

Screening the Silk Road: Q3 2021 All Cap Screening - Free Cashflow (FCF)

Alpha-Centric ESG Research

Kyle Rudden

<p>Two days ago the U.K. Financial Reporting Council announced 125 successful signatories (aka "not greenwashers") to the revised U.K. Stewardship Code. Signatories are integrating stewardship and ESG (Environmental, Social, Governance) factors into investment decisions, to high standards.</p><p>Whilst this is ostensibly limited to U.K. pension assets, ramifications are more far-reaching than it might at first appear (one indication is the number of North American and Asia Pacific signatories, in addition to the expected European names). More specifically, the broad relevance is because it:</p><ul>
<li>Affects firms doing business with U.K. asset managers/owners not just the managers/owners.</li>
<li>Is a quasi-blueprint for similar anti-greenwashing initiatives taking root in the U.S. and Asia.</li>
<li>Greenwashing is having an increasing impact on stocks prices (e.g., DWS Group last month).</li>
</ul><p>This is one battle in an emerging global war on greenwashing. The U.S. SEC has its own agenda to fight greenwashing and Asia isn't far behind (e.g., regulators in Japan stepping up scrutiny). There is more to come, and a lot to learn from this including who is (and <em>is not</em>) on the signatory list.</p>

Two days ago the U.K. Financial Reporting Council announced 125 successful signatories (aka "not greenwashers") to the revised U.K. Stewardship Code. Signatories are integrating stewardship and ESG (Environmental, Social, Governance) factors into investment decisions, to high standards.Whilst this is ostensibly limited to U.K. pension assets, ramifications are more far-reaching than it might at first appear (one indication is the number of North American and Asia Pacific signatories, in addition to the expected European names). More specifically, the broad relevance is because it:
Affects firms doing business with U.K. asset managers/owners not just the managers/owners.
Is a quasi-blueprint for similar anti-greenwashing initiatives taking root in the U.S. and Asia.
Greenwashing is having an increasing impact on stocks prices (e.g., DWS Group last month).
This is one battle in an emerging global war on greenwashing. The U.S. SEC has its own agenda to fight greenwashing and Asia isn't far behind (e.g., regulators in Japan stepping up scrutiny). There is more to come, and a lot to learn from this including who is (and is not) on the signatory list.

The War on Greenwashing: UK Stewardship Code "Successful Signatories" Has Broader Implications

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>On 2 September at 7pm Australia time, the Marvelous Milton Merger Arb ratio was fixed, and just now it was <a href="https://www.asx.com.au/asxpdf/20210903/pdf/4504qbggnhgyc0.pdf" target="_blank" rel="noopener">announced</a>. </p><p>The ratio of <a href="https://www.smartkarma.com/entities/milton-corp-ltd" target="_blank" data-smartkarma-citation="entities:29090:1" rel="noopener">Milton Corp Ltd (MLT AU)</a> shares to <a href="https://www.smartkarma.com/entities/washington-h-soul-pattinson-and-co-ltd" target="_blank" data-smartkarma-citation="entities:6054:1" rel="noopener">Washington H. Soul Pattinson and Co. Ltd (SOL AU)</a> shares has been decided at 0.1863. Entitlements will be rounded up or down to the nearest share.</p><p>Those who have been following on my model would have the NAV at A$5.622 on 2 Sep at the close, or A$5.702/share including the A$0.08 of dividend which went ex- on August 31. That delivered me a number of 0.1864 but they started with A$5.70 rather than A$5.702.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/227/647/original/Screenshot+2021-09-03+at+12.18.13+PM.png?1630642709" class="editor-image img-responsive" data-smartkarma-image-id="227647"></figure></section><p>As reported in the <a href="https://www.afr.com/street-talk/milton-corp-s-4b-takeover-finds-proxy-firm-support-20210901-p58ntx" target="_blank" rel="noopener">AFR</a>, both major proxy services came out in favor of the deal saying advantages outweighed disadvantages, and noting the IE's "fair value" range said pricing was appropriate; in a good quote from the article, "there were no stones thrown", which usually results in an approval at the Scheme Meeting.</p><p>The schedule reported in the filing is unchanged from the schedule in the Scheme Booklet.</p><div>
<p>Today's announcement means the merger trade is "fixed" rather than floating and now the remaining "risks" are...</p>
<ul>
<li>a small and eminently arb-able risk arb spread (which is 3.56% less comms and borrow fees as I type (excluding any franking credit benefit)</li>
<li>the risk of whether this gets voted through at the Scheme Meeting on the 13th, and</li>
<li>the index impacts</li>
</ul>
<p>There is, as always, more below the fold.</p>
</div><hr><div><table class="table table-striped">
<colgroup>
<col>
<col>
</colgroup>
<tbody>
<tr><td colspan="2" style="width: 539pt;"><h2>History of Insights on the Situation</h2></td></tr>
<tr>
<td><strong>Date</strong></td>
<td><strong>Title</strong></td>
</tr>
<tr>
<td>22 Jun 21</td>
<td><a href="https://www.smartkarma.com/insights/milton-merger-is-a-most-marvelous-arb" target="_blank" rel="noopener">Milton Merger Is A Most Marvelous Arb</a></td>
</tr>
<tr>
<td>24 Jun 21</td>
<td><a href="https://www.smartkarma.com/insights/milton-whsp-merger-index-implications-and-the-marvelous-arb" target="_blank" rel="noopener">Milton-WHSP Merger Index Implications and the Marvelous Arb</a></td>
</tr>
<tr>
<td>21 Jul 21</td>
<td><a href="https://www.smartkarma.com/insights/milton-s-marvelous-arm-meanders-along-marvelously" target="_blank" rel="noopener">Milton’s Marvelous Arb Meanders Along... Marvelously</a></td>
</tr>
<tr>
<td>5 Aug 21</td>
<td><a href="https://www.smartkarma.com/insights/the-still-marvelous-milton-arb-confirms-its-schedule-much-marvelousness-to-come" target="_blank" rel="noopener">The STILL MARVELOUS Milton Arb Confirms Its Schedule - Much Marvelousness to Come</a></td>
</tr>
<tr>
<td>12 Aug 21</td>
<td><a href="https://www.smartkarma.com/insights/the-magnality-of-the-marvelous-milton-merger-makes-a-moribund-march-to-metaphysis-it-s-mirific" target="_blank" rel="noopener">The Magnality of the Marvelous Milton Merger Makes a Moribund March To Metaphysis (It’s Mirific!)</a></td>
</tr>
<tr>
<td>25 Aug 21</td>
<td>
<a href="https://www.smartkarma.com/insights/marvelous-milton-making-its-move-new-30yr-highs-on-both-stocks" target="_blank" data-smartkarma-citation="insights:56651" rel="noopener">Marvelous Milton Making Its Move - New 30yr Highs On Both Stocks</a> </td>
</tr>
</tbody>
</table></div><div><p></p></div>

On 2 September at 7pm Australia time, the Marvelous Milton Merger Arb ratio was fixed, and just now it was announced. The ratio of Milton Corp Ltd (MLT AU) shares to Washington H. Soul Pattinson and Co. Ltd (SOL AU) shares has been decided at 0.1863. Entitlements will be rounded up or down to the nearest share.Those who have been following on my model would have the NAV at A$5.622 on 2 Sep at the close, or A$5.702/share including the A$0.08 of dividend which went ex- on August 31. That delivered me a number of 0.1864 but they started with A$5.70 rather than A$5.702.As reported in the AFR, both major proxy services came out in favor of the deal saying advantages outweighed disadvantages, and noting the IE's "fair value" range said pricing was appropriate; in a good quote from the article, "there were no stones thrown", which usually results in an approval at the Scheme Meeting.The schedule reported in the filing is unchanged from the schedule in the Scheme Booklet.
Today's announcement means the merger trade is "fixed" rather than floating and now the remaining "risks" are...

a small and eminently arb-able risk arb spread (which is 3.56% less comms and borrow fees as I type (excluding any franking credit benefit)
the risk of whether this gets voted through at the Scheme Meeting on the 13th, and
the index impacts

There is, as always, more below the fold.






History of Insights on the Situation

Date
Title


22 Jun 21
Milton Merger Is A Most Marvelous Arb


24 Jun 21
Milton-WHSP Merger Index Implications and the Marvelous Arb


21 Jul 21
Milton’s Marvelous Arb Meanders Along... Marvelously


5 Aug 21
The STILL MARVELOUS Milton Arb Confirms Its Schedule - Much Marvelousness to Come


12 Aug 21
The Magnality of the Marvelous Milton Merger Makes a Moribund March To Metaphysis (It’s Mirific!)


25 Aug 21

Marvelous Milton Making Its Move - New 30yr Highs On Both Stocks 




Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part

David Blennerhassett

Last Week in Event SPACE: SOHO China, Evergrande, Kerry Logistics, Milton, CBA, NTT

Commonwealth Bank of Australia / Event-Driven

<p style="text-align: left;">In <a href="https://www.smartkarma.com/insights/aussie-bank-buyback-season-starts-expect-a-12-15bn-and-funky-flows" target="_blank" data-smartkarma-citation="insights:55301" rel="noopener">Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows</a> 10 days ago I wrote that I expected <a href="https://www.smartkarma.com/entities/commonwealth-bank-of-australia" target="_blank" data-smartkarma-citation="entities:14:1" rel="noopener">Commonwealth Bank of Australia (CBA AU)</a> to announce an off-market buyback A$5.0-6.0bn when it announced earnings on 11 August.</p><div class="content-highlight">
<p><strong>11 Aug 2021: CBA releases earnings</strong></p>
<ul>
<li>In its Q3 update <a href="https://www.asx.com.au/asxpdf/20210512/pdf/44wdznw579z8cv.pdf" target="_blank" rel="noopener">released</a> on 12 May, <a href="https://www.smartkarma.com/entities/commonwealth-bank-of-australia" target="_blank" data-smartkarma-citation="entities:14:1" rel="noopener">Commonwealth Bank of Australia (CBA AU)</a> announced a CET1 ratio of 12.7%.</li>
<li>In April CBA issued PERL capital notes to the tune of A$1.18bn which raised Tier1 by 26bp, and sold its Comminsure business which will also raise it slightly in CY21H2. It sold its wealth management business earlier. Given earnings are expected to be robust and more writebacks from provisions made last year could be in the offing, what was an excess capital position of A$10-11.5bn at end-March could be on the order of A$12.0-13.5bn at end-June.</li>
<li>Given the change in CBA's profile from multi-strat bank to more of a deposit-taking institution, and the notion it could get the second part (A$500mm) of the $1bn capital penalty APRA applied in 2019 (following a review of its governance, culture and accountability) following remediation, there is likely to be more flexibility to lower the CET1 ratio.</li>
<li>The 12 May statement said <em>"A strong surplus capital position creates flexibility for the board in its consideration of capital management initiatives. The timing and extent of any such initiatives is dependent upon a continued trend of domestic economic improvement, our ongoing assessment of portfolio credit quality, and regulatory guidance."</em>
</li>
<li><strong>CBA should be expected to be able to raise its dividend AND buy back shares. I would expect a buyback of A$5.0-6.0bn or about half the distance between its end-June CET1 and the "Unquestionably Strong" level.</strong></li>
<li><em><strong>Given CBA's franking credit position, and its history of having conducted off-market buybacks in the past, one should expect CBA's buyback to be an off-market buyback. </strong></em></li>
</ul>
</div><h3></h3><h2>Today's News</h2><p>This morning, Commonwealth Bank of Australia released its FY2021 Full Year Earnings (<a href="https://www.commbank.com.au/content/dam/commbank-assets/investors/docs/results/fy21/cba-fy21-profit-announcement.pdf" target="_blank" rel="noopener">statement</a>, <a href="https://www.commbank.com.au/content/dam/commbank-assets/investors/docs/results/fy21/cba-fy21-results-presentation.pdf" target="_blank" rel="noopener">presentation</a>, <a href="https://www.commbank.com.au/content/dam/commbank-assets/investors/docs/results/fy21/cba-fy21-basel-iii-pillar-3-disclosure.pdf" target="_blank" rel="noopener">capital adequacy</a>, and there is, of course, a <a href="https://edge.media-server.com/mmc/p/jwtuzfqm" target="_blank" rel="noopener">webcast</a>, which goes along with the <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">Annual Report</a>, <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">Corporate Governance Statement</a>, and an update on the <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">Prudential Inquiry Remedial Action Plan</a>).  </p><p>As expected, results were good. Statutory NPAT up 19.7%yoy, mostly due to lower loan impairments. Operating profit was up 1.7%. NIM was down slightly to 2.03% due to higher quality assets and CET1 capital came in at 13.1%.</p><p><em><strong>And as expected, the final dividend was hiked - A$2.00/share for Record Date 18 August - and a <a href="https://www.commbank.com.au/about-us/investors/asx-announcements.html" target="_blank" rel="noopener">large off-market buyback was announced</a>. </strong></em></p><h3>A$6.0bn. </h3><p style="text-align: left;">Also with a Record Date of 18 August. </p><p style="text-align: left;"></p><p style="text-align: left;"><em>This insight talks about how the flows, and the possibilities. It is a follow-on from <a href="https://www.smartkarma.com/insights/aussie-bank-buyback-season-starts-expect-a-12-15bn-and-funky-flows" target="_blank" data-smartkarma-citation="insights:55301" rel="noopener">Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows</a>. One should expect <a href="https://www.smartkarma.com/entities/westpac-banking-corp" target="_blank" data-smartkarma-citation="entities:444:1" rel="noopener">Westpac Banking (WBC AU)</a> to announce an off-market buyback when it reports on 19 August. There are two bits of more recent news which impact this. I had expected A$3.0bn or more. I might expect A$4.0bn but there is a wee cloud there.</em></p>

In Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows 10 days ago I wrote that I expected Commonwealth Bank of Australia (CBA AU) to announce an off-market buyback A$5.0-6.0bn when it announced earnings on 11 August.
11 Aug 2021: CBA releases earnings

In its Q3 update released on 12 May, Commonwealth Bank of Australia (CBA AU) announced a CET1 ratio of 12.7%.
In April CBA issued PERL capital notes to the tune of A$1.18bn which raised Tier1 by 26bp, and sold its Comminsure business which will also raise it slightly in CY21H2. It sold its wealth management business earlier. Given earnings are expected to be robust and more writebacks from provisions made last year could be in the offing, what was an excess capital position of A$10-11.5bn at end-March could be on the order of A$12.0-13.5bn at end-June.
Given the change in CBA's profile from multi-strat bank to more of a deposit-taking institution, and the notion it could get the second part (A$500mm) of the $1bn capital penalty APRA applied in 2019 (following a review of its governance, culture and accountability) following remediation, there is likely to be more flexibility to lower the CET1 ratio.
The 12 May statement said "A strong surplus capital position creates flexibility for the board in its consideration of capital management initiatives. The timing and extent of any such initiatives is dependent upon a continued trend of domestic economic improvement, our ongoing assessment of portfolio credit quality, and regulatory guidance."

CBA should be expected to be able to raise its dividend AND buy back shares. I would expect a buyback of A$5.0-6.0bn or about half the distance between its end-June CET1 and the "Unquestionably Strong" level.
Given CBA's franking credit position, and its history of having conducted off-market buybacks in the past, one should expect CBA's buyback to be an off-market buyback. 

Today's NewsThis morning, Commonwealth Bank of Australia released its FY2021 Full Year Earnings (statement, presentation, capital adequacy, and there is, of course, a webcast, which goes along with the Annual Report, Corporate Governance Statement, and an update on the Prudential Inquiry Remedial Action Plan).  As expected, results were good. Statutory NPAT up 19.7%yoy, mostly due to lower loan impairments. Operating profit was up 1.7%. NIM was down slightly to 2.03% due to higher quality assets and CET1 capital came in at 13.1%.And as expected, the final dividend was hiked - A$2.00/share for Record Date 18 August - and a large off-market buyback was announced. A$6.0bn. Also with a Record Date of 18 August. This insight talks about how the flows, and the possibilities. It is a follow-on from Aussie Bank Buyback Season Starts - Expect A$12-15bn and Funky Flows. One should expect Westpac Banking (WBC AU) to announce an off-market buyback when it reports on 19 August. There are two bits of more recent news which impact this. I had expected A$3.0bn or more. I might expect A$4.0bn but there is a wee cloud there.

CBA Announces a BIG Off-Market Buyback - Timing and Past Cases

Australia

Commonwealth Bank of Australia provides banking, life insurance, and related services for individuals, small businesses and medium sized commercial enterprises. The Bank provides corporate and general banking, international financing, institutional banking and stock broking and funds management such as superannuation product.

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Commonwealth Bank of Australia (CBA AU)

Screening the Silk Road: Q3 2021 All Cap Screening - Free Cashflow (FCF)

Is it the start of a 12-year bull market in value? That's the duration of the last period when APAC value outperformed growth. Q'1s FCF screen...

David Lepper

The War on Greenwashing: UK Stewardship Code "Successful Signatories" Has Broader Implications

Telegraph from European front in global war on greenwashing. U.K. names stewardship victors ("not greenwashers"). Many notable casualties. Anti...

Kyle Rudden

Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part

Marvelous Milton Merger Mapping Mabbled. The ratio is settled at 0.1863 shares of WHSP for every share of Milton. Next is the index trade... But...

Travis Lundy

Last Week in Event SPACE: SOHO China, Evergrande, Kerry Logistics, Milton, CBA, NTT

The weekend is here! Pour yourself a coffee, grab a comfortable seat, and sift through a brief summary of insights on various events discussed...

David Blennerhassett

CBA Announces a BIG Off-Market Buyback - Timing and Past Cases

Commonwealth Bank of Australia today announced a BIG off-market buyback of A$6bn - at the upper end of my expected range. This deal will have super...

Travis Lundy

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