Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/boral-ltd" target="_blank" data-smartkarma-citation="entities:1487:1" rel="noopener">Boral Ltd (BLD AU)</a> today announced a special dividend and return of capital totalling $2.72/share. That is 46% of yesterday's closing price. </li>
<li>This was not unexpected. Management had promised, media articles had proposed as much. Now it is coming through. </li>
<li>Despite an 11% jump in the forward ex-div price today, the stock is cheap on a FY23 basis.  </li>
</ul>



Boral Ltd (BLD AU) today announced a special dividend and return of capital totalling $2.72/share. That is 46% of yesterday's closing price. 
This was not unexpected. Management had promised, media articles had proposed as much. Now it is coming through. 
Despite an 11% jump in the forward ex-div price today, the stock is cheap on a FY23 basis.  


Boral's 45% Capital Return - Resetting Forward Expectations

<div>After completing the $1.3bn sale of its 50% stake in USG Boral to Knauf Gips KG, international building and construction materials play <a href="https://www.smartkarma.com/entities/boral-ltd" target="_blank" data-smartkarma-citation="entities:1487:1" rel="noopener">Boral Ltd (BLD AU)</a> made an <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02359742-2A1290439?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">announcement</a> on April 1 it would use the proceeds to reduce net debt to A$1.5bn from A$1.9bn, and apply the remaining proceeds to a stock buyback. </div><div>Boral aims to buy up to 10% of shares out, or ~122mn shares, at a cost of A$670mn based on the then-prevalent share price. CEO Zlato Todorcevski said: “we believe that an on-market buy-back is the most effective method of returning this surplus capital to our shareholders.”</div><div>
As of the morning of <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02372944-2A1297240?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">May 10th</a>, Boral had bought back ~10.15mn shares - a bit less than 1%. 
After the close that day, <a href="https://www.smartkarma.com/entities/seven-group-holdings-ltd" target="_blank" data-smartkarma-citation="entities:803:1" rel="noopener">Seven Group Holdings (SVW AU)</a> <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02373310-2A1297476?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">announced</a> an off-market takeover at $6.50, at a zero premium to the last close. There were essentially no conditions to this Offer. There was no minimum acceptance condition. Seven held ~23.18% and said it would be "satisfied" for the Offer to result in a holding of around 30%. But there was no cap, and they were clearly happy to go higher. 
Seven Group had bought shares in the market in early 2020 in the covid crash, and by early June, owned 10%. by 11 September it owned 19.98%. In Australia, you can't go above 20% unless you launch a takeover, except for the neat little workaround which is that Australia's "creep rules" allow someone with more than 20% to buy up to but not more than 3.00% of shares out every six months. Seven got to 22.984% in early April. 
Boral's board rejected the Seven Offer in its <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02383423-2A1302901?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">Target Statement</a> of 9 June. The Independent Expert Grant Samuel came out with a fair value range of A$8.25-A$9.13/share, and concluded the Offer was not fair or reasonable.
In an ASX release on the <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02386227-2A1304322?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">21 June</a>, Boral said it would sell its North American Building Products business for US$2.15bn (~A$2.9bn). That figure was above expectations, but Seven criticized them for selling at a loss. 
About a week later, Seven <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02383423-2A1302901?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">bumped</a> its Offer, saying it would pay $7.30 cash if they get to 29.5%. Or $7.40 cash if they get to 34.5%.
Seven got to 29.5% by July 1, and 34.5% less than a week later.
Boral finished its buyback Wednesday having spent A$859.5MM buying back 122MM+ shares at an average price of $7.01 per share. This reduces the denominator, so Seven's stake has gone higher automatically in the interim.
Yesterday they announced they were at 44.9% as of Monday's close, and this morning they announced 48.41%. The deal closes 7pm Thursday which means two more submission days. It looks like they will get to 50.0% and if that happens, then there is an automatic 14-day extension. 
<a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a> has provided great background research on this situation in <a href="https://www.smartkarma.com/insights/boral-ltd-bld-au-seven-s-nil-premium" target="_blank" data-smartkarma-citation="insights:51279" rel="noopener">Boral Ltd (BLD AU): Seven's Nil Premium</a> and <a href="https://www.smartkarma.com/insights/boral-ltd-bld-au-rejects-seven-s-bump" target="_blank" data-smartkarma-citation="insights:53624" rel="noopener">Boral Ltd (BLD AU) Rejects Seven's Bump</a>. 
I seek to add on with last minute strategy and thinking about the post-Offer landscape, and there is more below the fold. 
</div>

After completing the $1.3bn sale of its 50% stake in USG Boral to Knauf Gips KG, international building and construction materials play Boral Ltd (BLD AU) made an announcement on April 1 it would use the proceeds to reduce net debt to A$1.5bn from A$1.9bn, and apply the remaining proceeds to a stock buyback. Boral aims to buy up to 10% of shares out, or ~122mn shares, at a cost of A$670mn based on the then-prevalent share price. CEO Zlato Todorcevski said: “we believe that an on-market buy-back is the most effective method of returning this surplus capital to our shareholders.”
As of the morning of May 10th, Boral had bought back ~10.15mn shares - a bit less than 1%. 
After the close that day, Seven Group Holdings (SVW AU) announced an off-market takeover at $6.50, at a zero premium to the last close. There were essentially no conditions to this Offer. There was no minimum acceptance condition. Seven held ~23.18% and said it would be "satisfied" for the Offer to result in a holding of around 30%. But there was no cap, and they were clearly happy to go higher. 
Seven Group had bought shares in the market in early 2020 in the covid crash, and by early June, owned 10%. by 11 September it owned 19.98%. In Australia, you can't go above 20% unless you launch a takeover, except for the neat little workaround which is that Australia's "creep rules" allow someone with more than 20% to buy up to but not more than 3.00% of shares out every six months. Seven got to 22.984% in early April. 
Boral's board rejected the Seven Offer in its Target Statement of 9 June. The Independent Expert Grant Samuel came out with a fair value range of A$8.25-A$9.13/share, and concluded the Offer was not fair or reasonable.
In an ASX release on the 21 June, Boral said it would sell its North American Building Products business for US$2.15bn (~A$2.9bn). That figure was above expectations, but Seven criticized them for selling at a loss. 
About a week later, Seven bumped its Offer, saying it would pay $7.30 cash if they get to 29.5%. Or $7.40 cash if they get to 34.5%.
Seven got to 29.5% by July 1, and 34.5% less than a week later.
Boral finished its buyback Wednesday having spent A$859.5MM buying back 122MM+ shares at an average price of $7.01 per share. This reduces the denominator, so Seven's stake has gone higher automatically in the interim.
Yesterday they announced they were at 44.9% as of Monday's close, and this morning they announced 48.41%. The deal closes 7pm Thursday which means two more submission days. It looks like they will get to 50.0% and if that happens, then there is an automatic 14-day extension. 
David Blennerhassett has provided great background research on this situation in Boral Ltd (BLD AU): Seven's Nil Premium and Boral Ltd (BLD AU) Rejects Seven's Bump. 
I seek to add on with last minute strategy and thinking about the post-Offer landscape, and there is more below the fold. 


Boral's Bump Earned, Likely to Extend, but THEN WHAT?

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

We have said it before and we will say it again; new highs are not a sell signal. This time we are referring to the S&amp;P 500 which is breaking out to all-time highs (above the prior February highs), something we have been able to say about the Nasdaq 100 for over two months. Breadth remains constructive for small- and large-caps and yesterday’s price action appears to be the start of yet another rotation into cyclical value/”reopening” plays. Our outlook remains bullish and we believe the path of least resistance remains higher. In today’s report we highlight attractive Groups and stocks within Materials &amp; Technology.

We have said it before and we will say it again; new highs are not a sell signal. This time we are referring to the S&amp;P 500 which is breaking out to all-time highs (above the prior February highs), something we have been able to say about the Nasdaq 100 for over two months. Breadth remains constructive for small- and large-caps and yesterday’s price action appears to be the start of yet another rotation into cyclical value/”reopening” plays. Our outlook remains bullish and we believe the path of least resistance remains higher. In today’s report we highlight attractive Groups and stocks within Materials &amp; Technology.

U.S. Equity Strategy: All-Time Highs Are Not a Sell Signal

Global equities (ACWI) and the equal-weighted S&amp;P 500 are attempting to break out for the fourth time this year from what has seemed like a never-ending horizontal consolidation period. At some point this consolidation will come to an end, however the weight of the evidence is not yet telling us “this time is different.” Despite some recent encouraging and positive developments from areas such as retail (XRT), EM (EEM), and European Banks (EUFN), we remain in wait-and-see mode as the market approaches resistance. In today's report we detail why we remain hesitant to call this a bull market along with what it would take to improve our outlook. We also highlight attractive Groups and stocks within Consumer Discretionary, Financials, and Materials: Retailers, Off-Price, Banks, Super-Regional, Construction Materials/Products, and Forest Products, Diversified.

Global equities (ACWI) and the equal-weighted S&amp;P 500 are attempting to break out for the fourth time this year from what has seemed like a never-ending horizontal consolidation period. At some point this consolidation will come to an end, however the weight of the evidence is not yet telling us “this time is different.” Despite some recent encouraging and positive developments from areas such as retail (XRT), EM (EEM), and European Banks (EUFN), we remain in wait-and-see mode as the market approaches resistance. In today's report we detail why we remain hesitant to call this a bull market along with what it would take to improve our outlook. We also highlight attractive Groups and stocks within Consumer Discretionary, Financials, and Materials: Retailers, Off-Price, Banks, Super-Regional, Construction Materials/Products, and Forest Products, Diversified.

U.S. Equity Strategy: Is Fourth Time a Charm?

Macro and Australian equity strategist, Macro Strategy Advisors

Shane Lee

Macro and Australian equity strategist

Macro Strategy Advisors

Cross Asset Strategy

<ul>
<li>
Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in FY20 still look too optimistic with 8.3% EPS growth expected down from 9.8% at the start of reporting season.  </li>
<li>
Trade tensions between the US and China have provided a relatively sombre backdrop, with the ASX 200 4% below its peak just before reporting season kicked off. Materials have been the key underperforming sector, with both BHP and RIO trading lower on the back of weaker iron ore prices and global growth concerns.  The RIO result was broadly in line with expectations, while the BHP result was a little weaker.  The result of the other market heavy-weight, CBA, was a little disappointing mainly because cash from the CFSGAM business sale remains on the balance sheet, but industry structural headwinds relating to remediation costs, low short rates and weak credit growth remain.</li>
<li>
Capital management has been a key area of focus. SUN, ABP and SCG announced buybacks after selling assets, while CCL preferred to hand the cashback as a special dividend after its SPC  QAN and CPU also announced buybacks, while WHC, SPK and ASX announced special dividends.  Several Miners including EVN and SAR announced changes to payout policy, while AMC decided to pay shareholders dividends on a quarterly basis.</li>
<li>
Some management teams (SUL, JBH, MGR, DHG, REA and CAR) in industries with headwinds such as housing and consumer spending are clearly taking up the challenge. CGF and MFG are taking up the fight in financial services and NEC is successfully repositioning itself away from broadcasting.  GFG is exposed to global trade issues like AMC and BXB, but management remains cautiously optimistic about the outlook.  BXB is facing structural headwinds from online retailing, but recessionary forces in Europe are a more immediate threat.  AMC is combating global weakness by focusing on integrating the Bemis acquisition.  Similarly, TCL is benefiting from the integration of its new asset (M4 East Tunnel).  Natural disasters were a dampener on the insurance results, while weakness in the High-roller market is again a clear negative for SKC and CWN. </li>
<li>
Green shoots are appearing in turnaround stories such as CCL, LLC and COL, but the market thinks it’s too early to add stocks such as VOC, CTD, PGH, BKL and CGC to that list. JHX could also be added as lower mortgage rates in both Australia and the US gain traction to support better industry conditions.</li>
<li>
CSL and COH were both standout positive results because their longer-term growth models are payoff and they are sticking to the winning strategy going forward. We thought A2M was dealt with a little harshly, but TWE seemed to silence some of its critics.</li>
<li>
We will update our model portfolio in a few weeks, but at this stage, we are likely to pull back our resources exposure after we receive the benefit of dividends. Clearly, the iron ore price cycle has turned, but we expect gold will remain well bid and would look to taking up positions in these stocks.  We think it’s too early to go fully defensive, but de-risking the portfolio more seems prudent.  Even lower global interest rates will make it difficult to be positive on Banks and some financials, but market volatility could create some opportunities.</li>
</ul>



Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in FY20 still look too optimistic with 8.3% EPS growth expected down from 9.8% at the start of reporting season.  

Trade tensions between the US and China have provided a relatively sombre backdrop, with the ASX 200 4% below its peak just before reporting season kicked off. Materials have been the key underperforming sector, with both BHP and RIO trading lower on the back of weaker iron ore prices and global growth concerns.  The RIO result was broadly in line with expectations, while the BHP result was a little weaker.  The result of the other market heavy-weight, CBA, was a little disappointing mainly because cash from the CFSGAM business sale remains on the balance sheet, but industry structural headwinds relating to remediation costs, low short rates and weak credit growth remain.

Capital management has been a key area of focus. SUN, ABP and SCG announced buybacks after selling assets, while CCL preferred to hand the cashback as a special dividend after its SPC  QAN and CPU also announced buybacks, while WHC, SPK and ASX announced special dividends.  Several Miners including EVN and SAR announced changes to payout policy, while AMC decided to pay shareholders dividends on a quarterly basis.

Some management teams (SUL, JBH, MGR, DHG, REA and CAR) in industries with headwinds such as housing and consumer spending are clearly taking up the challenge. CGF and MFG are taking up the fight in financial services and NEC is successfully repositioning itself away from broadcasting.  GFG is exposed to global trade issues like AMC and BXB, but management remains cautiously optimistic about the outlook.  BXB is facing structural headwinds from online retailing, but recessionary forces in Europe are a more immediate threat.  AMC is combating global weakness by focusing on integrating the Bemis acquisition.  Similarly, TCL is benefiting from the integration of its new asset (M4 East Tunnel).  Natural disasters were a dampener on the insurance results, while weakness in the High-roller market is again a clear negative for SKC and CWN. 

Green shoots are appearing in turnaround stories such as CCL, LLC and COL, but the market thinks it’s too early to add stocks such as VOC, CTD, PGH, BKL and CGC to that list. JHX could also be added as lower mortgage rates in both Australia and the US gain traction to support better industry conditions.

CSL and COH were both standout positive results because their longer-term growth models are payoff and they are sticking to the winning strategy going forward. We thought A2M was dealt with a little harshly, but TWE seemed to silence some of its critics.

We will update our model portfolio in a few weeks, but at this stage, we are likely to pull back our resources exposure after we receive the benefit of dividends. Clearly, the iron ore price cycle has turned, but we expect gold will remain well bid and would look to taking up positions in these stocks.  We think it’s too early to go fully defensive, but de-risking the portfolio more seems prudent.  Even lower global interest rates will make it difficult to be positive on Banks and some financials, but market volatility could create some opportunities.


ASX Reporting Season Update: Misses and Downgrades Amongst Bright Spots

Australia

James Hardie Industries Plc manufactures building products for new home construction and remodeling.  The Company's products include fiber cement siding, backerboard, and pipe. James Hardie Industries operates in the United States, Australia and New Zealand.

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James Hardie Industries Plc (JHX AU)

Boral's 45% Capital Return - Resetting Forward Expectations

Boral has finally announced its massive capital return to shareholders after significant asset sales in the last 12 months. There is probably more...

Travis Lundy

Boral's Bump Earned, Likely to Extend, but THEN WHAT?

Seven Group is nearing 50% on Boral, with two days left in the offer. Odds are they get there. If they do, the offer extends 14 days automatically....

Travis Lundy

U.S. Equity Strategy: All-Time Highs Are Not a Sell Signal

We have said it before and we will say it again; new highs are not a sell signal. This time we are referring to the S&P 500 which is breaking...

Vermilion Research

U.S. Equity Strategy: Is Fourth Time a Charm?

Global equities (ACWI) and the equal-weighted S&P 500 are attempting to break out for the fourth time this year from what has seemed like a...

Vermilion Research

ASX Reporting Season Update: Misses and Downgrades Amongst Bright Spots

Reporting season has been relatively disappointing with only 45% of stocks able to either meet or beat FY19 expectations. Analyst expectations in...

Shane Lee

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