Index Rebal/Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Index Rebal/Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

Index Rebalance

<ul>
<li>The STOXX Europe 600 Index is a benchmark index with a fixed number of 600 components representing large, mid and small capitalization companies across 17 countries of the European region.</li>
<li>The EURO STOXX Index is a subset of the STOXX Europe 600 Index and is also the parent index for the widely-tracked EURO STOXX 50 Index.</li>
<li>Below is a look at the Potential Adds and Deletes for the STOXX Europe 600 Index and the EURO STOXX Index in the upcoming index review in March 2022.</li>
</ul>


The STOXX Europe 600 Index is a benchmark index with a fixed number of 600 components representing large, mid and small capitalization companies across 17 countries of the European region.
The EURO STOXX Index is a subset of the STOXX Europe 600 Index and is also the parent index for the widely-tracked EURO STOXX 50 Index.
Below is a look at the Potential Adds and Deletes for the STOXX Europe 600 Index and the EURO STOXX Index in the upcoming index review in March 2022.


STOXX Europe Indices: Quiddity Leaderboard for March 2022 Rebalance (And Jan 2022 BHP Replacement)

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On October 28, <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> published Q3 trading update and downgraded guidance for FY 2021: it expects FY 2021 organic revenue to be 5% below FY 2020 on an organic basis (FY 2020 revenue was £1.68 billion), due to supply chain disruption and softer defence trends. Meggitt added that it expects underlying operating profit of between £170 million and £190 million (vs. £192 million in FY 2020).
The UK government ordered a probe into the takeover offer on national security grounds. The CMA is required to investigate the proposed transaction and report to the Secretary of State by March 18, 2022. Meggitt looks forward to engaging constructively with the CMA on its review. In mid-August, the Secretary of State ordered a similar probe into the takeover of <a href="https://www.smartkarma.com/entities/ultra-electronics-holdings-plc" target="_blank" data-smartkarma-citation="entities:22196:1" rel="noopener">Ultra Electronics Holdings (ULE LN)</a> by Cobham, and gave the CMA until January 18, 2022 to investigate the proposed deal.
<a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a> is an industrial buyer, and does not intend to dismantle Meggitt as it has happened with Cobham (Cobham was quickly dismantled after the takeover by Advent).
Boris is seeking allies beyond the EU, so I do not think the UK Government will block a deal from an American company with committed financing. Rather the Government will ask for guarantees that jobs/technology/manufacturing stay within the UK. With committed deal financing and almost sure green light from the UK Government, there are high chances that this deal will complete.
Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of comparables, source: Capital IQ consensus) and 3.4% FCF yield reflecting the bid premium. The spread is relentlessly tightening.
Gross spread is 6.2% for a deal that can take up to a year to close (and quite possibly 6-9 months). Recommendation is long MGGT LN, TP is 800p as per the Parker-Hannifin offer.

On October 28, Meggitt PLC (MGGT LN) published Q3 trading update and downgraded guidance for FY 2021: it expects FY 2021 organic revenue to be 5% below FY 2020 on an organic basis (FY 2020 revenue was £1.68 billion), due to supply chain disruption and softer defence trends. Meggitt added that it expects underlying operating profit of between £170 million and £190 million (vs. £192 million in FY 2020).
The UK government ordered a probe into the takeover offer on national security grounds. The CMA is required to investigate the proposed transaction and report to the Secretary of State by March 18, 2022. Meggitt looks forward to engaging constructively with the CMA on its review. In mid-August, the Secretary of State ordered a similar probe into the takeover of Ultra Electronics Holdings (ULE LN) by Cobham, and gave the CMA until January 18, 2022 to investigate the proposed deal.
Parker Hannifin (PH US) is an industrial buyer, and does not intend to dismantle Meggitt as it has happened with Cobham (Cobham was quickly dismantled after the takeover by Advent).
Boris is seeking allies beyond the EU, so I do not think the UK Government will block a deal from an American company with committed financing. Rather the Government will ask for guarantees that jobs/technology/manufacturing stay within the UK. With committed deal financing and almost sure green light from the UK Government, there are high chances that this deal will complete.
Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of comparables, source: Capital IQ consensus) and 3.4% FCF yield reflecting the bid premium. The spread is relentlessly tightening.
Gross spread is 6.2% for a deal that can take up to a year to close (and quite possibly 6-9 months). Recommendation is long MGGT LN, TP is 800p as per the Parker-Hannifin offer.

Parker-Hannifin/Meggitt: Update and Spread

On 16 August, Cobham Limited reached agreement on the T&amp;Cs of a recommended all cash acquisition of Ultra, for 3500p/share to be effected via a scheme of arrangement. Ultra shareholders would also be entitled to the interim dividend of 16.2p/share announced by Ultra on 19 July, payable on 17 on September to shareholders on the register at 27 August.
There is a lot of interest in UK defence and aerospace by both trade and PE buyers. Private-equity firms tap into free-flowing capital. Cobham was itself acquired by US buyout firm Advent in January 2020 (see <a href="https://www.smartkarma.com/insights/cobham-cob-ln-ready-to-fly" target="_blank" data-smartkarma-citation="insights:34506" rel="noopener">Cobham (COB LN) Ready to Fly)</a>. Britain conducted a review before signing off on the Advent deal after Cobham's founding family accused HM Government of letting go of a vital national asset.
The consideration represents 15.4x EV/22e EBITDA and 24.9x P/22e E, vs. comparables at a median 8.9x EV/Fwd EBITDA and 15.5x Fwd P/E. The aggregate premium of 68.8% to the 3-month VWAP seems generous enough.
By using Capital IQ consensus estimates, I run a DCF valuation of Ultra. By using a 7.8% WACC, a 21.5% tax assumption, and a (generous) exit multiple of 15.4x, my standalone fair value estimate is 3159p, which implies a perpetuity growth rate of 3.3%. The difference could be well justified by synergies from the deal.
On this basis, and considering that the deal is friendly and has high chances to close, recommendation is long ULE LN, TP 3500p. Gross spread is 4.0% (including interim). Upside could come from a competing offer.

On 16 August, Cobham Limited reached agreement on the T&amp;Cs of a recommended all cash acquisition of Ultra, for 3500p/share to be effected via a scheme of arrangement. Ultra shareholders would also be entitled to the interim dividend of 16.2p/share announced by Ultra on 19 July, payable on 17 on September to shareholders on the register at 27 August.
There is a lot of interest in UK defence and aerospace by both trade and PE buyers. Private-equity firms tap into free-flowing capital. Cobham was itself acquired by US buyout firm Advent in January 2020 (see Cobham (COB LN) Ready to Fly). Britain conducted a review before signing off on the Advent deal after Cobham's founding family accused HM Government of letting go of a vital national asset.
The consideration represents 15.4x EV/22e EBITDA and 24.9x P/22e E, vs. comparables at a median 8.9x EV/Fwd EBITDA and 15.5x Fwd P/E. The aggregate premium of 68.8% to the 3-month VWAP seems generous enough.
By using Capital IQ consensus estimates, I run a DCF valuation of Ultra. By using a 7.8% WACC, a 21.5% tax assumption, and a (generous) exit multiple of 15.4x, my standalone fair value estimate is 3159p, which implies a perpetuity growth rate of 3.3%. The difference could be well justified by synergies from the deal.
On this basis, and considering that the deal is friendly and has high chances to close, recommendation is long ULE LN, TP 3500p. Gross spread is 4.0% (including interim). Upside could come from a competing offer.

Cobham/Ultra Electronics: Another Raid on UK Defence

Leading International Investment Research, Edison Investment Research

Edison Investment Research

Leading International Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisors and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting.

Equity Bottom-Up

Ahead of its AGM Ultra has released a first quarter trading update that indicates no change to management expectations. The company still expects to make modest progress on a constant currency basis, although it will face FX headwinds. Encouragingly, despite the adverse exchange rate movement the order backlog at the end of the quarter stood at £933m, some 2% higher than at the start of FY18. An increased weighting to the second half of cash and earnings performance is still expected. The shares trade on a relatively low P/E against many UK peers, but the discount should start to diminish if operational execution continues as planned.

Ahead of its AGM Ultra has released a first quarter trading update that indicates no change to management expectations. The company still expects to make modest progress on a constant currency basis, although it will face FX headwinds. Encouragingly, despite the adverse exchange rate movement the order backlog at the end of the quarter stood at £933m, some 2% higher than at the start of FY18. An increased weighting to the second half of cash and earnings performance is still expected. The shares trade on a relatively low P/E against many UK peers, but the discount should start to diminish if operational execution continues as planned.

Ultra Electronics - Encouraging order book development

FY17 results were in line with the guidance reset by management in Q417, with cash performance ahead of expectations. The outlook for FY18 has some acceleration in organic sales growth, tougher FX assumptions, higher investment levels and the adoption of new accountings standards. Combined, this trims our revenues and margins estimates modestly. The proposed merger with Sparton Corporation has been terminated following the outcome of the anti-trust review in the US. While not ideal, US demand for sonobuoys remains strong and trading through the existing JV should continue. Return of cash to shareholders through a buyback reimburses the funds raised last year to fund the purchase. Growth is accelerating modestly, and our fair value stands at 1,816p.

FY17 results were in line with the guidance reset by management in Q417, with cash performance ahead of expectations. The outlook for FY18 has some acceleration in organic sales growth, tougher FX assumptions, higher investment levels and the adoption of new accountings standards. Combined, this trims our revenues and margins estimates modestly. The proposed merger with Sparton Corporation has been terminated following the outcome of the anti-trust review in the US. While not ideal, US demand for sonobuoys remains strong and trading through the existing JV should continue. Return of cash to shareholders through a buyback reimburses the funds raised last year to fund the purchase. Growth is accelerating modestly, and our fair value stands at 1,816p.

Ultra Electronics - Termination of Sparton acquisition process

United Kingdom

Ultra Electronics designs, develops, produces, and supports electronic and electro-mechanical systems, sub-systems, and products for defense, security, energy, and transport markets. They provide integrated information technology solutions used in high-integrity sensing, control, communication, and display systems, as well as advanced cybersecurity and tactical surveillance equipment. The company is headquartered in London, UK, and was founded in 1920.

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Ultra Electronics (UEH GR)

STOXX Europe Indices: Quiddity Leaderboard for March 2022 Rebalance (And Jan 2022 BHP Replacement)

A look at the Potential Adds and Deletes for the STOXX Europe 600 Index and the EURO STOXX Index in the upcoming index review in March 2022.

Janaghan Jeyakumar, CFA

Parker-Hannifin/Meggitt: Update and Spread

6.2% gross spread for a deal very likely to complete. TP is 800p. Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of...

Jesus Rodriguez Aguilar

Cobham/Ultra Electronics: Another Raid on UK Defence

Consideration represents 15.4x EV/22e EBITDA and 24.9x P/22e E (vs. comps 8.9x and 15.5x, and DCF valuation of 3159p). Deal is friendly with high...

Jesus Rodriguez Aguilar

Ultra Electronics - Encouraging order book development

Ahead of its AGM Ultra has released a first quarter trading update that indicates no change to management expectations. The company still expects...

Edison Investment Research

Ultra Electronics - Termination of Sparton acquisition process

FY17 results were in line with the guidance reset by management in Q417, with cash performance ahead of expectations. The outlook for FY18 has some...

Edison Investment Research

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