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

Insight Provider, CrossASEAN Research

Nicolas Van Broekhoven

Insight Provider

Value-focused bottom-up Asian equity research

NVB Asia Pte Ltd

Equity Bottom-Up

<ul><li><a href="https://www.smartkarma.com/entities/15717" target="_blank" data-smartkarma-citation="entities:15717:1">Ips Securex Holdings Ltd (IPSS SP)</a> is an integrated security solutions provider</li><li>Company founded in 2000 and listed on SGX in 2014 as a spin-off from IPS Group Pte. Ltd.</li><li>IPS' HQ in Singapore but active in 17 Asian countries</li><li>Philippines ISIS insurgency in Mindanao shows that Asian governments better be prepared for higher chance of terrorist activity in their respective countries</li><li>After dismal 2016 IPS Securex likely to report weak 2017 (year-end 30/6/17)</li><li>2018 should see rebound in Singapore market and potential new contract wins in Indonesia, Malaysia and Thailand</li><li>Share Price down 68% from peak in 2015; which makes this an interesting micro-cap to put on your watchlist</li></ul>

Ips Securex Holdings Ltd (IPSS SP) is an integrated security solutions providerCompany founded in 2000 and listed on SGX in 2014 as a spin-off from IPS Group Pte. Ltd.IPS' HQ in Singapore but active in 17 Asian countriesPhilippines ISIS insurgency in Mindanao shows that Asian governments better be prepared for higher chance of terrorist activity in their respective countriesAfter dismal 2016 IPS Securex likely to report weak 2017 (year-end 30/6/17)2018 should see rebound in Singapore market and potential new contract wins in Indonesia, Malaysia and ThailandShare Price down 68% from peak in 2015; which makes this an interesting micro-cap to put on your watchlist

Discover Singapore: IPS Securex (IPSS SP); Defending Asian Governments from Terrorist Threats

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

Discover Singapore: IPS Securex (IPSS SP); Defending Asian Governments from Terrorist Threats

Ips Securex Holdings Ltd (IPSS SP) is an integrated security solutions provider Company founded in 2000 and listed on SGX in 2014 as a spin-off...

Nicolas Van Broekhoven

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