Category

Value Investing

Brief Value Investing: AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue and more

By | Daily Briefs, Value Investing

In this briefing:

  1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

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Brief Value Investing: AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue and more

By | Daily Briefs, Value Investing

In this briefing:

  1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  2. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

2. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

Nissan

Early this morning the Yomiuri Shimbun reported that Renault SA (RNO FP) had decided to block Nissan CEO Saikawa’s reappointment at the company’s Annual Shareholders’ Meeting set to be held in late Jun, if he did not agree to a merger.

This move by Renault, or rather Paris, is to put it bluntly, absurdly clumsy and in our opinion goes a long way towards ensuring the death of the alliance. It also, together with Nissan Motor (7201 JP)‘s recent downward revision make the probability of a dividend cut more likely if things turn outright hostile.

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Brief Value Investing: AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue and more

By | Daily Briefs, Value Investing

In this briefing:

  1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue
  2. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut
  3. AGM Sunpower: Green Investments (GI) To Drive Re-Rating Going Forward; Remains Top Pick for 2019
  4. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis

1. AGM Jardine Cycle & Carriage (JCNC SP): Cars, Cows and Cement; High Gearing = Likely Rights Issue

Changing mix

The 50th JCNC AGM was all about cars, cows and cement. Investors questioned the board on various topics. 

Jardine Cycle & Carriage Ltd (JCNC SP) is an interesting play on Astra (at a discount), and now offers you exposure to some other large companies in Vietnam and Thailand. The increased investments have impacted the balance sheet which now carries $1.3 billion in holding debt. This is high by historical Jardine standards, another rights issue is therefore increasingly likely and is probably only a matter of time.

2. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

Nissan

Early this morning the Yomiuri Shimbun reported that Renault SA (RNO FP) had decided to block Nissan CEO Saikawa’s reappointment at the company’s Annual Shareholders’ Meeting set to be held in late Jun, if he did not agree to a merger.

This move by Renault, or rather Paris, is to put it bluntly, absurdly clumsy and in our opinion goes a long way towards ensuring the death of the alliance. It also, together with Nissan Motor (7201 JP)‘s recent downward revision make the probability of a dividend cut more likely if things turn outright hostile.

3. AGM Sunpower: Green Investments (GI) To Drive Re-Rating Going Forward; Remains Top Pick for 2019

25 4 2019%201 07 56%20pm

Sunpower Group (SPWG SP) hosted its annual meeting on 25/04/19 at the Marina Mandarin hotel. 

After an overview of FY18 results, the board of directors was engaged with shareholders in an hour of Q&A. We provide the highlights below.

Late last year I gave five high conviction ideas for 2019 in Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019 and Sunpower Group (SPWG SP) was on that list.

Shares have appreciated +62% YTD but continue to offer exceptional value for patient investors as the GI transformation story is still poorly understood by investors.

My Fair Value estimate of 1 SGD remains unchanged (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus).

4. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis

We consider the tone of HCM’s setsumeikai to have been largely positive. While guidance looked very weak, on a constant currency basis the company expects earnings to grow with strong results in the mining and value chain businesses offsetting potential weakness in China and Europe. While unit sales in China look a little frothy with local manufacturers becoming very aggressive on pricing, on the whole we believe the market has prematurely priced in a downturn while we expect mining demand to support continued strong results.

Get Straight to the Source on Smartkarma

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Brief Value Investing: Mallinckrodt – The Volatility Continues? and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Mallinckrodt – The Volatility Continues?
  2. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?
  3. Global Banking Trends: Trusting the Signals
  4. Nissan’s New Board and Management Developments
  5. SBI Bull Triangle/Perform

1. Mallinckrodt – The Volatility Continues?

3

Although Mallinckrodt’s bonds are trading at a significant discount to par, we recommend investors remain side-lined given our assessment of the probability of further price volatility.

 Although we acknowledge the equity cushion given a conservative EV/EBITDA valuation of ~6x vs. total debt/EBITDA of ~ 5x, we expect continued price volatility.

Accordingly, we believe a more attractive entry point will present itself over the coming months at a lower price level. Despite this, we think that the business, or its individual segments, will remain a going concern with an eventual spin-off into separate entities as per management’s plan.

However, the issue is timing and we expect further volatility due to legal/regulatory risk which is difficult to quantify

2. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?

Picture1

Sprint Corp has received approval from the Federal Communications Commission for their merger with T-Mobile to proceed following concessions. Justice Department approval is the next hurdle with the eventual outcome still remaining uncertain.

We reiterate our previous recommendation that investors should look to exit the bonds at current levels to mitigate deal risk as we believe that if the merger fails the company may face liquidity issues over the medium term given their deteriorating fundamental performance.

Specifically, Sprint Corp continues to generate negative free cash flow, if the proposed merger fails, the company may ‘burn’ cash within a few years.

3. Global Banking Trends: Trusting the Signals

The PH Score™ identifies fundamental momentum opportunity from more than 2000 shares globally on a quarterly basis, always focusing on the top and bottom deciles. We combine our PH Score™ with a technical indicator and additional valuation metrics to arrive at VFM (Valuation, Fundamentals, Momentum) which filters potential opportunities worthy of further due diligence and a deep-dive.

The top PH and VFM decile can be a collection of the “good, bad, and the ugly”. Current “winners” from the “good category” include Asia Commercial Bank/Vietnam (ACB VN) and Bimb Holdings (BIMB MK). Both are not too cheap but not dear either given progress underway.

For all its predictive strength, the PH Score™ does not capture earnings quality and non-NPL toxicity that may lie in SMLs or “stage-2” Loans. We thus sometimes get false signals from the “winners” due to earnings quality above all. This is the case for some Chinese banks for example (though not the “Big Four”) which we have analysed in detail. The growth of impaired loans is a systemic challenge and it is not getting much better. This quarter, the high-yielding Chinese “Big Four” continue to stand out in Asia and globally with robust PH Scores, and especially on VFM given the oversold signals. They are arguably better value than Bank Of Ningbo Co Ltd A (002142 CH) and China Merchants Bank A (600036 CH) that are relatively strong narratives though the former is now looking more interesting than for some time. China’s role in the global financial and economic system is now so pivotal that these signals better be right and the country manages to avoid a hard landing which remains a scary scenario as any viewer of YouTube can testify to.

With altogether different technical characteristics to China, there is Argentina. This is a marginal part of the global ecosystem, something of a Frontier backwater. Perhaps it gets more coverage than it deserves. We are somewhat unsure though about how to assess the recent high PH Score™ out of Argentina, based on high earnings yields and concrete fundamental trends (and some non-recurring contributions), given elevated Franchise Valuations and asset quality erosion. This remains an extremely speculative market. (2019 Elections – Part 6. Argentina: Macri Magic and the Peronist Spell). Bank shares here have revived of late, in tune with elevated PH Scores, but we cannot but feel that further volatility lies ahead. While we still have some time before elections in October, some funds seem to be putting their money to work on the basis of an anti-Cristina Kirchner “shoe-in” thesis while others are trading the news. The bet here is despite the pervasive influence of anti-IMF Kirchnerismo, the population will choose not go the way of Venezuela and vote for a “tough on crime” candidate such as Macri as in Brazil. It may be too early to call but too late for a Macri economic bounce.

Banks in Japan and India are more relevant cogs in the wheel of global finance and commerce. Here, we remain somewhat cautious and our readings are backed up by granular analysis by experts Hemindra Hazari and J. Brian Waterhouse and the noteworthy strategic thinking and insights of Daniel Tabbush. Japan seems to be cheap (on Franchise Valuation and P/B) for a reason while India is expensive for no reason. This is what our system seems to say too though Japan is always going to feature on VFM given our focus on FV and oversold technical signals.

Brazil remains a complex political challenge with Bolsonaro’s honeymoon well and truly over, and commentators now talking about the “emperor’s clothes”. Banco Santander Brasil SA (SANB11 BZ) scores well on our PH system though shares are far from cheap. Victor Galliano here, in an original and logical way, has pinpointed opportunities in the credit operations of retailers across Brazil and within LATAM which may well be a better way to play consumer finance opportunity than with pure banks. On a separate note, it is a pity that Ecuador is such a small banking market as trends are compelling.

In Europe, the UK (not the scandal-ridden Metro but Lloyds Banking (LLOY LN), Barclays Plc (BARC LN) and Royal Bank Of Scotland (RBS LN)) and French banks score well too which again challenges our thinking given the current political stasis in the former (with the electorate split in three) with FX implications as well as the uncertain backdrop in the latter. UBS Group AG (UBSG VX) and Credit Suisse Group AG (CSGN SW) seem to be moving in the right direction and valuations are hardly stretched.

CP published a note recently about inward-looking Polish lenders which exhibit subpar scores. (Polish Banks: Latest Fundamental Trends and Valuations Instil Caution). We believe trends and valuation are not benign in Poland though Bank Ochrony Srodowiska SA (BOS PW), a smaller lender with almost Greek-style Asset Quality issues, exhibits both positive trends and a low valuation.

We await Greek numbers to see whether trends are beginning to tick upwards given the probable election of a more pro-market government and low valuations. (2019 Elections – Part 5. Greece: New Democracy Promises Magic Makeover).

Then there is beleaguered Turkey. Trends are not as strong as they were (maybe artificially so) though some PH Score™ would be lower but for valuations. Expert Ercan Uysal paints quite a bleak picture here and his arguments are both convincing and pertinent. While there may be trading opportunities ahead, amidst the volatility, the fabric of the system is being unravelled by toxic loans and the probability of capital raising is high. Overriding corporate leverage is now being accompanied by concern with consumer indebtedness as joblessness rises. Given key valuation metrics and oversold signals in some cases, selective Turkish banks do score well on VFM with fundamental trends perhaps still not fully reflecting the underlying picture as detailed by Ercan Uysal.

Russia remains an interesting Banking jurisdiction despite its systemic issues and restructuring. There are some pockets of value here though core EM favourite, Sberbank Of Russia Pjsc (SBER LI), commands a premium rating with a below average PH Score. Sberbank shares a similar profile to Credicorp Ltd (BAP US), Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB4 BZ) in this respect. We caution against chasing quality and would recommend considering these banks at lower levels though in the case of BBCA in particular it would be a much lower rating.

We continue to remain highly sceptical of Australia and Canada  – partly in relation to real estate asset bubbles. While trends are eroding in Australia, with its China interconnections, Canadian banks seem to be still bucking the trend, defying gravity with “as good as it gets” readings. They have been high scorers for some time -maybe artificially so.

Scandinavian banks, especially Danske Bank A/S (DANSKE DC) and Swedbank AB (SWEDA SS), are on a repair mission -amidst high household leverage- that will take time given the reputational damage suffered. PH Scores in Denmark and at Nordea Bank AB (NDA SS) are especially subpar.

Asia-Pacific remains the jurisdiction with the softest fundamental momentum -though China and Japan command very different headline trends. While Profitability trends are mixed, Asset Quality, and Liquidity -as opposed to NIM and Efficiency- are not moving in the right direction. We are awaiting some key data out of South Korea but recent high rankings seem to be coming under more pressure and valuations have remained low for sometime as the market searches for a catalyst. An interesting opportunity may lie in unloved Pakistan with Bank Alfalah (BAFL PA).

Regionally, in terms of trends, Europe is not much better than Asia-Pacific, though -as mentioned- the UK, France and the large Swiss Groups appear to be making headway. Italian and Spanish banks, the latter heavily exposed to EM, present a mixed picture in terms of fundamental trends. Germany remains very much all about Deutsche Bank Ag Registered (DBK GR) which trades on a par with Japanese banks on a FV basis. In Europe, while Profitability trends are mixed, NIM, Asset Quality, Capital Adequacy, and Provisioning are not moving in the right direction.

Fundamental trends in the Middle East are on a par with LATAM. Here profitability, NIM, CIR, and Capital Adequacy are all moving in the right direction though Liquidity, Provisioning, and Asset Quality are eroding. In LATAM, there is an even bigger jump in Profitability (as in US) though it is Asset Quality and Liquidity rather than Efficiency or Provisioning that exhibit positive change.

The regional jurisdictions with the best fundamental momentum remain the US and Africa. While valuations can be elevated in the latter, (some less liquid players are very cheap), they are not excessive at the former. Some positive standouts from the larger players are Citigroup Inc (C US) and State Street (STT US). In the US, Profitability, NIM, Efficiency, Asset Quality and Capitalisation exhibit progression. (In Africa, improvement is seen in Asset Quality, Liquidity, Provisioning, and NIM). The US does have issues (such as student loans and credit cards) like everyone else, just less so it seems. The banking sector stands out in the US on a relative value basis (what this says about other sectors is a moot point) but continues to be subverted by yield curve movements just as it looks primed for a move higher. The fact that shares seem unable to put together a discrete and sustained run should be a concern for us all. (US Banks: The “Least Dirty Laundry” In the Neighbourhood Though Check Under the Hood).

4. Nissan’s New Board and Management Developments

Three days after earnings were released, describing restructuring efforts (and throwing old management under the bus), reorganization, and introducing to the public the New Nissan Governance Structure, on Friday 17 May after the close, Nissan Motor (7201 JP) officially announced its list of proposed directors to the board based on its New Governance Structure and provided more details. 

This came a day after the basics of the new plan were reported in the Nikkei along with the fact that embattled current Nissan CEO Hiroto Saikawa would stay on as director and CEO, Renault SA (RNO FP) CEO Thierry Bolloré would join the board, and Renault’s chairman Jean-Dominique Senard would also retain his role. 

The fact that Saikawa-san was staying on should not surprise anyone. But it should not be considered permanent. The threat by Renault/France this past week or two to not support Saikawa’s re-appointment was a minor mistake, but if they persist in it going forward, it will be a colossal mistake. 

The announcement of the board and governance structure now puts an emphasis on rehabilitation of management process and oversight. 

The board of directors selected the new director candidates based on the recommendations of the Provisional Nomination and Compensation Advisory Council, established in March. Taking into the consideration Nissan’s global business development and the transformation of the automotive industry under CASE technologies, emphasis has been placed on diversity in experience, knowledge, nationality and gender. Enhancement of diversity on the board will enable increased effectiveness and also strengthen the company’s governance structure.

The important points are that the Board, as proposed, will be 11 strong, with a majority of independent directors (in principle, a minimum of 6, but in this case 7), and the governance structure will move from being a company with statutory auditors to a company with three statutory committees (nomination, compensation, and audit), and as a result, upon approval of the new board members at the June AGM, all the statutory auditors would lose their positions (with one moving to a director position). 

From a tick-the-box perspective, this looks like a highly diverse board with 5 foreigners (3 of 7 independents are foreigners), two women, and people with diverse corporate backgrounds. If they take their jobs really seriously and learn about auto manufacturing and sales, the board holds promise. Interestingly, the foreigners selected among independents are all “Japan hands” to an extent that neither of the two Renault appointees are. 

This announcement and the news of Saikawa-san and Yamauchi-san as new COO should allow Nissan to more effectively stall Renault for time.

  • There are two appointees to the board from each of Renault management and Nissan management, which is something of a downgrade for Nissan compared to the old balance.
  • The newly appointed COO from Nissan will also be on the board, which is a strong position and may be meant so that the independent board members learn about him quickly so that perhaps would be the natural successor to Saikawa-san, who stays on. 
  • Saikawa-san staying means Renault either has to take it as-is, or has to go hard and public about its discontent, and risk blowing up the Alliance. 
  • The Revised Alliance Master Agreement (as revised in 2015) will likely need some renegotiation. 

5. SBI Bull Triangle/Perform

Sbi%20india

State Bank Of India (SBIN IN) is gearing up for a rally out of flat congestion that has dominated the range since late 2017 and did not participate in the Nifty’s two recent rally cycles. SBI is expected to not only outperform but stage an impressive absolute rally out of triangulation.

Triangles are often the most powerful breakout chart patterns that are followed by high momentum rallies.

We like buying weakness near 300 support but may start to run out of the gates on the back of the micro bull wedge outlined just above the triangle breakout point.

Upside targets will be upgraded if aggressive upside momentum unfolds.

MACD resistance represents the hurdle mid way through the rally cycle and likely to induce a stall.

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Brief Value Investing: Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut
  2. AGM Sunpower: Green Investments (GI) To Drive Re-Rating Going Forward; Remains Top Pick for 2019
  3. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis
  4. SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit

1. Nissan: Pressure From Paris Won’t Work… But It Probably Will Increase the Chance of a Dividend Cut

Nissan

Early this morning the Yomiuri Shimbun reported that Renault SA (RNO FP) had decided to block Nissan CEO Saikawa’s reappointment at the company’s Annual Shareholders’ Meeting set to be held in late Jun, if he did not agree to a merger.

This move by Renault, or rather Paris, is to put it bluntly, absurdly clumsy and in our opinion goes a long way towards ensuring the death of the alliance. It also, together with Nissan Motor (7201 JP)‘s recent downward revision make the probability of a dividend cut more likely if things turn outright hostile.

2. AGM Sunpower: Green Investments (GI) To Drive Re-Rating Going Forward; Remains Top Pick for 2019

25 4 2019%201 07 56%20pm

Sunpower Group (SPWG SP) hosted its annual meeting on 25/04/19 at the Marina Mandarin hotel. 

After an overview of FY18 results, the board of directors was engaged with shareholders in an hour of Q&A. We provide the highlights below.

Late last year I gave five high conviction ideas for 2019 in Overview of My Winners and Losers in 2018…and 5 High Conviction Ideas Going into 2019 and Sunpower Group (SPWG SP) was on that list.

Shares have appreciated +62% YTD but continue to offer exceptional value for patient investors as the GI transformation story is still poorly understood by investors.

My Fair Value estimate of 1 SGD remains unchanged (based on 15x FY21 EPS and company meeting its FY21 NPAT targets as communicated in CB2 prospectus).

3. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis

We consider the tone of HCM’s setsumeikai to have been largely positive. While guidance looked very weak, on a constant currency basis the company expects earnings to grow with strong results in the mining and value chain businesses offsetting potential weakness in China and Europe. While unit sales in China look a little frothy with local manufacturers becoming very aggressive on pricing, on the whole we believe the market has prematurely priced in a downturn while we expect mining demand to support continued strong results.

4. SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit

Src3

On May 31, 2018,  Spirit Realty Capital (SRC US), a triple net lease REIT that is primarily focused on single tenant retail real estate in the US, completed the spin-off of its lower quality and debt encumbered assets into a vehicle named Spirit MTA REIT (SMTA US). But, as we approach the first anniversary of the spin-off event, we believe it is worthwhile revisiting the situation since we continue to identify Spirit Realty as an attractive misvaluation opportunity, particularly as it has entered the last phase of its transition into a more typical triple net lease REIT which we believe should catalyze a value re-rating in the coming quarters.

Our valuation thesis points to a shareholder return well in excess of 20% (including the dividend) that should be achievable within a year if the aforementioned last phase of its transition progresses as expected. 

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Brief Value Investing: Using BORUC to Pick Asian Value Stocks and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Using BORUC to Pick Asian Value Stocks

1. Using BORUC to Pick Asian Value Stocks

Introducing the Bucephalus Operating Return on Utilised Capital

We created BORUC, the Bucephalus Operating Return on Utilised Capital, to reveal the true operating performance of businesses because ‘traditional’ measures (ROE, ROCE etc.) are easy to manipulate. Struggling companies often resort to creative accounting to obscure their problems and hide their decline. This alters the numerator in ROE, ROCE etc. and disguises their investment and capex cycles.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Sprint Corp – One Regulatory Approval, Another to Go, How Likely? and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?
  2. Global Banking Trends: Trusting the Signals
  3. Nissan’s New Board and Management Developments
  4. SBI Bull Triangle/Perform
  5. Geely (175.HK):Keep Calm and Accumulate Geely

1. Sprint Corp – One Regulatory Approval, Another to Go, How Likely?

Rplot01

Sprint Corp has received approval from the Federal Communications Commission for their merger with T-Mobile to proceed following concessions. Justice Department approval is the next hurdle with the eventual outcome still remaining uncertain.

We reiterate our previous recommendation that investors should look to exit the bonds at current levels to mitigate deal risk as we believe that if the merger fails the company may face liquidity issues over the medium term given their deteriorating fundamental performance.

Specifically, Sprint Corp continues to generate negative free cash flow, if the proposed merger fails, the company may ‘burn’ cash within a few years.

2. Global Banking Trends: Trusting the Signals

The PH Score™ identifies fundamental momentum opportunity from more than 2000 shares globally on a quarterly basis, always focusing on the top and bottom deciles. We combine our PH Score™ with a technical indicator and additional valuation metrics to arrive at VFM (Valuation, Fundamentals, Momentum) which filters potential opportunities worthy of further due diligence and a deep-dive.

The top PH and VFM decile can be a collection of the “good, bad, and the ugly”. Current “winners” from the “good category” include Asia Commercial Bank/Vietnam (ACB VN) and Bimb Holdings (BIMB MK). Both are not too cheap but not dear either given progress underway.

For all its predictive strength, the PH Score™ does not capture earnings quality and non-NPL toxicity that may lie in SMLs or “stage-2” Loans. We thus sometimes get false signals from the “winners” due to earnings quality above all. This is the case for some Chinese banks for example (though not the “Big Four”) which we have analysed in detail. The growth of impaired loans is a systemic challenge and it is not getting much better. This quarter, the high-yielding Chinese “Big Four” continue to stand out in Asia and globally with robust PH Scores, and especially on VFM given the oversold signals. They are arguably better value than Bank Of Ningbo Co Ltd A (002142 CH) and China Merchants Bank A (600036 CH) that are relatively strong narratives though the former is now looking more interesting than for some time. China’s role in the global financial and economic system is now so pivotal that these signals better be right and the country manages to avoid a hard landing which remains a scary scenario as any viewer of YouTube can testify to.

With altogether different technical characteristics to China, there is Argentina. This is a marginal part of the global ecosystem, something of a Frontier backwater. Perhaps it gets more coverage than it deserves. We are somewhat unsure though about how to assess the recent high PH Score™ out of Argentina, based on high earnings yields and concrete fundamental trends (and some non-recurring contributions), given elevated Franchise Valuations and asset quality erosion. This remains an extremely speculative market. (2019 Elections – Part 6. Argentina: Macri Magic and the Peronist Spell). Bank shares here have revived of late, in tune with elevated PH Scores, but we cannot but feel that further volatility lies ahead. While we still have some time before elections in October, some funds seem to be putting their money to work on the basis of an anti-Cristina Kirchner “shoe-in” thesis while others are trading the news. The bet here is despite the pervasive influence of anti-IMF Kirchnerismo, the population will choose not go the way of Venezuela and vote for a “tough on crime” candidate such as Macri as in Brazil. It may be too early to call but too late for a Macri economic bounce.

Banks in Japan and India are more relevant cogs in the wheel of global finance and commerce. Here, we remain somewhat cautious and our readings are backed up by granular analysis by experts Hemindra Hazari and J. Brian Waterhouse and the noteworthy strategic thinking and insights of Daniel Tabbush. Japan seems to be cheap (on Franchise Valuation and P/B) for a reason while India is expensive for no reason. This is what our system seems to say too though Japan is always going to feature on VFM given our focus on FV and oversold technical signals.

Brazil remains a complex political challenge with Bolsonaro’s honeymoon well and truly over, and commentators now talking about the “emperor’s clothes”. Banco Santander Brasil SA (SANB11 BZ) scores well on our PH system though shares are far from cheap. Victor Galliano here, in an original and logical way, has pinpointed opportunities in the credit operations of retailers across Brazil and within LATAM which may well be a better way to play consumer finance opportunity than with pure banks. On a separate note, it is a pity that Ecuador is such a small banking market as trends are compelling.

In Europe, the UK (not the scandal-ridden Metro but Lloyds Banking (LLOY LN), Barclays Plc (BARC LN) and Royal Bank Of Scotland (RBS LN)) and French banks score well too which again challenges our thinking given the current political stasis in the former (with the electorate split in three) with FX implications as well as the uncertain backdrop in the latter. UBS Group AG (UBSG VX) and Credit Suisse Group AG (CSGN SW) seem to be moving in the right direction and valuations are hardly stretched.

CP published a note recently about inward-looking Polish lenders which exhibit subpar scores. (Polish Banks: Latest Fundamental Trends and Valuations Instil Caution). We believe trends and valuation are not benign in Poland though Bank Ochrony Srodowiska SA (BOS PW), a smaller lender with almost Greek-style Asset Quality issues, exhibits both positive trends and a low valuation.

We await Greek numbers to see whether trends are beginning to tick upwards given the probable election of a more pro-market government and low valuations. (2019 Elections – Part 5. Greece: New Democracy Promises Magic Makeover).

Then there is beleaguered Turkey. Trends are not as strong as they were (maybe artificially so) though some PH Score™ would be lower but for valuations. Expert Ercan Uysal paints quite a bleak picture here and his arguments are both convincing and pertinent. While there may be trading opportunities ahead, amidst the volatility, the fabric of the system is being unravelled by toxic loans and the probability of capital raising is high. Overriding corporate leverage is now being accompanied by concern with consumer indebtedness as joblessness rises. Given key valuation metrics and oversold signals in some cases, selective Turkish banks do score well on VFM with fundamental trends perhaps still not fully reflecting the underlying picture as detailed by Ercan Uysal.

Russia remains an interesting Banking jurisdiction despite its systemic issues and restructuring. There are some pockets of value here though core EM favourite, Sberbank Of Russia Pjsc (SBER LI), commands a premium rating with a below average PH Score. Sberbank shares a similar profile to Credicorp Ltd (BAP US), Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB4 BZ) in this respect. We caution against chasing quality and would recommend considering these banks at lower levels though in the case of BBCA in particular it would be a much lower rating.

We continue to remain highly sceptical of Australia and Canada  – partly in relation to real estate asset bubbles. While trends are eroding in Australia, with its China interconnections, Canadian banks seem to be still bucking the trend, defying gravity with “as good as it gets” readings. They have been high scorers for some time -maybe artificially so.

Scandinavian banks, especially Danske Bank A/S (DANSKE DC) and Swedbank AB (SWEDA SS), are on a repair mission -amidst high household leverage- that will take time given the reputational damage suffered. PH Scores in Denmark and at Nordea Bank AB (NDA SS) are especially subpar.

Asia-Pacific remains the jurisdiction with the softest fundamental momentum -though China and Japan command very different headline trends. While Profitability trends are mixed, Asset Quality, and Liquidity -as opposed to NIM and Efficiency- are not moving in the right direction. We are awaiting some key data out of South Korea but recent high rankings seem to be coming under more pressure and valuations have remained low for sometime as the market searches for a catalyst. An interesting opportunity may lie in unloved Pakistan with Bank Alfalah (BAFL PA).

Regionally, in terms of trends, Europe is not much better than Asia-Pacific, though -as mentioned- the UK, France and the large Swiss Groups appear to be making headway. Italian and Spanish banks, the latter heavily exposed to EM, present a mixed picture in terms of fundamental trends. Germany remains very much all about Deutsche Bank Ag Registered (DBK GR) which trades on a par with Japanese banks on a FV basis. In Europe, while Profitability trends are mixed, NIM, Asset Quality, Capital Adequacy, and Provisioning are not moving in the right direction.

Fundamental trends in the Middle East are on a par with LATAM. Here profitability, NIM, CIR, and Capital Adequacy are all moving in the right direction though Liquidity, Provisioning, and Asset Quality are eroding. In LATAM, there is an even bigger jump in Profitability (as in US) though it is Asset Quality and Liquidity rather than Efficiency or Provisioning that exhibit positive change.

The regional jurisdictions with the best fundamental momentum remain the US and Africa. While valuations can be elevated in the latter, (some less liquid players are very cheap), they are not excessive at the former. Some positive standouts from the larger players are Citigroup Inc (C US) and State Street (STT US). In the US, Profitability, NIM, Efficiency, Asset Quality and Capitalisation exhibit progression. (In Africa, improvement is seen in Asset Quality, Liquidity, Provisioning, and NIM). The US does have issues (such as student loans and credit cards) like everyone else, just less so it seems. The banking sector stands out in the US on a relative value basis (what this says about other sectors is a moot point) but continues to be subverted by yield curve movements just as it looks primed for a move higher. The fact that shares seem unable to put together a discrete and sustained run should be a concern for us all. (US Banks: The “Least Dirty Laundry” In the Neighbourhood Though Check Under the Hood).

3. Nissan’s New Board and Management Developments

Three days after earnings were released, describing restructuring efforts (and throwing old management under the bus), reorganization, and introducing to the public the New Nissan Governance Structure, on Friday 17 May after the close, Nissan Motor (7201 JP) officially announced its list of proposed directors to the board based on its New Governance Structure and provided more details. 

This came a day after the basics of the new plan were reported in the Nikkei along with the fact that embattled current Nissan CEO Hiroto Saikawa would stay on as director and CEO, Renault SA (RNO FP) CEO Thierry Bolloré would join the board, and Renault’s chairman Jean-Dominique Senard would also retain his role. 

The fact that Saikawa-san was staying on should not surprise anyone. But it should not be considered permanent. The threat by Renault/France this past week or two to not support Saikawa’s re-appointment was a minor mistake, but if they persist in it going forward, it will be a colossal mistake. 

The announcement of the board and governance structure now puts an emphasis on rehabilitation of management process and oversight. 

The board of directors selected the new director candidates based on the recommendations of the Provisional Nomination and Compensation Advisory Council, established in March. Taking into the consideration Nissan’s global business development and the transformation of the automotive industry under CASE technologies, emphasis has been placed on diversity in experience, knowledge, nationality and gender. Enhancement of diversity on the board will enable increased effectiveness and also strengthen the company’s governance structure.

The important points are that the Board, as proposed, will be 11 strong, with a majority of independent directors (in principle, a minimum of 6, but in this case 7), and the governance structure will move from being a company with statutory auditors to a company with three statutory committees (nomination, compensation, and audit), and as a result, upon approval of the new board members at the June AGM, all the statutory auditors would lose their positions (with one moving to a director position). 

From a tick-the-box perspective, this looks like a highly diverse board with 5 foreigners (3 of 7 independents are foreigners), two women, and people with diverse corporate backgrounds. If they take their jobs really seriously and learn about auto manufacturing and sales, the board holds promise. Interestingly, the foreigners selected among independents are all “Japan hands” to an extent that neither of the two Renault appointees are. 

This announcement and the news of Saikawa-san and Yamauchi-san as new COO should allow Nissan to more effectively stall Renault for time.

  • There are two appointees to the board from each of Renault management and Nissan management, which is something of a downgrade for Nissan compared to the old balance.
  • The newly appointed COO from Nissan will also be on the board, which is a strong position and may be meant so that the independent board members learn about him quickly so that perhaps would be the natural successor to Saikawa-san, who stays on. 
  • Saikawa-san staying means Renault either has to take it as-is, or has to go hard and public about its discontent, and risk blowing up the Alliance. 
  • The Revised Alliance Master Agreement (as revised in 2015) will likely need some renegotiation. 

4. SBI Bull Triangle/Perform

Sbi%20india

State Bank Of India (SBIN IN) is gearing up for a rally out of flat congestion that has dominated the range since late 2017 and did not participate in the Nifty’s two recent rally cycles. SBI is expected to not only outperform but stage an impressive absolute rally out of triangulation.

Triangles are often the most powerful breakout chart patterns that are followed by high momentum rallies.

We like buying weakness near 300 support but may start to run out of the gates on the back of the micro bull wedge outlined just above the triangle breakout point.

Upside targets will be upgraded if aggressive upside momentum unfolds.

MACD resistance represents the hurdle mid way through the rally cycle and likely to induce a stall.

5. Geely (175.HK):Keep Calm and Accumulate Geely

Screen%20shot%202019 05 16%20at%2015.48.50

Geely’s share price overshot near-term fundamentals in April in our view, and recent correction of the share price brings back the investment opportunity. 

Previously, the market was over positive on the uptrend of auto sector shipment yoy in 1Q2019 and the positive bias amongst government officials on the launch of  supportive policies for the auto sector. Investors were expecting the arrival of the spring in China auto sector.

However, although we think on the expected supportive policies materialise, it will take time to have details of the policies get ready and take effect. Moreover, we believe 2019 would be the worst ever year for auto sector after decades of fast growth.  We don’t think the demand would recover from such a high base so soon. The market share gaining by NEV is also a headwind. 

Looking forward, Geely’s sales data might will be volatile. We suggest buying on weakness and wait for the eventual demand recovery.

Get Straight to the Source on Smartkarma

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Brief Value Investing: Global Banking Trends: Trusting the Signals and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Global Banking Trends: Trusting the Signals
  2. Nissan’s New Board and Management Developments
  3. SBI Bull Triangle/Perform
  4. Geely (175.HK):Keep Calm and Accumulate Geely
  5. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

1. Global Banking Trends: Trusting the Signals

The PH Score™ identifies fundamental momentum opportunity from more than 2000 shares globally on a quarterly basis, always focusing on the top and bottom deciles. We combine our PH Score™ with a technical indicator and additional valuation metrics to arrive at VFM (Valuation, Fundamentals, Momentum) which filters potential opportunities worthy of further due diligence and a deep-dive.

The top PH and VFM decile can be a collection of the “good, bad, and the ugly”. Current “winners” from the “good category” include Asia Commercial Bank/Vietnam (ACB VN) and Bimb Holdings (BIMB MK). Both are not too cheap but not dear either given progress underway.

For all its predictive strength, the PH Score™ does not capture earnings quality and non-NPL toxicity that may lie in SMLs or “stage-2” Loans. We thus sometimes get false signals from the “winners” due to earnings quality above all. This is the case for some Chinese banks for example (though not the “Big Four”) which we have analysed in detail. The growth of impaired loans is a systemic challenge and it is not getting much better. This quarter, the high-yielding Chinese “Big Four” continue to stand out in Asia and globally with robust PH Scores, and especially on VFM given the oversold signals. They are arguably better value than Bank Of Ningbo Co Ltd A (002142 CH) and China Merchants Bank A (600036 CH) that are relatively strong narratives though the former is now looking more interesting than for some time. China’s role in the global financial and economic system is now so pivotal that these signals better be right and the country manages to avoid a hard landing which remains a scary scenario as any viewer of YouTube can testify to.

With altogether different technical characteristics to China, there is Argentina. This is a marginal part of the global ecosystem, something of a Frontier backwater. Perhaps it gets more coverage than it deserves. We are somewhat unsure though about how to assess the recent high PH Score™ out of Argentina, based on high earnings yields and concrete fundamental trends (and some non-recurring contributions), given elevated Franchise Valuations and asset quality erosion. This remains an extremely speculative market. (2019 Elections – Part 6. Argentina: Macri Magic and the Peronist Spell). Bank shares here have revived of late, in tune with elevated PH Scores, but we cannot but feel that further volatility lies ahead. While we still have some time before elections in October, some funds seem to be putting their money to work on the basis of an anti-Cristina Kirchner “shoe-in” thesis while others are trading the news. The bet here is despite the pervasive influence of anti-IMF Kirchnerismo, the population will choose not go the way of Venezuela and vote for a “tough on crime” candidate such as Macri as in Brazil. It may be too early to call but too late for a Macri economic bounce.

Banks in Japan and India are more relevant cogs in the wheel of global finance and commerce. Here, we remain somewhat cautious and our readings are backed up by granular analysis by experts Hemindra Hazari and J. Brian Waterhouse and the noteworthy strategic thinking and insights of Daniel Tabbush. Japan seems to be cheap (on Franchise Valuation and P/B) for a reason while India is expensive for no reason. This is what our system seems to say too though Japan is always going to feature on VFM given our focus on FV and oversold technical signals.

Brazil remains a complex political challenge with Bolsonaro’s honeymoon well and truly over, and commentators now talking about the “emperor’s clothes”. Banco Santander Brasil SA (SANB11 BZ) scores well on our PH system though shares are far from cheap. Victor Galliano here, in an original and logical way, has pinpointed opportunities in the credit operations of retailers across Brazil and within LATAM which may well be a better way to play consumer finance opportunity than with pure banks. On a separate note, it is a pity that Ecuador is such a small banking market as trends are compelling.

In Europe, the UK (not the scandal-ridden Metro but Lloyds Banking (LLOY LN), Barclays Plc (BARC LN) and Royal Bank Of Scotland (RBS LN)) and French banks score well too which again challenges our thinking given the current political stasis in the former (with the electorate split in three) with FX implications as well as the uncertain backdrop in the latter. UBS Group AG (UBSG VX) and Credit Suisse Group AG (CSGN SW) seem to be moving in the right direction and valuations are hardly stretched.

CP published a note recently about inward-looking Polish lenders which exhibit subpar scores. (Polish Banks: Latest Fundamental Trends and Valuations Instil Caution). We believe trends and valuation are not benign in Poland though Bank Ochrony Srodowiska SA (BOS PW), a smaller lender with almost Greek-style Asset Quality issues, exhibits both positive trends and a low valuation.

We await Greek numbers to see whether trends are beginning to tick upwards given the probable election of a more pro-market government and low valuations. (2019 Elections – Part 5. Greece: New Democracy Promises Magic Makeover).

Then there is beleaguered Turkey. Trends are not as strong as they were (maybe artificially so) though some PH Score™ would be lower but for valuations. Expert Ercan Uysal paints quite a bleak picture here and his arguments are both convincing and pertinent. While there may be trading opportunities ahead, amidst the volatility, the fabric of the system is being unravelled by toxic loans and the probability of capital raising is high. Overriding corporate leverage is now being accompanied by concern with consumer indebtedness as joblessness rises. Given key valuation metrics and oversold signals in some cases, selective Turkish banks do score well on VFM with fundamental trends perhaps still not fully reflecting the underlying picture as detailed by Ercan Uysal.

Russia remains an interesting Banking jurisdiction despite its systemic issues and restructuring. There are some pockets of value here though core EM favourite, Sberbank Of Russia Pjsc (SBER LI), commands a premium rating with a below average PH Score. Sberbank shares a similar profile to Credicorp Ltd (BAP US), Bank Central Asia (BBCA IJ) and Itau Unibanco Holding Sa (ITUB4 BZ) in this respect. We caution against chasing quality and would recommend considering these banks at lower levels though in the case of BBCA in particular it would be a much lower rating.

We continue to remain highly sceptical of Australia and Canada  – partly in relation to real estate asset bubbles. While trends are eroding in Australia, with its China interconnections, Canadian banks seem to be still bucking the trend, defying gravity with “as good as it gets” readings. They have been high scorers for some time -maybe artificially so.

Scandinavian banks, especially Danske Bank A/S (DANSKE DC) and Swedbank AB (SWEDA SS), are on a repair mission -amidst high household leverage- that will take time given the reputational damage suffered. PH Scores in Denmark and at Nordea Bank AB (NDA SS) are especially subpar.

Asia-Pacific remains the jurisdiction with the softest fundamental momentum -though China and Japan command very different headline trends. While Profitability trends are mixed, Asset Quality, and Liquidity -as opposed to NIM and Efficiency- are not moving in the right direction. We are awaiting some key data out of South Korea but recent high rankings seem to be coming under more pressure and valuations have remained low for sometime as the market searches for a catalyst. An interesting opportunity may lie in unloved Pakistan with Bank Alfalah (BAFL PA).

Regionally, in terms of trends, Europe is not much better than Asia-Pacific, though -as mentioned- the UK, France and the large Swiss Groups appear to be making headway. Italian and Spanish banks, the latter heavily exposed to EM, present a mixed picture in terms of fundamental trends. Germany remains very much all about Deutsche Bank Ag Registered (DBK GR) which trades on a par with Japanese banks on a FV basis. In Europe, while Profitability trends are mixed, NIM, Asset Quality, Capital Adequacy, and Provisioning are not moving in the right direction.

Fundamental trends in the Middle East are on a par with LATAM. Here profitability, NIM, CIR, and Capital Adequacy are all moving in the right direction though Liquidity, Provisioning, and Asset Quality are eroding. In LATAM, there is an even bigger jump in Profitability (as in US) though it is Asset Quality and Liquidity rather than Efficiency or Provisioning that exhibit positive change.

The regional jurisdictions with the best fundamental momentum remain the US and Africa. While valuations can be elevated in the latter, (some less liquid players are very cheap), they are not excessive at the former. Some positive standouts from the larger players are Citigroup Inc (C US) and State Street (STT US). In the US, Profitability, NIM, Efficiency, Asset Quality and Capitalisation exhibit progression. (In Africa, improvement is seen in Asset Quality, Liquidity, Provisioning, and NIM). The US does have issues (such as student loans and credit cards) like everyone else, just less so it seems. The banking sector stands out in the US on a relative value basis (what this says about other sectors is a moot point) but continues to be subverted by yield curve movements just as it looks primed for a move higher. The fact that shares seem unable to put together a discrete and sustained run should be a concern for us all. (US Banks: The “Least Dirty Laundry” In the Neighbourhood Though Check Under the Hood).

2. Nissan’s New Board and Management Developments

Three days after earnings were released, describing restructuring efforts (and throwing old management under the bus), reorganization, and introducing to the public the New Nissan Governance Structure, on Friday 17 May after the close, Nissan Motor (7201 JP) officially announced its list of proposed directors to the board based on its New Governance Structure and provided more details. 

This came a day after the basics of the new plan were reported in the Nikkei along with the fact that embattled current Nissan CEO Hiroto Saikawa would stay on as director and CEO, Renault SA (RNO FP) CEO Thierry Bolloré would join the board, and Renault’s chairman Jean-Dominique Senard would also retain his role. 

The fact that Saikawa-san was staying on should not surprise anyone. But it should not be considered permanent. The threat by Renault/France this past week or two to not support Saikawa’s re-appointment was a minor mistake, but if they persist in it going forward, it will be a colossal mistake. 

The announcement of the board and governance structure now puts an emphasis on rehabilitation of management process and oversight. 

The board of directors selected the new director candidates based on the recommendations of the Provisional Nomination and Compensation Advisory Council, established in March. Taking into the consideration Nissan’s global business development and the transformation of the automotive industry under CASE technologies, emphasis has been placed on diversity in experience, knowledge, nationality and gender. Enhancement of diversity on the board will enable increased effectiveness and also strengthen the company’s governance structure.

The important points are that the Board, as proposed, will be 11 strong, with a majority of independent directors (in principle, a minimum of 6, but in this case 7), and the governance structure will move from being a company with statutory auditors to a company with three statutory committees (nomination, compensation, and audit), and as a result, upon approval of the new board members at the June AGM, all the statutory auditors would lose their positions (with one moving to a director position). 

From a tick-the-box perspective, this looks like a highly diverse board with 5 foreigners (3 of 7 independents are foreigners), two women, and people with diverse corporate backgrounds. If they take their jobs really seriously and learn about auto manufacturing and sales, the board holds promise. Interestingly, the foreigners selected among independents are all “Japan hands” to an extent that neither of the two Renault appointees are. 

This announcement and the news of Saikawa-san and Yamauchi-san as new COO should allow Nissan to more effectively stall Renault for time.

  • There are two appointees to the board from each of Renault management and Nissan management, which is something of a downgrade for Nissan compared to the old balance.
  • The newly appointed COO from Nissan will also be on the board, which is a strong position and may be meant so that the independent board members learn about him quickly so that perhaps would be the natural successor to Saikawa-san, who stays on. 
  • Saikawa-san staying means Renault either has to take it as-is, or has to go hard and public about its discontent, and risk blowing up the Alliance. 
  • The Revised Alliance Master Agreement (as revised in 2015) will likely need some renegotiation. 

3. SBI Bull Triangle/Perform

Sbi%20india

State Bank Of India (SBIN IN) is gearing up for a rally out of flat congestion that has dominated the range since late 2017 and did not participate in the Nifty’s two recent rally cycles. SBI is expected to not only outperform but stage an impressive absolute rally out of triangulation.

Triangles are often the most powerful breakout chart patterns that are followed by high momentum rallies.

We like buying weakness near 300 support but may start to run out of the gates on the back of the micro bull wedge outlined just above the triangle breakout point.

Upside targets will be upgraded if aggressive upside momentum unfolds.

MACD resistance represents the hurdle mid way through the rally cycle and likely to induce a stall.

4. Geely (175.HK):Keep Calm and Accumulate Geely

Screen%20shot%202019 05 16%20at%2015.48.50

Geely’s share price overshot near-term fundamentals in April in our view, and recent correction of the share price brings back the investment opportunity. 

Previously, the market was over positive on the uptrend of auto sector shipment yoy in 1Q2019 and the positive bias amongst government officials on the launch of  supportive policies for the auto sector. Investors were expecting the arrival of the spring in China auto sector.

However, although we think on the expected supportive policies materialise, it will take time to have details of the policies get ready and take effect. Moreover, we believe 2019 would be the worst ever year for auto sector after decades of fast growth.  We don’t think the demand would recover from such a high base so soon. The market share gaining by NEV is also a headwind. 

Looking forward, Geely’s sales data might will be volatile. We suggest buying on weakness and wait for the eventual demand recovery.

5. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

6

We believe that Bristow’s senior secured bonds are overvalued at current levels of ~ 86% and would be better BUYERS in the low 60’s based on our valuation.

Accordingly, our analysis suggests that the value breaks in the senior secured part of the capital structure and we expect recoveries on the unsecured bonds to be close to zero.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Nissan’s New Board and Management Developments and more

By | Daily Briefs, Value Investing

In this briefing:

  1. Nissan’s New Board and Management Developments
  2. SBI Bull Triangle/Perform
  3. Geely (175.HK):Keep Calm and Accumulate Geely
  4. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?
  5. Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

1. Nissan’s New Board and Management Developments

Three days after earnings were released, describing restructuring efforts (and throwing old management under the bus), reorganization, and introducing to the public the New Nissan Governance Structure, on Friday 17 May after the close, Nissan Motor (7201 JP) officially announced its list of proposed directors to the board based on its New Governance Structure and provided more details. 

This came a day after the basics of the new plan were reported in the Nikkei along with the fact that embattled current Nissan CEO Hiroto Saikawa would stay on as director and CEO, Renault SA (RNO FP) CEO Thierry Bolloré would join the board, and Renault’s chairman Jean-Dominique Senard would also retain his role. 

The fact that Saikawa-san was staying on should not surprise anyone. But it should not be considered permanent. The threat by Renault/France this past week or two to not support Saikawa’s re-appointment was a minor mistake, but if they persist in it going forward, it will be a colossal mistake. 

The announcement of the board and governance structure now puts an emphasis on rehabilitation of management process and oversight. 

The board of directors selected the new director candidates based on the recommendations of the Provisional Nomination and Compensation Advisory Council, established in March. Taking into the consideration Nissan’s global business development and the transformation of the automotive industry under CASE technologies, emphasis has been placed on diversity in experience, knowledge, nationality and gender. Enhancement of diversity on the board will enable increased effectiveness and also strengthen the company’s governance structure.

The important points are that the Board, as proposed, will be 11 strong, with a majority of independent directors (in principle, a minimum of 6, but in this case 7), and the governance structure will move from being a company with statutory auditors to a company with three statutory committees (nomination, compensation, and audit), and as a result, upon approval of the new board members at the June AGM, all the statutory auditors would lose their positions (with one moving to a director position). 

From a tick-the-box perspective, this looks like a highly diverse board with 5 foreigners (3 of 7 independents are foreigners), two women, and people with diverse corporate backgrounds. If they take their jobs really seriously and learn about auto manufacturing and sales, the board holds promise. Interestingly, the foreigners selected among independents are all “Japan hands” to an extent that neither of the two Renault appointees are. 

This announcement and the news of Saikawa-san and Yamauchi-san as new COO should allow Nissan to more effectively stall Renault for time.

  • There are two appointees to the board from each of Renault management and Nissan management, which is something of a downgrade for Nissan compared to the old balance.
  • The newly appointed COO from Nissan will also be on the board, which is a strong position and may be meant so that the independent board members learn about him quickly so that perhaps would be the natural successor to Saikawa-san, who stays on. 
  • Saikawa-san staying means Renault either has to take it as-is, or has to go hard and public about its discontent, and risk blowing up the Alliance. 
  • The Revised Alliance Master Agreement (as revised in 2015) will likely need some renegotiation. 

2. SBI Bull Triangle/Perform

Sbi%20india

State Bank Of India (SBIN IN) is gearing up for a rally out of flat congestion that has dominated the range since late 2017 and did not participate in the Nifty’s two recent rally cycles. SBI is expected to not only outperform but stage an impressive absolute rally out of triangulation.

Triangles are often the most powerful breakout chart patterns that are followed by high momentum rallies.

We like buying weakness near 300 support but may start to run out of the gates on the back of the micro bull wedge outlined just above the triangle breakout point.

Upside targets will be upgraded if aggressive upside momentum unfolds.

MACD resistance represents the hurdle mid way through the rally cycle and likely to induce a stall.

3. Geely (175.HK):Keep Calm and Accumulate Geely

Screen%20shot%202019 05 16%20at%2015.48.50

Geely’s share price overshot near-term fundamentals in April in our view, and recent correction of the share price brings back the investment opportunity. 

Previously, the market was over positive on the uptrend of auto sector shipment yoy in 1Q2019 and the positive bias amongst government officials on the launch of  supportive policies for the auto sector. Investors were expecting the arrival of the spring in China auto sector.

However, although we think on the expected supportive policies materialise, it will take time to have details of the policies get ready and take effect. Moreover, we believe 2019 would be the worst ever year for auto sector after decades of fast growth.  We don’t think the demand would recover from such a high base so soon. The market share gaining by NEV is also a headwind. 

Looking forward, Geely’s sales data might will be volatile. We suggest buying on weakness and wait for the eventual demand recovery.

4. Bristow – Is There an Opportunity to Invest Prior to the Financial Restructuring?

6

We believe that Bristow’s senior secured bonds are overvalued at current levels of ~ 86% and would be better BUYERS in the low 60’s based on our valuation.

Accordingly, our analysis suggests that the value breaks in the senior secured part of the capital structure and we expect recoveries on the unsecured bonds to be close to zero.

5. Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

Map%20of%20bald%20hill%20surrounding%20area

Earlier this month Wesfarmers Ltd (WES AU) bid for Kidman Resources (KDR AU) in a move that raised some eyebrows in the lithium sector. Wesfarmers had earlier gone after Lynas Corp Ltd (LYC AU) but that deal looks increasingly complex given the latter has several pending issues to be resolved in Malaysia. Yesterday Australian newspapers reported that several KDR investors were resisting the Wesfarmers offer as they say it undervalues the company.

This morning investors are informed that Alliance Mineral Assets (AMS SP) is placing 32.5M AUD worth of shares at 0.20 AUD/share to both Galaxy Resources (GXY AU) and Jiangxi Special Electric A (002176 CH).  The entire placement will result in 13% dilution for existing shareholders.

After the placement Galaxy will become Alliance’s largest shareholder with an almost 12% stake. Jiangxi Special Electric will own just over 9% of the company.

Officially this placement will help speed up the development of the Bald Hill deposit but the real reason for this share issuance is to get Galaxy over 10% so it has a blocking minority in case any other buyers would be circling Alliance Mineral.

Over time a full takeover of Alliance by Galaxy is the only logical outcome. Tick Tock, how long will this take? 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis and more

By | Daily Briefs, Value Investing

In this briefing:

  1. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis
  2. SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit
  3. HCM: 4Q Unlikely to Surprise but We Do Not Expect an Earnings Decline Next Year
  4. Using BORUC to Pick Asian Value Stocks

1. HCM: Setsumeikai Positive and Earnings Should Grow on Constant Currency Basis

We consider the tone of HCM’s setsumeikai to have been largely positive. While guidance looked very weak, on a constant currency basis the company expects earnings to grow with strong results in the mining and value chain businesses offsetting potential weakness in China and Europe. While unit sales in China look a little frothy with local manufacturers becoming very aggressive on pricing, on the whole we believe the market has prematurely priced in a downturn while we expect mining demand to support continued strong results.

2. SpinTalk:Spirit Realty Capital (SRC US)- A Rising Spirit

Src3

On May 31, 2018,  Spirit Realty Capital (SRC US), a triple net lease REIT that is primarily focused on single tenant retail real estate in the US, completed the spin-off of its lower quality and debt encumbered assets into a vehicle named Spirit MTA REIT (SMTA US). But, as we approach the first anniversary of the spin-off event, we believe it is worthwhile revisiting the situation since we continue to identify Spirit Realty as an attractive misvaluation opportunity, particularly as it has entered the last phase of its transition into a more typical triple net lease REIT which we believe should catalyze a value re-rating in the coming quarters.

Our valuation thesis points to a shareholder return well in excess of 20% (including the dividend) that should be achievable within a year if the aforementioned last phase of its transition progresses as expected. 

3. HCM: 4Q Unlikely to Surprise but We Do Not Expect an Earnings Decline Next Year

Hcm%20pb

Hitachi Construction Machinery (6305 JP) is down 41% since its early Feb 2018 peak. This is despite consensus OP estimates having risen 28% since that period. Consensus is forecasting 1.6% growth in OP next FY and we also expect low-mid single digit growth. Given valuations, however, we believe the market may be pricing in a significant earnings decline and thus believe there is potential upside for the stock.

4. Using BORUC to Pick Asian Value Stocks

Introducing the Bucephalus Operating Return on Utilised Capital

We created BORUC, the Bucephalus Operating Return on Utilised Capital, to reveal the true operating performance of businesses because ‘traditional’ measures (ROE, ROCE etc.) are easy to manipulate. Struggling companies often resort to creative accounting to obscure their problems and hide their decline. This alters the numerator in ROE, ROCE etc. and disguises their investment and capex cycles.

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