Bottom-Up EquitiesDaily Briefs

Equity Bottom-Up:, Naspers, Mitsubishi UFJ Financial (MUFG), Ammb Holdings, Recruit Holdings, Guangzhou Baiyun International Airport, ASX Ltd, Link REIT, State Bank Of India and more

In today’s briefing:

  • – All Systems Go
  • Naspers: “Double” Discount Warranted? The Search for a Catalyst Continues
  • Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG
  • AMMB: Top Decile PH Score™ and VFM Asset
  • Recruit Holdings [Alt Data]: HR-Tech Makes a Swift Recovery but Could Be Already Priced-In
  • Guangzhou Baiyun Intl Airport (600004 CH): Sep Marked the First Dual YoY Growth
  • ASX Limited – Softening Trends Continue
  • Link REIT – Weak Results Preview
  • SBI’s NPA Reduction Was Largely On Account of Write-Offs, Not Better Management – All Systems Go

By Thomas J. Monaco

* Should Continue to Get a Significant Upward Re-Rating: Mainland China has been at the epicenter of this tourism slowdown. If the virus impact continues to be held in check for 2-3 weeks post-Golden Week, the risk to tourism and confidence should start to seriously abate; and 

*Travel Rebound Underway: The good news is that mainland China hasn’t “officially” reported local COVID-19 infections since August 15th, although there were two asymptomatic cases disclosed in late September. After nine plus months of hiding and the Covid-19 pandemic largely under control in mainland China, the Ministry of Culture and Tourism stated that the first four days of the Golden Week holiday beginning October 1st witnessed nearly 425 mn local trips – nearly 80% of the level posted in 2019.

Naspers: “Double” Discount Warranted? The Search for a Catalyst Continues

By Wium Malan, CFA

Between early-2018 and late-2019, Naspers (NPN SJ) / Prosus (PRX NA) management took meaningful steps to attempt a narrowing of their discount to listed NAV, the most important of which was announcing the intended spin-off of all Naspers’ ex-South African internet assets into a new entity, Prosus, to be listed on Euronext Amsterdam, with a secondary listing on the JSE, which resulted in a narrowing of the discount from c.35% to c.25%. 

However, in the year since the listing of Prosus, we have seen a “double” discount manifest given Prosus’ c. 27% discount to its listed NAV as well as Naspers’ c. 29% discount to its listed NAV (which entirely comprises its 73% shareholding in Prosus). Intuitively, this seems excessive and, in this insight, I take a closer look at, what I believe to be, the top reasons for this discount, to find catalysts which might unlock value. 

I believe we will continue to see a c.25% holding company discount at Prosus, with another c.20% warranted at Naspers. I cannot, however, identify any catalysts that would cause the “double” discount to widen and have applied these values to my SOTP. I estimate fair value for Prosus at €101/share (31% upside) and Naspers at R4,404/share (47% upside).

Mitsubishi UFJ Financial Group – MS Continues to Dilute MUFG

By Thomas J. Monaco

*Morgan Stanley/Eaton Vance Transaction: Morgan Stanley (MS.US) announced its intention to acquire Eaton Vance for approximately USD 7 bn in a 50/50 cash/stock transaction. According to MS, this transaction is expected to be earnings break-even on deal consummation. We are less optimistic;  

*MUFG Should Worry About Dilution: Mitsubishi UFJ Financial Group (8306.JP) [MUFG] collectively owns 22.6% of the outstanding shares of MS on a fully diluted basis; prior to both the E*Trade Financial and Eaton Vance (EV.US) transactions MS represented an estimated and outsized 25.4% of MUFG’s FY (March) 2020 bottom-line – despite MUFG’s high reliance on gains.In aggregate, both transactions dilute MUFG’s MS stake by 3.57% to 18.99%. Both transactions are anticipated to dilute MUFG’s earnings attributable to Morgan Stanley by USD 175 mn or close to 9.0% YOY or 2.2% overall for MUFG in FY 2020 – assuming the status quo on securities gains; and

*MUFG Already Has Enough Headaches: Earnings at MUFG remain quite tenuous. Outside of its high reliance on volatile sources of securities trading, impairment losses associated with its ownership stake in Bank Danamon (BNMN.IJ),  earnings pressures from Union Bank in California,  the re-jigging of the systems integration at MUFG NICOS too should continue to weigh on future results. 

AMMB: Top Decile PH Score™ and VFM Asset

By Paul Hollingworth

Ammb Holdings (AMM MK)  shows benign fundamental momentum (high PH Score™) with improved Liquidity and Capitalisation, stable Asset Quality and NIM, and a standout enhancement in Efficiency which cushioned the blow of higher Credit Costs.

Our PH Score™ shows that the bank is making marked headway on the Efficiency front which is a key variable to underpin Profitability moving forward given a stable though thin NIM. Liquidity and Capitalisation trends are benign too while Asset Quality is stable. The top-line shows moderate growth, in line with Credit expansion, and lower Funding Costs while “non-core Income” represented 23% of PT Profit – an indication of reasonable earnings quality- despite robust trading gains. The bottom-line was impacted lower by higher Credit Costs as elsewhere (with the exception of China) which may reverse going forward. Comprehensive Income was in excess of Net Profit – a good sign.

VFM expresses an asset according to its value-quality characteristics (PH Score™), its technical picture, and an additional valuation filter. AMMB is in the top decile globally.

AMMB is looking at focusing its core operations away from insurance which may unlock long-term value.

The shares are not dear. A FV of 8%, a PBV of 0.47x, an Earnings Yield of 15.7%, a Dividend Yield of 4.5%, and a Total Return Ratio of 1.6x are not unattractive. Shares thus trade below common-sense thresholds of 10% (FV), 1x (PBV), 10% (EY), and 1x (TRR) respectively.  

The PH Score™ is a fundamental momentum-quantamental score that scores banks according to changes in value-quality. The Score encompasses Profitability, Operating Efficiency, Liquidity, Capital, Asset Quality, and Coverage as well as a valuation variable. Scores lie between 0 and 10, with higher scores representing more positive signs. The PH Score™ was back tested over 2007-17 for global banks and conclusively shows progressively higher returns across quintiles ranked by Score. 

Recruit Holdings [Alt Data]: HR-Tech Makes a Swift Recovery but Could Be Already Priced-In

By Supun Walpola’s (Indeed) and’s (Glassdoor) web traffic data for 2Q FY03/21 suggest that Recruit’s HR Technology segment may have recovered from its poor pandemic-hit 1Q. However, we believe Recruit’s potential recovery could be already priced-in.

Guangzhou Baiyun Intl Airport (600004 CH): Sep Marked the First Dual YoY Growth

By Osbert Tang, CFA

There is full recovery in both domestic aircraft movement and passenger throughput at Guangzhou Baiyun International Airport (600004 CH) in Sep, which registered YoY growth of 8.5% and 0.7%, respectively. The figures suggested further strength in the domestic market and should reflect positively on a QoQ in GBIA’s profitability improvement. Also, the initial figures for the Golden Week have pointed to a 4.9% higher daily aircraft movement and 8.2% higher daily passenger throughput than the average in Sep. 

We believe the rebound of international passenger will be an increasingly important driver for GBIA’s traffic recovery over the next 12 months. For example, China Southern Airlines (1055 HK) has already increased its international flights departing from Guangzhou from 16 in Sep to 20 in Oct. GBIA has also obtained approval for non-public issuance of A-shares to its parent to raise fresh equity of Rmb3.2bn, and we believe these are all positive developments for the company.

ASX Limited – Softening Trends Continue

By Thomas J. Monaco

*Weaker Futures Activity Continues: ASX Limited (ASX.AU) [ASX] remains a among the better listed exchanges globally, earnings fundamentals are likely to remain under pressure for the foreseeable future. During the September 2020 update, stronger capital markets activity was a positive surprise and velocity is tracking well. However, the weaker trend in futures activity continues its downward trend whilst costs continue to rise as ASX continues to invest in technology; and

*Expect Consensus To Take Hatchet To EPS:  New revenue initiatives are also unlikely to add materially to growth in FY 2021. In our view, consensus forecasts remain beyond what is rational and significant EPS downgrades are inevitable.  In light of these headwinds, it’s pretty difficult to justify a P/E of 38x FY 2022 consensus forecasts.

Link REIT – Weak Results Preview

By Thomas J. Monaco

*Weak Numbers Expected: Link REIT (823.HK) [Link] hosted a pre-blackout investor presentation on Oct 8, 2020.The outcome was generally a negative earnings pre-announcement whereby DPU is set to decline 7.6% – the first dividend decline since Link was listed in 2005. The culprit for the poor pre-announcement was a negative rental reversion rate and increased rental concessions (which we believe are not one off) in Hong Kong, factors which are anticipated to continue to place intense pressure on results for the foreseeable future; and  

*Hong Kong Pressures Are Very Apparent: This recent London transaction is so far away from Link REIT’s core competencies speaks volumes as to where it believes its core Hong Kong retail business is heading. This doesn’t seem like smart diversification and smells more of panic leverage when one considers the price and location of this deal. We are hopeful that management doesn’t let the large cash position burn another hole its pocket.   

SBI’s NPA Reduction Was Largely On Account of Write-Offs, Not Better Management

By Hemindra Hazari

Media commentators analysing the tenure (October 7, 2017 to October 6, 2020) of Rajnish Kumar as chairman of the State Bank Of India (SBIN IN) (SBI), India’s largest bank by assets, have commented on the sharp decline in gross non-performing assets (GNPAs) in absolute and in percentage terms during his leadership. SBI’s GNPAs declined from Rs 2.2 trillion (10.9% of gross loans) in FY2018 to Rs 1.3 trillion (5.4% of gross loans) by 1QFY2021. However, the decline in NPAs was primarily due to write-offs, which are an accounting entry requiring minimal management intervention. If the improvement in asset quality had been primarily the result of recovery and upgradation of accounts, management would deserve to be commended, as strenuous efforts are required by bank staff to recover bad debts from defaulters. As the bulk of write-offs in government banks relate to corporate accounts, where promoters/founders have siphoned off funds by inflating project costs, or have diverted funds to other purposes, recovery from such defaulters is unlikely to be significant (accounts like Essar Steel are an exception). The trend of declining NPAs is likely to be reversed when another tsunami of bad debts from the Covid-19-induced lockdown hits the banking sector; banks would require massive recapitalisation as they write off bad loans. In SBI this round of write-offs will be managed by Dinesh Kumar Khara, who succeeded Rajnish Kumar as chairman on October 7, 2020.

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