Daily BriefsSingapore

Singapore: Singtel and more

In today’s briefing:

  • Last Week in Event SPACE: SingTel, Bharti Airtel, Kerry Logistics, Milton, Jardine Matheson

Last Week in Event SPACE: SingTel, Bharti Airtel, Kerry Logistics, Milton, Jardine Matheson

By David Blennerhassett

Last Week in Event SPACE …

  • Singtel (ST SP)‘s implied stub, net of all listcos, is currently around the lowest level outside of the GFC. 
  • Bharti Airtel (BHARTI IN)‘s Rights Entitlements are funkier than people think. And while they are going to be a tiny portion of one’s portfolio, at receipt, there are some really cool aspects.
  • If assuming the Irrevocable Agreement signors intend to tender only what they put in their Irrevocable Agreement, then owning Kerry Logistics Network (636 HK) around $24.00 looks the right place. Share are currently trading comfortably through that level. 
  • Milton Corp Ltd (MLT AU) is now a straightforward short-dated scrip merger arb trade PLUS an index inclusion trade with high impact.
  • Jardine Matheson Holdings (JM SP) still looks rather rich compared to history and other conglomerates. Plus the buybacks have gone and long onlies have had 4 months to reinvest Jardine Strategic Holdings (JS SP) proceeds into JM.
  • Plus, other events, CCASS movements (flagging possible Offers and  IPO lock-ups), and Mood Spins.

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classifications, and Events – or SPACE – in the past week)

M&A – ASIA

Kerry Logistics Network (636 HK)  (Mkt Cap: $6.0bn; Liquidity: $8mn)

KLN announced on the 24 August a delay in the record date for the Special Dividend. With the Partial expected to close on the 2 September, questions have been asked whether those shareholders who have already tendered – or those investors who tender before the 2 September – whether they are still eligible for the special dividend? My call with KLN was such that the Partial may be declared unconditional on the first close – the 2 Sept – which means the Partial is required to be open for at least another 14 days, or through to the 16 September, which would then encompass the special dividend’s 15 September record date.

  • But it is actually simpler than this. In the circular (page 7) it says: “means the date immediately prior to the Final Closing Date, being the record date for determining Shareholders’ entitlement to the Special Dividend“. So the Special Dividend record date has to be 1 day prior to the Final Closing Date.

  •  This is a partial offer, not a voluntary/mandatory general Offer. This means, even if unconditional, shareholders who tender, sell all rights and benefits attaching to them as at or after the Final Closing Date. “Whether or not a Shareholder tenders any Share for the acceptance of the Partial Offer, conditional on completion of the Warehouses Sale (which is conditional upon, amongst other conditions, the Partial Offer becoming or being declared unconditional in all respects), every Shareholder as at the Record Date will receive the Special Dividend.”

  • At HK$24.10 – at the time of my insight – assuming the Controlling Shareholders and Executive Directors, etc tender only the Irrevocable Quantities, and assuming the back end trades at Undisturbed of HK$16.92 less the Special Dividend of HK$7.28, the fair value back end is HK$9.64, and the Implied Public Shareholder Participation Rate is 100%.  If using PER at the undisturbed price, the six-month prior average, and the price at which the warehouses were sold, then you’re looking at HK$23.80, HK$23.85, and HK$23.65 as an entry-level – assuming 100% participation. The key risk here is that the Irrevocable Agreement signors will tender more.
  • And as anticipated, Kerry Logistics Network (636 HK)‘s partial was declared unconditional on the First Closing Date. The Offer will now remain open until the 16 September – and cannot be extended further. The record date for the special dividend is the 15 September, and 13th Sept for the interim. You’ll get both if you buy today, and then tender – or not tender. Doesn’t look terribly attractive at these levels though. 

(link to my insight: Kerry Logistics (636 HK): Technicalities As Partial Draws To An End)

Milton Corp Ltd (MLT AU)  (Mkt Cap: $3.4bn; Liquidity: $5mn)

On 2 September at 7pm Australia time, the Marvelous Milton Merger Arb ratio was fixed, and just now it was announced.  The ratio of Milton shares to Washington H. Soul Pattinson and Co. Ltd (SOL AU) shares has been decided at 0.1863. Entitlements will be rounded up or down to the nearest share. This is now a straightforward short-dated scrip merger arb trade PLUS an index inclusion trade with high impact.  The risk arb spread is MLT to WHSP where the current price of MLT also includes a special dividend with franking credits. The ratio is 1 share of MLT gets you A$0.37 shares of special divs (plus franking credits) and 0.1863 shares of WHSP.  The index inclusion is one where Travis expects passive trackers in MSCI, FTSE, and S&P/ASX 200 index family funds will have to buy A LOT of shares of  WHSP. 

  • It is not clear when all the index trades will occur. There are rules, and there are overrides. Travis goes into considerable detail in his piece out Friday.

(link to Travis’ insight: Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part)

China Logistics Property Holdings (1589 HK)  (Mkt Cap: $1.8bn; Liquidity: $7mn)

CLPH has announced its chairman, Li Shifa, has entered into an S&P with JD.com Inc. (9618 HK), to sell his 26.38% stake in CLPH at a price of $4.35/share.  Provided conditions to the S&P are fulfilled, and with JD.com currently holding 10.64%, it would be obligated to make a Mandatory General Offer (MGO) – also at HK$4.35/share. The key S&P condition is approval from China’s AML (Anti-Monopoly Law) Authority, which should not be an issue. The key condition to the MGO becoming unconditional is JD.com holding 50% of the voting rights in CLPH. RRJ Capital, Joy Orient, and Dajia Baoxian have given irrevocables to tender in their 21.94%, 3.3%, and 4.14% respective stakes. This all looks pretty clean.

  • JD.com had the patience, played the long game, which essentially backed CLPH into a corner.
  • But the price is widely viewed as a disappointment, given where it traded back in December last year when a change of control was first floated. This may trade wide at the onset given investors expected a higher price, and may be disinclined to hold all the way to close. But I think this should trade relatively tight to terms. The Offer price will not be increased. And as one reader put it, they’re just happy to get this slow-burning deal off their books.

(link to my insight: China Logistics (1589 HK): JD.com’s Offer Comes Up Short)

Fubon Financial Holding Co (2881 TT) announced many months ago when it took over Jih Sun Financial (5820 TT) that it would do an equity raise to do so. Janaghan Jeyakumar discussed this rights issue in Fubon Financial Holding Co (2881 TT): Rights Issue a week ago.  Pricing was expected to be confirmed in the days ahead, and it has been confirmed. The 548,000,000 common shares will be issued at NT$58.9/share each.  The 333,330,000 C Class Preferred Shares (non-cumulative dividend) will be issued at NT$60/share each. The dividend rate was set at 3.0% (7yr IRS + a fixed spread (7yr IRS 0.6538% + 2.3462% spread)).  By all means exercise the Common Share Rights you are allocated.  The Pref Shares are probably a toss-up. If you do not exercise them in order to sell, you aren’t losing much at all. Link to Travis Lundy‘s insight: Fubon Financial Rights – Common Share Rights Should Be Exercised, Pref Rights Are Worth Near Zero.

China Youzan (8083 HK) announced Youzan Tech has re-filed its application for the listing of shares, which will now be done by way of an offering of new shares, not a listing by introduction. Both the scrip ratio and cash portion remain unchanged under China Youzan’s delisting transaction, by way of Scheme. The estimated value per Youzan Tech shares by an independent valuer is now RMB21.76 (~HK$26.20/share), down 39% from the previous indicative price.  Therefore the proposed consideration for China Youan shareholders is HK$1.4654/share, a 100.7% premium to last close, but a 55.7% discount to last close ahead of the initial announcement in February this year. I would avoid this stock. It is extremely volatile. Plus there are various moving parts leading to the calculation of what is considered “fair”.  Plus there is a question mark over timing, and whether the listing gets Exchange approval.  I do, however, expect the Scheme to get up. Link to my insight: China Youzan (8083 HK): Once Bitten …. .

Small-cap logistics JREIT CRE Logistics REIT (3487 JP) (“CRE”) has launched another follow-on equity offering.  This time, the total offer quantity will be 64,550 units and that means the total offer size would be around ¥13bn (~US$120mn) which is slightly larger than last time (~US$106mn) but still quite small in comparison to some of the other recent JREIT offerings. However, historically such follow-on equity offerings have acted as catalysts for strong secondary market performance in the weeks following the Pricing Date and in his insight CRE Logistics (3487 JP): Can They Do Better Than Last Time?, Janaghan took a look at whether CRE has the potential to perform as well as it did last time. 

Travis took a look at the Showa Denko K.K. (4004 JP) offering. He notes the history to peers, the offering size itself, the Real World Float of Showa Denko and concludes that one could be bullish or bearish depending on one’s horizon. More on his thoughts out this weekend at Showa Denko (4004 JP) Offering – Supply, Passive Demand, and Opportunity

Specialty prescription drug manufacturer Lansen Pharmaceutical Holdings Co, Ltd. (503 HK) has been a terrific little earner since December last year. Lansen has made significant gains from the sale of its stake in Zhejiang Starry Pharmaceut-A (603520 CH). Cash on hand was US$103mn (~HK$800mn) as at 1H21, with a net cash position of US$73.88mn.  Chairman Wu Zhen Tao acquired 66.44mn shares (16.873%) at an average price of HK$1.84/share, outlaying HK$122.5mn. The highest price paid was ~HK$2.197/share.  Buybacks were 11.01mn shares (2.772% of shares out) at an average price of HK$2.71/share, outlaying ~HK$30mn. The highest price paid was probably ~HK$2.85/share.  Lansen is not a large, nor liquid company. But it was a potential privatisation play. Concurrent with its interim results, Lansen announced a special dividend of HK$1.55/share. The record date is the 16 September, with payment on the 28 September.   Shares gained 33% on the news to close at HK$2.97. This is your cue to exit. Link to my insight: Lansen Pharm (503 HK): Here Is Your Exit.

STUBS

Singtel (ST SP) (Mkt Cap: $29bn; Liquidity: $44mn)

SingTel’s 1Q22 (March-June 2021) return to the black, versus last year’s loss, illustrates an improving business environment. EBITDA at the parent level – the unlisted ops – returned a 11% gain yoy.  Amid improving earnings, the market is assigning S$6.3bn less for the unlisted ops since the beginning of the year. 

  • Stripping out its listco holdings, I see the implied stub, trading at <1x forward EV/EBITDA – if extrapolating out 1Q22 number for theFY22E.  Plus you have potential monetisation of non-core assets together with other infrastructure assets up for sale. 
  • The pushback I hear is that SingTel is too “busy” amid a myriad of “distractions”, and that StarHub Ltd (STH SP) is potentially a better 5G bet.
  • Yet SingTel appears to have well overshot to the downside. SingTel is down 39% yoy, compared to +21%, +29%, and +1% for Bharti Airtel (BHARTI IN), Globe Telecom (GLO PM), and STH.  Get involved either as deep value play, and/or an inexpensive entry into Airtel. 

(link to my insight: StubWorld: SingTel Plumbs Multi-Year Low

Jardine Matheson Holdings (JM SP) (Mkt Cap: $20.6bn; Liquidity: $16mn)

In my prior insight Jardine Matheson: Lessons in Dissenton the 29 April, I thought Matheson was unattractive at a 13% discount to NAV, plus near-term news may focus on Jardine Strategic Holdings (JS SP)‘s dissension rights, and Matheson’s potential exposure thereon. Matheson is down ~15% since that note (while the Straits Times Index is down ~4%).  Since that insight, Matheson released its interim results, which not only provided clarity on the net debt at the parent level, which was largely guesswork amid the Matheson/Jardine Strategic Holdings (JS SP) circularity; but also unlisted stub ops – especially Jardine Motors – performed exceptionally in the 1H21. At a ~23% discount to NAV on adjusted historical NAVs, value is emerging, but rich vs. historical levels. 

  • The market cap is down US$3.2bn since my last report. The market is also assigning US$1.2bn less to the stub ops – and those ops have had a stellar 1H21. Plus US$0.9bn in cash has been banked from those ops. My current stub ops are valued at US$2.1bn compared to US$1.2bn back in April.
  • There is still a question mark over the cost of those dissension rights. But as seen in recent Cayman Island appraisal rights cases, the final uplift in “fair value” for dissenters has been modest to non-existent.
  • Collapsing the circularity and removing its complexity should drive interest (from LOs) in Matheson. And holdings like HKL are cheap at 0.3x P/B. The pushback? – the unattractiveness of the UK Standard listing, the absence of buybacks, plus Matheson gained 20% at the time of the Strategic Offer.

(link to my insight: Jardine Matheson: Value Gradually Emerging Four Months On)

EVENTS

Bharti Airtel (BHARTI IN)  (Mkt Cap: $50bn; Liquidity: $6mn)

After the relative success of last year’s Partially Paid Rights Offer conducted by Reliance Industries (RIL IN) discussed in basics in The Reliance Industries [RIL] Rights Offering then in gory detail in Reliance Rights Offer Detailed – Big. $7bn Big. And InterestingBharti Airtel (BHARTI IN) has decided to conduct a Partially Paid Offering of its own.  Bharti Airtel, of course, also raised money in a 19 for 67 rights offering in May 2019 followed by a straight equity raise announced in December 2019 and executed in January 2020.  On 30 August, Bharti Airtel announced that its board had met and approved a Rights Issue to fully-paid up shares which works with a construct called Partially Paid Shares. 

  • There are no details yet for the issue period, trading period, and record date but what we do know is that investors will get 1 Right for every 14 Shares held; will be entitled to purchase 1 Share at Rs 535/share (vs ~Rs 620/share on the 30th of August) for every Right (or Rights Entitlement (“RE”)) that they receive; will only have to put up 25% of the funds in the initial stage (i.e. 25% of Rs 535 or Rs 133.75/share), then there will be subsequent capital calls over the following 36 months (vs 18 months for the Reliance version of the same; and will be able to subscribe for over-allotments to take up the rights of those who let theirs lapse.
  • Investors should look for a chance to buy the Rights and PPS near intrinsic. That put option and the embedded financing are worth a fair bit.
  • Because passive funds will receive the rights and the rights will not go into the various indices immediately. I expect those shares to come out quickly when they start trading as the dummy line is taken out of the index (passive managers receive the rights, but the index provider does not include them and instead assigns a zero value to them.

Link to:
Travis’ insight: Bharti Airtel Partially Paid Rights Situation
Brian Freitas‘ insight: Bharti Airtel’s Large Partly Paid Rights Offering

Hitachi Transport System (9086 JP)  (Mkt Cap: $3.5bn; Liquidity: $11mn)

Hitachi Transport has decided to cancel 19.8% of its shares outstanding, effectively ridding itself of treasury shares. That cancellation occured this week. This will mean a substantial drop in share count. That will mean, unless countered by the TSE in a corporate action treatment to be named later, a large selldown of shares on 29 October based on TOPIX calculation rules. Because the TSE measures Free Float Weight on a different time frame than it measures shares outstanding, and the FFW is updated once a year based on the numbers as of the end of the fiscal year, the fact that Hitachi Transport’s float was very low at end-March using the TSE’s FFW methodology means there is a decent chance that the float rate will be lowered, meaning an even larger selldown in end October (29 October).

  • If the TSE does an ad hoc measurement which takes into account both the increase in float percentage by using 31 March float shares against 29 Sep float shares, it will still be a big selldown at end-October.  The Passive Sell should be 1.2-2.0mm shares or 7-11 days of ADV. There could be a selldown by SG Holdings. They have stock to go to meet their target from a year ago. That could be 3.5mm shares or more. 
  • Travis likes the “HTS is a takeover candidate trade” and it is part of the reason why he liked the stock nearly a year ago. HOWEVER… he had hoped the earnings rebound would move faster, and M&A would move faster, and for the moment he sees nothing to suggest a great deal of urgency. Furthermore,  he is not convinced (and this comes without the benefit of having spoken to management) that HTS really wants to be taken over by a PE Fund. They may be willing to work with one in growing outside Japan, but he doesn’t get the feeling they want to be owned by one. If they did, management and directors would probably own more than 0.1%.

(link to Travis’ insight: Hitachi Transport Uncoupled – TSE Prime, Price Popping, And Supply To Come)

Results are out for the WH Group (288 HK) Partial Offer.  1,916,937,202 Shares to be bought-back against valid acceptances in respect of a total of 8,288,742,088 Shares tells you Pro-Ration was 23.12699782%. Travis has seen a notice passed around which says that the MSCI selldown for the 2 Sept at the close on WH Group  includes no change in FIF (float weight) which stays at 65% but there will be a share count reduction of 1.917bn shares.  I have yet to see a FTSE or Hang Seng announcement. In FTSE, it sits in limbo because it is not specifically a UK/Aus name though the event is specifically like one described, and it is more than large enough to warrant a specific change. Link to Travis’ insight: WH Group Post-Tender Outlook – Index Selldown and Back-End Trading/Valuations.

TAKEOVER RULES – INDIA BUY-BACK GUIDE 2021

A “Buyback” is where (for our purposes) a publicly-listed company repurchases its shares from existing shareholders, sometimes in the market, sometimes in a structured buyback off exchange, and sometimes at a price higher than market price (in this insight, we will use the nouns “Buy-back” and “Buyback” interchangeably; the official regulatory documents in India often use the form with the hyphen).

  • When companies use excess cash to buy back shares, they often not only end up optimising their capital structure but also “achieve” EPS accretion with the aid of a reduction in the total share count of the company. Some companies use buy-backs to support their share prices during sluggish periods and others attempt to use it as a defence mechanism against hostile takeover situations.  Still others in India use it to return capital to their promoters. All that is pretty well-known.
  • In India, such Buy-backs are governed by the SEBI (BUY-BACK OF SECURITIES) REGULATIONS, 2018 (last amended on 17th April 2020) and are principally executed through three main mechanisms – Tender Offers, On-Market Transactions, and Book-building Processes.
  • In this insight Quiddity India Buy-Back Guide 2021: Regulations & Patterns – Travis and Janaghan will look into the regulations that govern each of the buy-back mechanisms to discover the basis for how they get executed.

M&A – US

M&A – EUROPE

  • On 27 August, Castor (the acquisition vehicle of Ion) raised the offer price FOR Cerved Group S.p.A. (CERV IM) to €10.20/share, a ~7.4% increase, for a total consideration of €1,976 mn. The minimum threshold condition was raised to a stake of 80% from 50% plus one share and the tender period was extended until 9 September. In Castor Raises Bid for Cerved Jesus Rodriguez Aguilar‘s fair value is  €11.04/share. 

M&A ROUND-UP IN AUGUST

For the month of August, 10 new deals (firm and non-binding) were discussed on Smartkarma with an overall announced deal size of ~US$39bn, buoyed by the massive Afterpay Touch (APT AU) transaction.

  • The average premium for the new deals announced (or first discussed) in August was ~28%, with a year-to-date average of ~33% (112 deals & total deal size of US$234bn). This compares to the average premium for all deals in 2020 (158 deals) and 2019 (145 deals) of 31% and 31.5% respectively.

M&A RISK ARB WEEKLY ROUND-UP

  • This insight provides a quick summary of gross/annualised (where possible) spreads (on deals discussed on Smartkarma) across Asia-Pacific as at the last trading date, and how those spreads have changed over the last week; plus the next hard events over the coming weeks. I number 36, mostly firm, deals around the region.

INDEX REBALS

  •  FTSE EPRA Nareit Rebalance Decided. The FTSE EPRA Nareit Global Real Estate Index Rebalance for September 2021 has been announced. There are 29 Additions – 28 from Asia – and two deletions.  The original announcement caught investors by surprise, and baskets were hurriedly formed as impact was expected to be large. The inclusion date is 17 September. The impact should still be large (it has been large so far). Link to Travis’ insight: FTSE EPRA Nareit Rebalance Decided; Sub-Baskets Worth Trading Still.

  •  JPX-Nikkei 400 Rebalance 2022. A periodic review is conducted by the Index providers, the JPX Group and Nikkei Inc, in August every year. This review is conducted using the final business day of June as the base date. In JPX-Nikkei 400 Rebalance 2022: Leader Board End-Aug 2021, Janaghan Jeyakumar looks at the lists of potential Inclusions and Removals for the JPX-Nikkei 400 Rebalance to come in August 2022. The conventional trade would be to go LONG the Potential Inclusions and go SHORT the potential Removals. However, Janaghan believes it is too early in the timeline to set up this trade. For now, he would add these to a watchlist and track the evolution of these baskets. 

OTHER M&A & EVENT UPDATES

  • As expected, Golden Throat Holdings (6896 HK) has pushed out the dispatch date for the Scheme Document to the 19 October (on or before). 
  • Also expected, Independent Scheme Shareholders of Chong Hing Bank (1111 HK) overwhelmingly (99.97%) approved the Scheme at the Court Meeting yesterday. The effective date is expected to be the 27 September, with payment on or before the 7 October.

  • Central Pattana Pub (CPN TB) has now completed the purchase of shares in Siam Future Development (SF TB)on 30 August 2021 equal to 52.15% of shares out at Bt12.00/share. After the completion of shares purchase, the number of shares held by CPN is 56.26%. Therefore, CPN is required to make a tender offer for the remaining shares in SF.

  • The SPA is now unconditional triggering a mandatory take-over for the remaining shares of Ijm Plantations (IJMP MK) at RM3.10. The Offer Doc is expected to be dispatched within 21 days. Settlement takes place within 10 from valid acceptances. This will trade tight. 

  • Youfoodz Holdings (YFZ AU)announced that the Federal court of Australia has approved the convening of Scheme Meeting and despatch of Scheme Booklet. The Scheme Meeting will be held on the 8th October 2021.

  • Mcdonald’s Corp (MCD US) reported that it had sold 3.5mm shares of Mcdonald’s Holdings Co Japan (2702 JP) at JPY 5290 on 26 August (the closing price of that day). That means there should be another 3.5mm shares sold in the market over the next short while, but that should be the last block. The stake which remains is 35.32% and in July 2020, MCD said they would stop at 35%. 

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, lock-up expiry, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

Tibet Water Resources Ltd. (1115 HK) 10.29%Chiw SangChing Hing
Hang Tai Yue Group Holdings (8081 HK) 14.33%Get NiceKingston
TL Natural Gas (8536 HK)32.92%Glory SunSt Chart
Jiangxi Bank Co Ltd (1916 HK) 10.03%CCBChina Industrial
Zioncom (8287 HK)30.00%CNILego
Source: HKEx
The following large movement(s) concern recently listed companies, and therefore are (likely) lock-up related.

Name

% chg

Into

Out of

Hygeia Healthcare Group (6078 HK) 13.19%JPMOutside of CCASS
Source: HKEx

I listen to a bunch of music when writing insights. Here are a handful of tunes, old & new, that piqued my interest during the week: Pynch’s Somebody Else; Let Out on the Loose (Danny Krivit Edit), Christelle Bofale’s Miles, Nick Garbett & Mike Majkowski’s Mid Mountains.

What are you listening to? 

Enjoy your Sunday!


Before it’s here, it’s on Smartkarma