After two weeks of not posting, the market is pretty much where it was when I left. The much awaited Santa Claus rally has not materialized and much to chagrin of investors, things still look like a complete blur. Over the past two weeks, plenty has happened, we had a very nice little EU summit which made David Cameron public enemy number 1 in Europe. He is starting to look a lot like Margaret Thatcher but I have to say that he really made me look at him in a different light. It takes massive balls to do what he did and he showed the world he had enormous ones. The EU summit's proposal for a new treaty was initially well received however as the week went by the conviction behind is started to look a little shaky to say the least.
Global markets have welcomed the new additions of high profile IPOs like Chow Tai Fook (twice the size of Tiffany's!), Chine New Life Insurance, Zynga and Groupon. All ended underwater and it should be seen as a barometer for the weak sentiment in the markets. Volumes have been extremely thin and it looks like only institutional and proprietary players fooling around in the markets. The next two weeks are going to be key to see how the new year will play out. I have a sneaky feeling that things are going to be really volatile before the new year begins.
Quietly but surely, the Euro has fallen to year lows with the ECB lowering interest rates once again. This is definitely not the end of the Euro's weakness because more easing measures can be expected down the road. More Eurozone countries are going to get downgraded over the next one to two months as Moodys and S&P put the finishing touches of their reviews for those countries. Euro weakness will be a good gauge of how the markets are going to move. Also bear in mind, Gold has lost quite a bit of its luster. In my view, gold is going to go through a tough run because technical charts show that the precious metal is unable to rebound convincing and it has revisited their lows once again. Looks like a lot of unwinding by investors to take profits to cover for losses on other positions.
In this post, I would like to focus more on something that is of great interest to me. The privatization of QSR and KFC which was announced over the past 3 trading days. I believe those who have been following this blog will know that QSR was one of my favourite picks and once again another stock has been taken private amongst my picks. Sigh. The reason why I am sighing is because these are the companies that really have great potential to deliver great returns investors and once they are taken private, investors are not given the opportunity to really benefit from them.
The current offer for QSR from Johor Corp and CVC capital is at an attractive price of $6.80 which values QSR at 17 times p/e. That is not expensive because if we look at the other companies like Jollibee of Philippines, Cafe De Coral and the Little Fat Sheep of Hong Kong, they all trade at more than 20 times p/e. Also these are companies with less brand equity compared to KFC. If I were a shareholder, there is no way in this world I would take this offer but I am pretty sure because of this poor sentiment, the offer will be accepted. Now all we can hope for is for another competing offer to be tabled. This is a possibility but not one that I am too optimistic about.
One thing that still baffles me is how this will affect Kulim. Kulim is a wonderfully managed plantation company that owns more than 50% of QSR. Johor Corp owns more than 50% of Kulim. The question is, now that QSR and KFC will be held under a special investment vehicle in Massive Equity Sdn Bhd, what happens to Kulim's stake? Will Massive Equity be paying cash for the stake or will it be exchanged for other things. I have been looking at Kulim and this is one company that has had a fantastic track record and have extensive businesses outside of their core plantation business. If Johor Corp continues to use Kulim as the holding company for the privatized QSR, Kulim will continue to benefit from the KFC franchise. Which means that this is a good opportunity for investors to switch from their QSR holdings to Kulim.
Currently, there is some speculation that Kulim's stake in QSR will be swapped with Johor Corp for more plantation assets. That is something which I am not too keen on. I would prefer for a cash settlement or a continuation of Kulim as a stakeholder of QSR. Kulim currently trades at 9 times 2011 earnings which is very decent with very strong cashflow. If their QSR stake is bought over in cash, that would mean they would net more than RM1 billion in cash. Which could mean a nice special dividend for shareholders. They do not need the cash and have more than enough to pay off most of their debt. Therefore, a nice dividend of close to 80 cents per share is not out of the question. Throw that in with the normal dividend yield of 4.4%, we are looking at close to 25% yield for the coming year. Of course that is not sustainable but still a very attractive yield that will keep the price stable at least through the next few months.
The key reason for Johor Corp's move to privatize QSR and KFC is because they have a growing debt burden and with this restructuring, they will be able to benefit for KFC's strong cashflow to meet their debt burden. This is one of the key reasons to why I have been very positive on these companies because their predictable and stable cashflows are their key attractions. Remember, in situations like the one we are in today, stable and predictable cashflows are the most important when we are buying companies. Forget growth for the time being as we will be seeing stagnating growth for the next 1 to 2 years.
Well that is all I have to say for this week. Have a great Christmas and will be back with more of my thoughts for next year.
Best,
SVI
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