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Capital Calls

31 March 2021 By Breakingviews columnists

Concise insights on global finance in the Covid-19 era.


– Geely’s Volvo IPO

– Walgreens

– Saudi Aramco

Road hogs. Zhejiang Geely’s latest motor trip could be even more bumpy than the last one. On Wednesday, the Chinese automaker said it was considering a separate listing for its Volvo Cars unit, an idea founder Li Shufu scrapped in 2018 when investors balked at his mooted $30 billion valuation. After last month applying the brakes to a full merger between the two companies, Geely reckons a revived initial public offering could value the brand at $20 billion, Bloomberg reported.

Even that looks souped up, though. Assume Volvo’s net income next year returns to the $1.1 billion it made in 2019, before the pandemic, and apply German rival Volkswagen’s 9.5 times multiple. The Swedish brand might have an equity value of $10 billion. True, investors may be prepared to pay a little extra for Volvo’s heady goal to only sell battery cars by 2030. But Geely investors still hoping for a luxury ride should again brace for disappointment. (By Christopher Thompson)

A shot at going private. Transatlantic pharmacy group Walgreens Boots Alliance raised its guidance for the remaining two quarters of its financial year on Wednesday, thanks in part to more people coming into its stores to get Covid-19 vaccinations. It’s one component of the $48 billion company’s strategy for fighting off Amazon.com.

Walgreens has been under pressure from online competition, a lack of inflation in drug prices and a lockdown-induced dearth of customers needing things like cold medicine. But the company has at least partially turned the corner. It expects to administer up to 34 million vaccines this fiscal year. With the U.S. government paying $40 per shot, that’s a nice benefit in itself, and patients may also buy more candy and such while in the store.

Amazon can’t match Walgreens’ in-store clinics. Yet the latter’s stock is still a third below its 2018 high, and Executive Chairman Stefano Pessina has explored taking the firm private. The latest results show why that might be a smart investment. (By Robert Cyran)

Slash and grab. Mohammed bin Salman has found a new source of cash for his 12 trillion riyal ($3.2 trillion) pivot away from oil: company dividends. The Saudi crown prince said on Tuesday that $1.9 trillion oil giant Saudi Aramco and its new acquisition Saudi Basic Industries (SABIC) could supply 60% of the private sector’s $1.3 trillion contribution to his 2030 plan, by lowering dividends and diverting cash to diversification projects.

The good news for the non-state investors holding just over 1.5% of Aramco is that MbS won’t be pinching their dividends. In essence, the prince is just spelling out what dividends already being paid to the state will be used for. But while Aramco Chief Executive Amin Nasser claimed on Wednesday that the scheme was “voluntary”, it underscores minority investors’ lack of control over the company. That in itself is another reason to avoid any future Aramco equity offerings. (By George Hay)

Lowballed. China’s $393 billion liquor giant appears to have no interest in cheering up investors battered by a heavy sell-off. Kweichow Moutai, the country’s biggest stock by market value whose much coveted baijiu liquor fetches a whopping 90% gross margin, said it will grow revenue by 10.5% in 2021. That’s up from 10.3% last year but way off Daiwa analysts’ forecast of 25%, and much slower than rival Luzhou Laojiao’s estimated compounded growth of 24% to 2022.

Such conservatism seems hard to square given strong market demand for the drink. Investors had been suspicious of management’s penchant to serve local government interests and accused it of channelling profit to Moutai’s state-controlled parent. Last year they protested against the liquor company’s generous plans to fund local highway projects. Shares have already dropped 20% from their February peak amid broader concerns over monetary tightening. Investors looking for a pick-me-up may be disappointed. (By Yawen Chen)

Stars aligned. Julius Baer can go back on the M&A prowl. The Swiss financial watchdog has scrapped a ban on large acquisitions imposed because of severe anti-money-laundering failings, the wealth manager said on Wednesday. The decision comes at a good time for Julius Baer. The bank has nearly 1 billion Swiss francs in excess capital before hitting its self-imposed Common Equity Tier 1 floor of 11%. It’s also richly valued. An 85% rally in its shares over the past 12 months has boosted its market capitalisation to 14 billion Swiss francs. At 3.5 times its tangible book, Julius Baer is valued at more than three times Swiss rivals UBS and Credit Suisse.

Boss Philipp Rickenbacher could use the bank’s expanded equity or borrow on the market to buy a sizable target, like Geneva bank Edmond de Rothschild or $2 billion Swiss-listed EFG International. The only caveat is that it should not create another onerous asset clean-up. (By Lisa Jucca)

Third time tricky. KKR’s efforts to take cash out of its Australian lender have hit another snag. On Wednesday the private-equity firm and fellow investors Deutsche Bank and Värde Partners filed to take non-bank Latitude Financial public at A$2.6 billion ($2 billion). It’s their third attempt to list the company. But the price is a 13% discount to a deal the owners struck  to sell a tenth of the company to Japan’s Shinsei Bank less than three weeks ago.

That’s a remarkably quick change. Shinsei gets to improve its terms too, now buying 5% at the original price and the rest at the valuation touted in initial public offering prospectus. The implied internal rate of return for the business KKR and partners bought from GE in 2015 drops a tad to 14% excluding dividends, Breakingviews calculates. There’s room to improve as they’ll still own around two-thirds of the lender after the share sale but it’s hardly an auspicious start. (By Antony Currie)

Great stall. Chinese carmaker Great Wall Motor may be driving too fast. On Tuesday, the $36 billion company reported net profit grew by a fifth last year. After rallying more than 400% over 12 months, shares are trading at a zippy 29 times forward earnings, per Refinitiv. That puts it motoring ahead of giants like Toyota and Daimler, as well as compatriots including Geely and Dongfeng, which trade on multiples closer to half that figure.

The group is dabbling in electric cars, hydrogen and chips, all catnip to investors. But it is still early days for Great Wall’s technology. Sales of new-energy vehicles aren’t much better than those of other legacy automakers, and initiatives like investing in semiconductors are barely underway. Meanwhile, a closer inspection of the recent results reveals that the bottom line was flattered by one-off gains, without which growth would have been stagnant.

There is cause for optimism: Sales are on the up and new models might boost margins. But the stock could soon hit the speed limit. (by Katrina Hamlin)


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