From the Securities Lending Trading Desk – Week of April 22nd

In the Americas, directional demand persists for cannabis producer, HEXO Corp.(HEXO). In Asia Pacific, Australian vitamin maker Blackmores Ltd announced a slump in third-quarter profits last week as it saw its sales in China decline once again. In Europe, lending demand for Mediaset strengthens as the TV company announced an appetite for M&A.

Americas

Directional demand persists for cannabis producer, HEXO Corp. (HEXO) as analysts question whether the company can meet its lofty revenue guidance for fiscal 2020. The budgeted revenue is above consensus estimates and many believe It will take time for the Canadian recreational pot market to increase in product demand. The company’s high valuation, coupled with the potential earnings shortfall on the horizon, has caught the attention of bearish investors. High utilization levels in the lending market has kept fee levels elevated.

Price volatility has made Amyris Inc. (AMRS), an industrial biotechnology company, an attractive target among short sellers spurring increased securities lending demand. The company turned in a disappointing year in 2018 by missing its own revenue guidance by 58%. On 4/11 shares plunged after accounting errors were discovered resulting in the company cutting its fiscal 2018 revenue by $12 million and net income by $7 million. Multiple class action suits were filed against the company as a result. Subsequently, the shares surged after news they will pay down upcoming debt with cash instead of common stock avoiding more share dilution. With the stock expected to remain volatile, Amyris should continue to be a long term directional focus name.

Asia Pacific

Australian vitamin maker Blackmores Ltd announced a slump in third-quarter profits last week as it saw its sales in China decline once again. Net income for the period came in at just under A$10 million ($7.1 million), a decline of 43 per cent compared to the third quarter of 2018. The company cited a major reason for the poor sales was due to the imposition of new regulations requiring any Chinese business importing into the country to be registered with the government subject to local taxes. This has particularly affected agents who shop in Australia on behalf of clients in China, an arrangement that accounts for about one third of Blackmores’ entire business in China. As these agents operate on thin margins and, as a result of the new rules, many have been forced out of business. We continue to see long-term securities lending demand for Blackmores, which has seen its share price decline by nearly 30 per cent in the past year.

Shares in Australian paint manufacturer DuluxGroup Ltd surged by as much as 28 per cent last week after it agreed to sell its business to Nippon Paint Holdings. Japan’s largest manufacturer of paints and coatings offered to buy out its Australian rival for A$3.8 billion ($2.7 billion) in an all-cash deal, representing a 28 per cent premium. The purchase will give Nippon Paint access to an important sales channel given Dulux’s no.1 ranking in Australia & New Zealand. Analysts also believe the deal will make Nippon Paint more relevant in an industry that is continuing to consolidate and further cement its product offering in the Asia-Pacific region. It will also enable the company to diversify away from China where its sales are cooling, given a slowdown in the real estate sector. We saw limited securities lending demand for both DuluxGroup and Nippon Paint following the announcement of the deal.

Europe

The world’s largest cement maker, LafargeHolcim Ltd (LHN SW) announced this week it was issuing its 2019 scrip dividend with a guaranteed 8% discount. Subject to approval at the annual general meeting the board has given shareholders the choice of receiving the dividend as stock, cash or a combination of both. The discounted shares will be fixed based on the daily volume weighted average price traded on the SIX Swiss Exchange during the nine trading days from May 27, 2019 to June 7, 2019. Options in the Swiss firm rose to almost 12 times the 20-day average after the news was announced with borrowers paying a premium for clients that can guarantee cash elections.

Lending demand for Mediaset strengthens as the TV company announced an appetite for M&A. Following reports early in the week that Italian TV company Mediaset (MS IM) and German digital entertainment provider ProSienbenSat (PSM GY) rejected newspaper reports of a potential merger, Mediaset let its shareholders know that it was looking to strike deals to compete with global streaming giants. The market took the news positively and shares have risen just over 4.5% leading into the long European weekend. Short interest has risen from lows of 7% in October last year to present day levels of 22% as part of the announcement included the possibility that cash for a potential dividend may be used to facilitate the acquisitions. Global industry lending utilization is at ~90% according to Datalend.