In July, the Fund reported a loss of -0.94% on an absolute basis. At the stock level the top three contributors during the month were Barco, Valmet and Boozt; whilst at the other end of the spectrum, Akwel, Rieter and Spie were the three main detractors.
On 19th July, Barco published very convincing H1 results. Since inception in May 2015, the Company has been a constituent of the Fund’s portfolio, a time frame during which the stock’s value has more than doubled. In the Investment Adviser’s view there is still plenty of upside potential from margin improvements, portfolio rationalisation, restructuring and balance sheet optimisation.
On 25th July, Valmet published solid numbers for the first half of the year, having raised its annual sales guidance on 17th July. Very similar to Barco, Valmet offers very reasonable valuation multiples and additionally still has sizeable potential for margin improvements and balance sheet optimisation.
Boozt rebounded in July post a correction triggered by market rumours relating to the arrival of Amazon in the Nordics this year. According to the team, Amazon is likely to set up operations in the Nordics at some point, however based on the Company’s positioning and presence in other markets (like Germany or the UK), the Investment Adviser does not consider this to be a threat to Boozt’s operations in its home territories.
Akwel was the month’s largest detractor, contributing to the Fund’s negative performance (-0.98% impact). Whilst acknowledging that Akwel is an automotive business, operating in a sector particularly out of favour since the beginning of the year, the stock price evolution year to date (-38%) is, in the Investment Adviser’s opinion, a strong overreaction and represents a very attractive opportunity at this level. From a fundamental perspective nothing justifies the severe downturn in the Company’s stock price. Organic growth in H1 18 was very strong at +10.7%, especially considering the strong base comparison from H1 17 of 8.9%. In 2017 the Company’s operating margin stood at 11.2%, well above industry standard.
Such a margin level is even more impressive in the Investment Advisers opinion when factoring in the Company’s prudent accounting policies which refuse to capitalise R&D costs, contrary to most of its peers that use and abuse this accounting gimmick to enhance their operating performances. Not only is the Company growing fast with notable margins, it also comes at paltry valuation multiples, trading at 0.6x sales, 4.2x EBITDA, 5.5x EBIT and 7.0x PE for 2018. In 2019, Price to Book is estimated to stand at 1.03 for a Return on Equity of 16.7%. Let’s forget for one second that this investment is an auto supplier. In reality, it is a financial instrument with a par value of 100 paying a 16%+ coupon which is offered at a price of 103, as such the Investment Adviser believes at this level it is too cheap to be ignored.
Rieter has been a victim of the situation in Turkey during H1. The country, through its developed textile industry, represents a very interesting target market for Rieter’s machines. The context of the presidential elections during spring and the evolution of the Lira has not been favourable at all, with the latter being even more detrimental to Rieter, which sells premium (thus high margin) machines in this country. What are we left with?
A circa 10% free cash flow yielding Company with a significant hidden real estate value to be deployed in the coming years. This is why the team has decided to continue to hold the investment.
Those above mentioned examples explain why the Investment Adviser has maintained its prudent stance in H1, with a close to 20% cash position in the Fund. In the Investment Adviser’s opinion, markets today are much more driven by momentum than fundamentals, triggering volatility and dispersion, thereby inevitably leading to very interesting investment opportunities between now and the end of the year.
The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 16/08/18 and are based on internal research and modelling.
For detailed performance information based on complete 12-month periods since inception, please refer to the Fund’s factsheet, which is obtainable from https://www.eisturdza.com/funds/fund-documents.
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