Stock market rebound in February and continued outperformance for the Fund

BY BERTRAND FAURE

Monthly Fund Commentary
10 Mar 2017

BY BERTRAND FAURE

European financial markets recovered in February after muted performance in January. The Fund’s benchmark was up +3.05% during the month and as a consequence, year to date performance now stands at +2.73%. In that context, the Fund recorded a +2.23% return in February, underperforming its benchmark, however year to date, the Fund’s return amounts to +5.32%, translating into a +2.59% outperformance.

Since inception in May 2015, the Fund is up 18.74% while the Fund’s benchmark is down 0.81%, a 19.55% outperformance after 22 months of operations.

Metall Zug was the most significant monthly contributor to the performance, followed by MGI Coutier and Tarkett. At the other end of the spectrum, Granges, Alten and Aubay were the three main detractors.

The Fund initiated one new position during the month: OVS in Italy while the investments in Serge Ferrari (France) and Cancom (Germany) were closed, recording, respectively, a +23.6% and a -1.2% return since the Fund initiated those positions in September 2015 and February 2016. The Fund also tendered its shares in GfK to the offer presented by KKR to take the company private and the proceeds should be received during March 2017.

Carved out of Gruppo Coin in 2014, OVS is the leading Italian apparel retailer with 7% market share, operating nearly 1,300 stores (directly operated stores and franchising) and two brands. The IPO which completed in early 2015 allowed OVS to raise EUR349m, reducing its leverage to 1.3x debt/EBITDA at year-end. The OVS brand has evolved into a fast fashion retail brand, while UPIM has been repositioned at a lower price point and oriented towards the “family” segment. The company is engaged in an aggressive expansion plan of its store base in Italy and into some neighbouring countries.

In December 2016, the investment vehicle Sempione Retail successfully took over the struggling Swiss apparel retailer Charles Vögele, despite offering a very small premium to the market price. OVS is investing just EUR 13m for 35% of Sempione Retail, but it can call a further 45% in 2019 at a discounted multiple and thus consolidate it.

The Investment Adviser sees the deal extremely positively for several reasons. In the short term, OVS will see: 1) royalties from Charles Vögele for the use of the OVS format in Switzerland and 2) additional procurement savings due to Charles Vögele’s increased purchasing volumes from suppliers. If the turnaround succeeds, the reward could be sizeable, as: 1) OVS could increase its stake (from 35% to 80% at a 25% discounted multiple and could probably buy the remaining 20% at fair value); and 2) it would improve its status from a nearly pure Italian retailer, with potential benefits in terms of investor perception and “proof” that the brand and format can work outside of Italy. Risk is low (€13 million compared to OVS’s market cap of €1.2 billion), as OVS could decide not to exercise its call option if the Charles Vögele turnaround does not work out as expected.

 

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 06/03/17 and are based on internal research and modelling.