REG - AVI Global Trust PLC - Half-year Report
01/06/2023 07:00
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RNS Number : 2212B AVI Global Trust PLC 01 June 2023
AVI GLOBAL TRUST PLC
('AGT' or the 'Company')
LEI: 213800QUODCLWWRVI968
Announcement of unaudited results for the half-year ended 31 March 2023
Half Year Financial Report for the year ended 31 March 2023
A copy of the Company's Annual Report for the half year ended 31 March 2023
will shortly be available to view and download from the Company's website,
https://www.aviglobal.co.uk. Neither the contents of the Company's website nor
the contents of any website accessible from hyperlinks on the Company's
website (or any other website) is incorporated into, or forms part of, this
announcement.
Dividend
The Directors have declared the payment of an interim dividend of 1.2p per
Ordinary Share for the period ended 31 March 2023, which will be paid on 14
July 2023 to Ordinary shareholders on the register at the close of business on
16 June 2023 (ex-dividend 15 June 2023).
The following text is copied from the Half-Year Report and Accounts:
OBJECTIVE
The investment objective of the Company is to achieve capital growth through a
focused portfolio of investments, particularly in companies whose shares stand
at a discount to estimated underlying net asset value.
FINANCIAL HIGHLIGHTS
- Net asset value ('NAV') total return per share increased +5.3% to 208.35p
- Share price total return +5.5%
- Benchmark index increased on a total return basis +10.3%
- Interim dividend maintained at 1.2p
PERFORMANCE SUMMARY
Net asset value per share (total return) for six months to 31 March 2023(1)* 5.3%
Share price total return for the six months to 31 March 2023* 5.5%
31 March 2023 31 March 2022
Discount* (difference between share price and net asset value)(2) 10.4% 9.1%
Six months to Six months to
31 March 2023 31 March 2022
Earnings and Dividends
Investment income £9.40m £9.25m
Revenue earnings per share 1.28p 1.25p
Capital earnings per share 9.42p (0.18p)
Total earnings per share 10.70p 1.07p
Ordinary dividends per share 1.20p 1.20p
Expense Ratio (annualised)*
Management, marketing and other expenses 0.84% 0.87%
(as a percentage of average shareholders' funds)
High Low
Period Highs/Lows
Net asset value per share 225.53p 195.03p
Net asset value per share (debt at fair value) 227.99p 197.80p
Share price (mid market) 205.50p 174.60p
(1) As per guidelines issued by the Association of Investment Companies
('AIC'), performance is calculated using net asset values per share inclusive
of accrued income and debt marked to fair value.
(2) As per guidelines issued by the AIC, the discount is calculated using the
net asset value per share inclusive of accrued income and with the debt marked
to fair value.
Buybacks
During the six months ended 31 March 2023 the Company purchased 11,946,757
Ordinary Shares for cancellation at a cost of £23,206,000 . During the
half-year no Ordinary Shares were cancelled from treasury.
*Alternative Performance Measures
For all Alternative Performance Measures included in this Report, please see
definitions in the Glossary in the Half-Year Report and Accounts.
CHAIRMAN'S STATEMENT
My predecessor Susan Noble retired at the Annual General Meeting in December
2022 and this is my first statement as Chairman. The Company has thrived under
Susan's leadership and the Board would like to record our thanks to her. We
have enjoyed working with her and wish her well in her future endeavours.
Overview of the Half Year
Having lived through over a decade of very low inflation and interest rates,
economies and markets are now having to adjust to higher levels of both. The
collapse of Silicon Valley Bank and the rescue of Credit Suisse in March 2023
illustrate the challenges for governments and central banks in seeking to
control inflation while not causing lasting economic damage.
The NAV total return(1) for the six months under review was +5.3%,
underperforming our comparator benchmark which produced a return of +10.3%. As
set out in the Investment Manager's Report, all of the underperformance
occurred in a difficult period in March 2023. While it is disappointing to
report returns behind the benchmark, AVI have produced strong returns over the
long term and we are encouraged by the range of investment opportunities which
the team are now seeing.
Revenue and Dividends
Revenue earnings for the six months under review were 1.28 pence per share.
The Board has elected to pay an interim dividend of 1.2 pence per share, which
is the same as last year. The Board recognises that a dividend which is steady
and able to rise over time is attractive to many shareholders but, as my
predecessors in the chair have regularly noted, the portfolio is managed
primarily for capital growth.
Gearing
We have not made any changes to the structure of the Company's debt in the
period under review. Deployment of available cash is the responsibility of AVI
and driven by their stock selection and, as set out in the Investment
Manager's Report, net gearing increased in the period, driven by the
Investment Manager taking advantage of some attractive investment
opportunities.
Share Price Rating and Marketing
The Board and Manager take an active interest in the share price rating. We
have an extensive marketing programme which promotes the shares to a wide
variety of investors, both professional and individuals. We aim to provide
comprehensive and engaging reports on our activities and disseminate these
through both traditional and electronic media channels.
We also recognise that at times there can be merit in using share buybacks
with the intention of limiting the volatility in the discount. This is an
approach which we encourage with many of our investee companies. During the
six months under review, 11.9 million shares were bought back, representing
2.43% of the shares in issue (excluding treasury shares) as at the start of
the period. Shares were bought back when the Board believed that the discount
was unnaturally wide. As well as benefitting shareholders by limiting the
discount at which they could sell shares if they so wish, buying back shares
at a discount also produced an uplift in value to the benefit of continuing
shareholders, by approximately 0.22%.
The Board
Following Susan Noble's retirement, June Jessop was appointed as a
non-executive Director with effect from 1 January 2023. June was previously
Senior Business Manager at Stewart Investors and a member of the EMEA
Management Committee of First Sentier Investors (of which Stewart Investors is
a sub-brand). June has spent her entire career in financial services, gaining
broad experience in portfolio management, client relationship, business
development and, latterly, general management roles. She has been an
investment manager for institutions, charities and private clients, including
managing assets of an investment trust and investing in closed-end funds on
behalf of clients. My colleagues and I are delighted to welcome June to the
Board. She brings a wealth of experience in both managing assets and in the
management of investment businesses. Her skills complement those of the other
Board members and we look forward to working with her.
Annual General Meeting
The resolutions at the AGM in December 2022 were each passed by a large
majority and the Board would like to thank shareholders for their continuing
support.
Outlook
The changes to the portfolio described in the Investment Manager's Report are
indicative of the opportunities currently presented in various parts of the
world. In particular, the level of gearing has increased and I would emphasise
that this is driven solely by opportunities at the individual company level
rather than any view on economies or markets.
The recent issues in the banking sector are a cause for concern, as more
broadly are the continuing geopolitical and inflationary challenges that the
world faces. Against this background your Board believes that there is a good
base of value in the portfolio and we are optimistic. While markets will
inevitably be volatile, over the long term we expect AVI to continue to
deliver attractive returns to investors.
Graham Kitchen
Chairman
31 May 2023
(1) An Alternative Performance Measure: see Glossary in the Half-Year Report
and Accounts.
INVESTMENT MANAGER'S REPORT
PERFORMANCE REVIEW
"This is the most complex, disparate and cross-cutting set of challenges that
I can remember in the 40 years that I have been paying attention to such
things" - Lawrence Summers, Former US Treasury Secretary.
The above quote was from late 2022, prior to the collapse of Silicon Valley
Bank ('SVB'), when the lagged effects of monetary policy tightening, its
(un)intended consequences, and the conflicting nature of price stability and
financial stability were laid bare. Undoubtedly the world has become more
complex since, with the yield curve now the most inverted since 1981,
indicating a high probability of a US recession and a precarious economic
outlook globally.
Our experience shows that the key to driving successful long-term returns is
to focus on the bottom-up fundamentals - and this is exactly what we continue
to do.
Over the last six months we have found an increasingly attractive and varied
opportunity set. This is in stark contrast to late 2021, when we reduced our
use of gearing to reflect relatively narrow discounts and seemingly stretched
underlying valuations. Since then, stock prices have de-rated considerably and
we have been waiting for the right opportunities.
In the interim period we have added new positions in Spectrum Brands, Haw Par,
Brookfield Corporation and News Corp. We have also initiated a position in a
basket of heavily overcapitalised Japanese regional banks that we believe
should benefit from changes to Japanese monetary policy, as yield curve
control becomes increasingly untenable. Positions in Oakley Capital
Investments and Schibsted were increased materially as we seek to have a more
concentrated top-end of the portfolio, reflective of our conviction.
To fund these, we reduced our positions in EXOR and Pershing Square Holdings,
and exited Sony and a number of smaller positions. Since January 2023, we have
begun deploying a substantial portion of our borrowings for the first time in
more than a year. At the end of March 2023 net gearing stood at 6.9%.
Over the interim period AGT achieved a NAV total return of +5.3%. Christian
Dior, FEMSA and Oakley Capital Investments were the most significant
contributors to returns, whilst Aker, Brookfield Corporation and Godrej
Industries were the largest detractors.
AGT's return compares to the MSCI AC World ex US (your Company's comparator
benchmark) and the MSCI AC World, which returned +10.3% and +6.3%,
respectively. As such your Company underperformed on a relative basis by -4.9%
and -1.0%, respectively.
All of the underperformance came during the final month of March 2023 (indeed,
as at the end of February 2023 AGT was +1.0% ahead of the comparator benchmark
for the interim period).
A comparison of performance with indices over three and five years is set out
in the table below:
All returns in GBP, net of fees 3 years 5 years
AGT NAV TR +76.7% +46.2%
MSCI AC World ex US +40.1% +28.2%
MSCI AC World +54.0% +58.6%
As is the way in financial markets, the collapse of SVB has had repercussions
and ramifications well beyond what seemed initially to be an isolated event.
The volatile market environment has led to a general widening of discounts.
Combined with disappointing short-term developments at Schibsted (discussed
below) this has pushed the portfolio weighted average discount wider, acting
as a headwind to performance. In March 2023 alone, the portfolio weighted
average discount moved from 33.5% to 37.2%, although it remains slightly
narrower than the 38.0% at the end of the last financial year.
Contributors and Detractors for the six months ending 31 March 2023
Contribution*
Contributors
Christian Dior +1.83%
FEMSA +1.61%
Oakley Capital Investments +1.39%
EXOR +1.18%
Apollo Global Management +0.83%
Detractors
Aker ASA -0.61%
Brookfield Corporation -0.58%
Godrej Industries -0.58%
Third Point Investors -0.53%
News Corp -0.48%
* Contribution is the percentage amount that a position has added to the
Company's net asset value over the six-month period.
In addition, our investments in US alternative asset managers KKR, Apollo and
Brookfield Corporation were caught up in the ensuing general sell off in
financials following the events at SVB. We believe this is a case of throwing
the baby out with the bath water and remain excited about prospective returns
for these high-quality lowly-valued companies.
( )
The portfolio has also suffered from the strength of Sterling, which has
reduced returns by -5.2% over the interim period.
At last year's AGM we highlighted FEMSA and Schibsted as two positions with
idiosyncratic event potential that could drive returns.
As we detail in the commentary below, in the case of FEMSA this event has
already come to fruition, with the conclusion of its strategic review. This
helped the shares to rise by +54% over the interim period, making it the
second largest contributor.
In the case of Schibsted the path has been a little more bumpy, detracting
from returns of late. In March 2023 comments from the controlling shareholder
dampened expectations for a near-term distribution of shares in Adevinta,
which has seen the discount balloon to 45%. However, we continue to engage
with all key stakeholders and have been adding to the position in what we
believe to be one of our highest return potential ideas.
In a challenging and uncertain environment for equities en-masse, we believe
that event-based opportunities where companies are undergoing structural
change, with clear catalysts for discount narrowing, are an increasingly
relevant part of our repertoire, and highlight new positions in Spectrum
Brands and News Corp as fitting that pattern. Meanwhile, in Japan, we continue
to find deeply undervalued companies where we can add value as engaged owners.
Whilst relative underperformance is never pleasing, it is an inevitable
consequence of running a differentiated and concentrated portfolio, which
in-turn are pre-requisites for generating excess returns.
In this vein we remain confident and excited about the opportunity set ahead
of us and the underlying prospects for NAV growth and catalysts for discount
narrowing. With the portfolio weighted average discount at 37.2%, we are
optimistic about prospective returns.
CONTRIBUTORS
Christian Dior
(Discount: 16.2%/Contribution: +1.83%)
Christian Dior ('CDI') was the largest contributor to your company's
performance during the interim period, adding 183bps to returns.
The shares rose +38% - slightly behind the NAV (which rose +39%) - and, as
such, the discount widened modestly from 15% to 16%.
The proximate cause for CDI's outperformance was China, with luxury goods
companies being key beneficiaries of the rapid re-opening of the economy and
abandonment of zero-COVID policies. Industry analysts at Bain estimate that
China's re-opening will see the global luxury industry grow at +6-8% in 2023,
versus prior estimates of +3-5%. CDI's sole asset is a 41% stake in LVMH.
Alongside LVMH's full year results - published at the end of January 2023 -
Mr. Arnault struck a similarly optimistic tone, declaring "we have every
reason to be confident, indeed optimistic on China", with "quite spectacular"
signs of things to come from Macau, where Chinese tourists can now travel.
In terms of LVMH's fourth quarter and full year results, the business remains
in rude health with Q4 sales organic growth of +9%, well ahead of consensus.
On the other hand, operating profit and margins were weaker than expected with
much higher than anticipated marketing expenditure. Whilst interpreted as a
negative by some, we believe this speaks to both LVMH's strength and why
megabrands are likely to continue outperforming, with significant scale
advantages in an industry with high fixed costs. In the short term, megabrands
go through periods where they underearn as spending runs far above "inflation
operational expenditure", but in the long run the brand equity is increased
and growth extended. Smaller monobrands simply cannot compete with this, with
our estimates indicating that Louis Vuitton's incremental expenditure in 2022
is of a similar magnitude to a smaller monobrand's entire budget. If it is
artistic creativity and a certain "je ne sais quoi" that creates brand
strength, it is investment in the brand that maintains it.
As such, we see LVMH as well placed to keep compounding earnings. The current
19x forward EV/EBIT multiple is in-line with the five-year average and does
not appear excessive relative to the group's quality, pricing power and margin
structure. As such we are optimistic for the prospects for NAV growth. On top
of this, there is further upside if and when the family decide to simplify the
group structure - the Arnault family have bought ~€500m of LVMH stock in the
market so far in 2023.
FEMSA
(Discount: 31.9%/Contribution: +1.61%)
FEMSA was a material contributor over the period, with a share price return of
54%.
By way of reminder, we initiated a position in FEMSA in 2021, with an
investment case predicated on the highly attractive nature of FEMSA Comercio -
which operates Oxxo-branded convenience stores, and other small-format retail
stores, across Mexico and Latin America - and the unduly low valuation the
market was awarding the business. In 2022 management announced a
"comprehensive strategic review" of the group structure with a focus on
reducing the sum-of-the-parts discount.
In February 2023, FEMSA concluded its strategic review and took considerable
steps to unlock the sum-of-the-parts discount at which the company trades. The
conclusion of the review will see FEMSA simplify its group structure and
re-focus on its core businesses. Most pertinently, the company announced that
it intends to exit its stake in Heineken, which prior to announcement was
worth €7.4bn or 28% of FEMSA's market cap (gross of tax). Shortly following
the announcement, FEMSA sold €3.2bn of Heineken/Heineken Holding stock in an
accelerated book build and issued a €500m bond exchangeable in Heineken
Holding shares.
The company will also monetise other non-core assets, the most notable of
which is US speciality distributor Envoy Solutions, and return excess capital
to shareholders, with a new targeted leverage ratio of 2x Net Debt to EBITDA.
Our estimates suggest that, inclusive of further Heineken sales, the company
could well have excess capital of $9bn, or 29% of its market cap.
We view these developments highly favourably. The company has taken concrete
steps to unlock value and shine light on the value of FEMSA Comercio - an
expertly managed and scale-advantaged operator with strong unit economics,
improving margins, and a long growth runway. The stub currently trades at 8.4x
forward EBITDA vs. closest peer Walmex at 13.4x. Such a discount feels
increasingly unjustified given the measures taken, with a cleaner equity story
and capital structure conducive to both a narrowing of this discount and the
prospect of increased shareholder returns.
Oakley Capital Investments
(Discount: 31.3%/Contribution: +1.39%)
Oakley Capital Investments ('OCI') was a significant contributor to your
company's NAV over the period, adding +1.4% as the shares returned +21% and
its discount closed from -42% to -31%. The share price was driven by Oakley
reporting its stellar FY22 results, with its NAV growing +24% for the year
despite a turbulent economic backdrop.
OCI's underlying portfolio of asset-light, tech-enabled businesses delivered
strong earnings growth in 2022, with 65% of total portfolio value growth
attributable to the financial performance of the portfolio. The average EBITDA
growth across the portfolio was 22%, a remarkable achievement reflecting the
quality of the businesses that Oakley has assembled. The remaining 35% is from
multiple expansion attributable to uplifts from divestments.
The market environment has been one of scepticism towards private valuations
and, ultimately, the only point when there is certainty about valuations of
private assets is when they are sold. Oakley are paid fees on
committed/invested capital rather than mark-to-market gains, leaving them no
incentive to unduly mark up the portfolio. In fact, we believe that Oakley's
portfolio carrying value is very much at the conservative end of the peer
group. This was evidenced by OCI making five exits in 2022 at an average 5x
gross money multiple and average premium to their carrying value of +70%. This
only further highlights the conservatism of OCI's portfolio valuation
approach.
Oakley were equally active on the investing side over the period, making
£214m in new investments and £55m in follow-on investments. They also made a
€30m commitment to Oakley Capital PROfounders Fund III.
Of particular note was the performance of IU Group, which alone accounted for
51% of the NAV growth in 2022 (+64p). By way of reminder IU Group, Germany's
largest private university group, is the crown jewel in Oakley's portfolio,
now accounting for 21% of OCI's NAV. Despite its outsized position it remains
one of the top three highest growth companies in the portfolio, growing EBITDA
+38% year-on-year ('YoY') and student numbers +16%.
Oakley had anticipated that IU's growth would almost certainly come from
international expansion, but the European business has continued to perform
resiliently, increasing student numbers by 16% YoY. The international business
remains an exciting prospect and represents a future avenue through which IU
can spur company growth if/when the European business begins to plateau. Only
one quarter of the total student growth in 2022 came from the international
cohort.
Following the period end, Oakley's Fund III sold out of its position in German
education business IU Group with Oakley's Fund V taking a stake alongside new
third-party investors (thus ensuring validation of the transaction price).
Although the sale price was equivalent to the most recent carrying value, we
note that the asset had been written up by +85% over 2022. Over the life of
the investment, it generated a multiple on cost of ~11x.
On a look-through basis, IU Group accounted for 21% of OCI's NAV and has now
effectively been resized at 6% given OCI's continuing exposure to the asset
via Fund V.
At Oakley's Capital Markets Day held on the day the transaction was announced,
management discussed how IU Group's next phase of growth would require further
investment into AI and M&A and that, given these investments would weigh
on near-term earnings growth, the opportunity to realise some of the
significant gains made sense.
While we feel that IU Group's true value is higher than the current
carrying/exit value, realising the largest portfolio investment at NAV not
only returns a lot of cash to Oakley in a good environment to make new
investments (c. £240m for OCI alone), but should help to underpin the NAV.
The retention of a material stake in the business means OCI shareholders will
continue to benefit from the company's long growth runway.
OCI continues to offer the opportunity to own a fast-growing, high-quality
portfolio of recurring revenue businesses, backed by a manager with a distinct
deal sourcing strategy, and all available at a discount of 31%. We remain
excited by our holding in OCI.
EXOR
(Discount: 45.0%/Contribution: +1.18%)
Over the interim period EXOR shares returned +16%. This was driven by NAV
growth (+20%), as the discount widened from 43% to 45%.
All three key listed holdings, Ferrari, Stellantis and CNH Industrial,
contributed to NAV growth, with share price returns of +30%, +36%, and +21%
respectively, during a period in which they all reported encouraging full year
results.
Results from Stellantis (the autos company that resulted from the merger of
Fiat Chrysler ('FCA')] and PSA) were particularly impressive. In the second
half of 2022, sales and operating profit grew +19% and +17% YoY, both coming
in 4% ahead of consensus expectations. The broad trends that typified
post-pandemic results - low volumes, strong pricing, high margins - were still
present, albeit less pronounced and versus a more demanding comparison period.
The full year group operating margin of 13.0% is a real yardstick of success -
driven not only by exceptional North American performance (16.4% margin), but
also performance in Europe that was previously unfathomable (9.9% margin vs.
the FCA European business which was loss-making in five of the last eight
years to 2020, with 3.2% the highest margin achieved).
Longer-term readers of our letters may remember that FCA's extreme
undervaluation and the scope for value creation through industry consolidation
were key attractions that initially led us to invest in EXOR in 2016. The
latter of these two points has of course occurred, with the formation of
Stellantis. 2022 results serve to highlight just what a success the merger has
been, with Stellantis achieving €7.1bn of net cash synergies - exceeding the
€5bn target more than two years ahead of plan. However, the first point -
valuation - remains unresolved, with Stellantis trading at a 21% free cash
flow yield and roughly half the PE multiple of Ford and GM (adjusted for
accounting differences). The recent announcement of a €1.5bn share buyback
further highlights the attractive valuation and, combined with the proposed
dividend, will see a total of €5.7bn (11% of market cap) returned to
shareholders.
The past 18 months have been challenging but profitable ones for the auto
industry, as volume scarcity has led to increased pricing power, lower levels
of dealer incentives and higher margins. Inventory levels are starting to
normalise and the path ahead now appears less rosy. With industry-leading
breakeven points and a rock-solid balance sheet, combined with the upcoming
launch of the RAM BEV, we believe this could be exactly the environment in
which Stellantis' quality is recognised - to the benefit of EXOR's NAV.
EXOR's discount remains wide (45%) and the prospects for NAV growth appear
compelling. However, during the period we partially reduced the position to
free up capital for new ideas with more imminent catalysts to drive returns,
such that EXOR is currently your Company's sixth largest holding at 5.9% of
NAV.
Apollo Global Management
(Discount: 32.3%/Contribution: +0.83%)
Apollo Global, the US alternative asset manager ('AAM'), was a strong
contributor over the period on the back of accelerating growth in its asset
management and insurance businesses. While the +37% increase in share price
over the period compares favourably to the +16% recorded by the S&P 500
index, the return had been substantially higher heading into March 2023 before
the fall-out from the SVB banking collapse hit the shares hard.
A non-immaterial portion of this March decline can likely be explained by
programmatic sector-wide trades of "Financials" stocks. That said, one can
understand that AAMs with insurance operations where asset/liability matching
is a key risk should be under more scrutiny than peers running a pure-play
asset management business. That some AAMs with no insurance exposure were down
more than those with, suggests the selling was somewhat indiscriminate.
But a closer look at APO's insurance business is merited.
Following its 1 January 2022 merger with Athene Insurance, APO has by far the
greatest amount of insurance liabilities on its balance sheet of all the AAMs.
While classified as an insurance company, Athene is more usefully analysed as
a spread-lending business. Its most common transaction involves a retail
customer purchasing a deferred annuity for a one-off lump sum paid up front.
In return, Athene promises to make a bullet repayment in eight to ten years'
time that represents a fixed yearly percentage return on the original
investment with some additional potential for capped upside based on equity
market performance. No tax is payable by the customer until the end of the
period, meaning returns compound at a greater rate than they otherwise would.
Athene invests the funds received in a portfolio of securities (94% in fixed
income, of which 96% is investment grade) and makes a return on the difference
between the yield it generates on those assets and the return it pays out to
the policyholder. Athene seeks to earn a return premium from complexity and
illiquidity rather than from taking additional credit risk, and its
return-on-equity has averaged 16% over the last four years (in line with its
target of mid-to-high-teens).
As interest rates rose, SVB suffered massive deposit flight from its
undiversified customer base. This exposed the company's reckless duration
mismatch with its capital base facing erosion from the recognition of
hitherto-unrealised losses on its long duration investments in treasuries and
mortgage backed securities. Crucially, unlike SVB, Athene's liabilities are
well protected from disintermediation (i.e., policyholders withdrawing to seek
higher returns elsewhere as rates rise). Firstly, 30% of its liabilities
(predominantly institutional products) are entirely non-surrenderable, while a
further 52% are structured with penalties for early withdrawal.
That leaves just 18% of Athene's liabilities that could be withdrawn without
any surrender charge. Given Athene's strict liability-matching investment
approach, these liabilities are backed by the shortest duration assets
(floating rate securities). Indeed, the withdrawal of this group of policies
could be a net benefit to Athene given it would release capital which could be
redeployed to support the sale of better-protected products with lower
liquidity needs and lower capital requirements. Analysis of historic consumer
behaviour also confirms the sticky nature of annuities with even the most
troubled institutions experiencing only modest upticks in withdrawals in
2008/09 during the global financial crisis.
Given Athene's fortress-like balance sheet, substantial excess capital, and
Apollo's opportunistic/contrarian investment style, we would expect the
company to be a net beneficiary of volatility. We added to Apollo at the March
2023 lows at a share price equating to just 10x our estimate of 2023 earnings.
Later in the month, APO management re-confirmed both their 2023 and their
long-term (2026) targets, with the latter being to double fee-related and
total earnings between 2021 and 2026.
DETRACTORS
Aker ASA
(Discount: 16.6%/Contribution: -0.61%)
Aker detracted from returns over the interim period. In local currency terms
the shares were down by a modest -3%; however, in Sterling terms this equated
to a -9% return. The relatively small local share price return masks the
larger (-16%) decline in the NAV, from which we were largely protected as the
discount narrowed from 24% to 17%.
The key driver of the NAV decline was Aker BP, shares in which declined -15%.
Having held Aker since 2008, we have written about the company extensively in
previous interim and annual reports. In recent times much of this focus has
been on Aker BP, which accounts for 57% of NAV, and the attractive long-term
prospects for a well-managed low-cost-low-emission oil and gas company, with a
long-production growth runway in a world starved of capex. This idea led us to
more than double our position in Aker since the start of 2020.
However, growing fears of recessions in Europe and the US have led to
significant concerns about the demand outlook for oil, which have been
amplified more recently as investors digested the ongoing issues in the US
banking system. Meanwhile, during 2022 Russian production remained stubbornly
high in the face of sanctions, and we have witnessed record drawings of US
Strategic Petroleum Reserves. This led to a material setback in oil prices and
in the share prices of oil-related equities.
The OPEC+ group of oil producing nations have responded, with a surprise
production cut in October 2022 and again in April 2023 - which has helped oil
prices to recover in the weeks following the end of the interim period. Whilst
this has resulted in ire from the White House, it highlights the extent to
which power has shifted to OPEC+ and Saudi Arabia, who no longer fear losing
market share to US Shale, the role of which as a meaningful swing producer is
now seemingly but a feature of history. This so-called "OPEC-put" should act
as a floor for prices and serves as a reminder of the inelastic nature of
non-OPEC supply.
All told, we believe that the thesis of insufficient capital investment and
production growth remains intact, with events of the last year only serving to
highlight the foundational and fundamental importance of energy sources, and
the significant and elongated role of hydrocarbons.
We expect such an environment to be conducive to a period of sustained higher
prices and that Aker BP will benefit from this, as they embark on a
significant production growth plan. In turn these cash flows can be returned
to Aker through dividends (with Aker BP's dividend growing +10% YoY) and
invested in higher growth/higher terminal value businesses, such as Aker
Horizons, Aker Asset Management and Cognite. Aker's history is one of
tremendous value creation and business building, and this is something that we
expect going forward.
Brookfield Corporation
(Discount: 47.1%/Contribution: -0.58%)
AGT acquired a position in what was then called Brookfield Asset Management in
December 2022 ahead of the spin-off of a 25% stake in its asset management
business. What was Brookfield Asset Management has been renamed Brookfield
Corporation ('BN'); the spun-off asset management business has taken on the
name of its parent company ('BAM').
Our research highlighted that BAM (as it was) was trading at a dislocated
valuation and that either (i) the asset management business was being valued
on too cheap a multiple or (ii) the discount on the other assets was too wide.
In our view, the stand-alone asset management business was likely to attract a
high valuation given that its income is derived entirely from highly-prized
fee-related earnings (up until approximately 2027 when it should start
generating carry from funds launched post spin-off); its high (90%) dividend
pay-out policy; its light balance sheet; its estimated five-year fee-related
earnings compound annual growth rate of +17%; and its advantaged AUM mix
focused on real assets, power, and renewables with BAM the best-placed of all
the alternative asset managers ('AAM's) to exploit the multi-trillion dollar
climate transition opportunity over the next decade.
Valuations subsequent to the spin-off mean that the discount on Brookfield
Corp is very wide, with the spun-off asset management business trading towards
the multiples of high-quality balance-sheet light peers. To take advantage of
the relative valuations, we sold our BAM shares and used the proceeds to buy
more BN.
Brookfield Corp's NAV is comprised of the remaining 75% stake in now-listed
Brookfield Asset Management (42% of NAV); a 100% stake in unlisted Brookfield
Property Group (34% of NAV); stakes in listed Brookfield-managed closed-end
funds (18% of NAV); and an insurance business amongst other investments.
On all permutations, Brookfield Corp is valued cheaply. The headline discount
of 46% is wide, as is the 88% implied discount to its unlisted investments.
Expressed differently, the discount could be looked at as writing off the
entirety of the $33bn in real estate and then assigning an 18% discount to all
the other assets. If we take another iteration, we could say that Brookfield
Corp should trade at an arbitrary 20% holding-company discount - doing so
would then imply a write-down in the Brookfield Property Group of -81%.
On Brookfield Corp's first earnings call post spin-off, management made clear
that further action would be taken were the undervaluation to persist. Aside
from ramping up share buybacks, we would also expect further spin-offs of the
remaining stake in the asset management business to help in unlocking value.
We added to the position after the accounting period end.
Godrej Industries
(Discount: 65.0%/Contribution: -0.58%)
Godrej Industries detracted 58bps from returns during the interim period. The
shares declined -8%, fractionally more than the NAV (-7%), and as such the
discount remained largely unchanged at 65%. The fall in share price was
amplified by a -11% depreciation of the Indian Rupee against the Pound.
In terms of NAV, strength at Godrej Consumer (51% of NAV) was offset by
weakness at Godrej Properties (29%) and Godrej Agrovet (11%). Shares in Godrej
Properties declined -14% over the period, in what was generally a weaker
environment for Indian real estate developers. The BSE Realty Index declined
-6% as the impact of higher mortgage rates and reduction in affordability
started to be felt and moderated an ebullient market. In April 2023 the
Reserve Bank of India paused rate hikes, which all else equal provides a surer
footing for the market as we look ahead. Indeed, the company targets +20%
mid-term growth, and benefits from a strong brand equity, making it a
preferred partner for landowners, and has a high preference from buyers.
Godrej Consumer shares rose +6% during a period in which the company reported
a promising set of results, showing strong top-line growth and margin
expansion, improved underlying consumer demand and cost input inflation
abated. Management have navigated a tricky period over the last 12 months,
investing heavily in marketing through the cycle, and addressing
underperformance in Indonesia. They also simplified operations in Africa,
where the turnaround over the last two years has been impressive. Input prices
have declined materially YoY which, combined with improving underlying demand,
should drive earnings growth.
The shares remain incredibly cheap, trading on a 65% discount to NAV. The
unlisted Godrej Chemicals (7% of NAV) and Godrej Housing Finance Limited (2%)
are performing well and highlight the way in which Godrej Industries can
incubate and build businesses to create value. Over time we believe the market
should reward this with a narrower discount. However, we believe the company
could be much more dynamic in crystalising this value. As such we sold a
portion of our holding during the period, re-allocating capital to situations
with clearer catalysts to unlock value.
Third Point Investors
(Discount: 21.2%/Contribution: -0.53%)
Third Point Investors ('TPOU') materially underperformed with its NAV falling
by -4% versus +16% and +18% gains for the S&P 500 and MSCI AC World
indices respectively. A widening discount (from 17% to 20%) compounded matters
and resulted in a share price decline of -8%.
While the credit book was a solid contributor to returns, woeful
underperformance on both the long and short equity strategies more than offset
this with mark-downs in the VC portfolio adding to the pain.
AGT also owns a direct position in the Third Point Offshore Master Fund that
underlies TPOU. This was acquired as a result of our participation in an
exchange facility offered to TPOU shareholders in early 2022, that allowed
qualifying shareholders to exchange a portion of their TPOU shareholding for
shares in the Master Fund at a 2% discount to NAV. This saw 43% of our
position exchanged for shares in the Master Fund, and we have since redeemed
this holding at the maximum permissible rate and will have exited entirely by
the end of June 23.
News Corp
(Discount: 52.8%/Contribution: -0.48%)
During the period we initiated a new position in News Corp - the Murdoch
family-controlled holding company. The shares continued to fall throughout the
period, detracting from returns.
Whilst the current structure was established in 2013, the relevant history
dates back to 1952, when a 21-year-old Rupert Murdoch returned to Australia
from Oxford to take over what was left of his father's newspaper business -
which had been much diminished by death duties and taxes. From this he built
one of the most dominant media empires of the 20th - and indeed 21st -
century, amassing vast wealth and notoriety in the process.
Today we believe that News Corp is one of the most misvalued and misunderstood
companies in our investment universe, trading at a 53% discount to our
estimated NAV. The NAV is principally comprised of the following assets: a 64%
listed stake in REA Group (36% of NAV), the Australian real estate classified
marketplace, and unlisted assets Dow Jones, HarperCollins and Move accounting
for 39%, 13%, and 8%, respectively.
In particular, Dow Jones is a crown jewel asset that has successfully evolved
to become a thriving digital consumer business, whilst both organically and
in-organically building a high-quality information services business that
warrants a premium multiple reflective of its growing, high margin, sticky,
recurring revenues. The value and quality of this business is misunderstood by
the sell side and ignored by the market.
We estimate that Dow Jones alone is worth nearly 3x News Corp's stub value.
The stub trades at just 2.9x EBITDA, with EBITDA expected to grow at an
estimated +9% CAGR from 2023-25. This compares to the S&P Communications
Services sector median multiple of 10.4x, the New York Times at 16.1x and
Information Services peers at 22.3x.
Management are highly aware of, and dissatisfied with, the current valuation.
Although not consummated, the recent proposed sale of Move (8% NAV) indicates
a willingness to make structural changes to unlock value, with multiple
potential levers. These include the sale of Move, a monetisation of Foxtel,
increased disclosure at Dow Jones - or the holy grail distribution of REA
Group, which accounts for 76% of News Corp's market cap. Whilst timing is
uncertain, the attractive underlying nature of the NAV means that we can
afford to be patient and makes time our friend. Returns from NAV growth and
discount narrowing appear attractive.
Joe Bauernfreund
Asset Value Investors Limited
31 May 2023
INVESTMENT PORTFOLIO
At 31 March 2023
Company Portfolio classification % of IRR ROI Cost Equity Exposure(4) % of net assets
investee
£'000(3)( )
company (%, GBP)(1) (%, GBP)(2) £'000
Oakley Capital Investments Closed-ended Fund 10.5% 27.8% 112.2% 38,241 83,588 8.5%
Schibsted 'B' Holding Company 4.0% 15.3% 20.0% 71,238 66,694 6.7%
Aker ASA Holding Company 1.6% 17.1% 77.7% 56,389 62,134 6.3%
Pershing Square Holdings Closed-ended Fund 0.6% 19.8% 44.2% 41,476 59,800 6.1%
KKR and Co Holding Company 0.2% 38.2% 98.9% 30,305 58,674 5.9%
EXOR Holding Company 0.4% 11.5% 39.1% 40,665 56,233 5.7%
Christian Dior Holding Company 0.0% 41.8% 162.4% 24,583 55,595 5.6%
FEMSA Holding Company 0.3% 24.1% 44.5% 39,314 55,532 5.6%
Apollo Global Management 'A' Holding Company 0.1% 16.1% 14.3% 33,528 41,467 4.2%
Nihon Kohden Asset-backed Special Situation 2.0% 29.7% 10.0% 35,246 38,581 3.9%
Top ten investments 410,985 578,298 58.5%
Spectrum Brands Holdings Holding Company 1.7% nm 4.9% 35,602 37,124 3.8%
Wacom Asset-backed Special Situation 4.7% -10.6% -14.7% 37,086 31,238 3.2%
News Corp Holding Company 0.6% nm -13.9% 35,674 30,676 3.1%
Symphony International Holdings Closed-ended Fund 15.7% 7.4% 45.2% 26,636 30,616 3.1%
IAC Holding Company 0.8% -66.0% -48.4% 58,911 29,318 3.0%
Princess Private Equity Closed-ended fund 4.9% nm 2.9% 27,185 27,961 2.8%
Third Point Investors Closed-ended Fund 3.9% 7.6% 34.9% 22,265 26,087 2.6%
D'Ieteren Group Holding Company 0.3% 37.7% 34.4% 17,455 24,939 2.5%
DTS Asset-backed Special Situation 2.6% 11.7% 27.1% 20,754 24,448 2.5%
Godrej Industries Holding Company 1.8% -6.1% -18.8% 30,288 24,076 2.4%
Top twenty investments 722,841 864,781 87.5%
Digital Garage Asset-backed Special Situation 1.6% 31.4% 36.5% 19,431 19,584 2.0%
SK Square Holding Company 0.5% nm 3.8% 17,342 17,987 1.8%
Pantheon International Closed-ended Fund 1.2% -8.3% -5.5% 16,124 15,112 1.5%
SK Kaken Asset-backed Special Situation 1.8% -6.0% -22.6% 19,056 13,373 1.4%
Molten Ventures Closed-ended Fund 3.0% -47.9% -30.5% 18,332 12,745 1.3%
Dai Nippon Printing Asset-backed Special Situation 0.2% nm 12.8% 10,840 12,276 1.3%
Konishi Asset-backed Special Situation 2.4% 3.0% 10.5% 10,913 11,201 1.1%
Pasona Group Asset-backed Special Situation 2.1% 9.2% 25.9% 9,139 10,190 1.0%
ICG Enterprise Trust Closed-ended Fund 1.4% -10.5% -6.3% 10,364 9,575 1.0%
Haw Par Corporation Holding Company 0.7% nm -4.6% 9,423 8,995 0.9%
Top thirty investments 863,805 995,819 100.8%
Hipgnosis Songs Fund Closed-ended Fund 0.8% -2.8% -2.0% 11,911 8,280 0.8%
Bank of Kyoto Asset-backed Special Situation 0.3% nm -5.5% 8,361 7,811 0.8%
Hachijuni Bank Asset-backed Special Situation 0.4% nm -4.6% 8,094 7,696 0.8%
VNV Global Holding Company 4.0% 60.5% 37.5% 12,209 7,618 0.8%
Shiga Bank Asset-backed Special Situation 0.9% nm -10.6% 8,332 7,418 0.8%
Third Point Offshore Master Fund Closed-ended Fund -6.0% -4.8% 7,795 7,046 0.7%
Toagosei Asset-backed Special Situation 0.7% -0.1% -0.5% 7,307 6,474 0.6%
Iyogin Holdings Asset-backed Special Situation 0.4% nm -1.4% 6,496 6,394 0.6%
Shin Etsu Polymer Asset-backed Special Situation 0.8% 50.9% 22.8% 2,887 6,197 0.6%
T Hasegawa Asset-backed Special Situation 0.6% 7.9% 5.8% 4,458 4,661 0.5%
Top forty investments 941,655 1,065,414 107.8%
Teikoku Sen-I Asset-backed Special Situation 1.5% 0.4% 1.2% 6,177 4,234 0.4%
JPEL Private Equity Closed-ended Fund 15.4% 20.5% 105.0% 1,554 4,092 0.4%
VEF Holding Company 2.3% -22.5% -12.2% 4,525 3,563 0.4%
TSI Holdings Asset-backed Special Situation 0.8% nm 20.0% 2,206 2,656 0.3%
Seraphim Space Investment Closed-ended Fund 2.9% -55.3% -20.1% 3,213 2,566 0.3%
ITFOR Asset-backed Special Situation 1.1% nm -1.9% 1,680 1,647 0.2%
Better Capital (2009) Closed-ended Fund 17.4% 22.2% 41.4% 1,962 978 0.1%
Ashmore Global Opportunities - GBP Closed-ended Fund 8.5% 97.4% 120.5% 40 249 0.0%
Equity investments at fair value 963,012 1,085,399 109.9%
Total Return Swaps
Brookfield Corporation 48,698 4.9%
Total Return Swaps - long positions 48,698 4.9%
SK hynix Inc (10,145) (1.0%)
Standard & Poors 500 Index ETF (61,692) (6.3%)
Total Return Swaps - short positions (71,837) (7.3%)
Total net investment exposure 1,062,260 107.5%
Total Return Swap - notional value included in above 5,676 0.6%
Net current assets less current liabilities (excluding Total Return Swaps) 42,239 4.3%
Non-current liabilities (122,135) (12.4%)
Net assets 988,040 100.0%
(1) Internal Rate of Return. Calculated from inception of AVI Global Trust's
investment. Refer to Glossary in the Half-Year Report and Accounts.
(2) Return on Investment. Calculated from inception of AVI Global Trust's
investment. Refer to Glossary in the Half-Year Report and Accounts.
(3) Cost. Refer to Glossary in the Half-Year Report and Accounts.
(4) Notional current equity value of investments and swaps.
FURTHER INFORMATION
AVI Global Trust Plc's Half Year Report for the period ended 31 March 2023
will be available today on https://www.aviglobal.co.uk.
It will also be submitted shortly in full unedited text to the Financial
Conduct Authority's National Storage Mechanism and will be available for
inspection at data.fca.org.uk/#/nsm/nationalstoragemechanism
(https://data.fca.org.uk/#/nsm/nationalstoragemechanism) in accordance with
DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and
Transparency Rules.
ENDS
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