REG - AVI Global Trust PLC - Half-year Report
05/06/2024 07:00
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RNS Number : 1067R AVI Global Trust PLC 05 June 2024
AVI GLOBAL TRUST PLC
('AGT' or the 'Company')
LEI: 213800QUODCLWWRVI968
Announcement of unaudited results for the half-year ended 31 March 2024
Half Year Financial Report for the year ended 31 March 2024
A copy of the Company's Annual Report for the half year ended 31 March 2024
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 1.2 pence
per Ordinary Share for the period ended 31 March 2024, which will be paid on
19 July 2024 to Ordinary shareholders on the register at the close of business
on 21 June 2024 (ex-dividend 20 June 2024).
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 +13.9%
- Share price total return +16.0%
- Benchmark index(±) increased on a total return basis +16.1%
- Interim dividend maintained at 1.2p
PERFORMANCE SUMMARY
Six months to Six months to
31 March 2024 31 March 2023
Net asset value per share (total return) (1)* +13.9% +5.3%
Share price total return* +16.0% +5.5%
31 March 2024 31 March 2023
Discount* (difference between share price and net asset value)(2) 9.4% 10.4%
Six months to Six months to
31 March 2024 31 March 2023
Earnings and Dividends
Investment income £9.99m £9.40m
Revenue earnings per share 1.28p 1.28p
Capital earnings per share 9.42p 9.42p
Total earnings per share 10.70p 10.70p
Ordinary dividends per share 1.20p 1.20p
Expense Ratio (annualised)*
Management, marketing and other expenses as a percentage of average 0.88% 0.84%
shareholders' funds
High Low
Period Highs/Lows
Net asset value per share 252.88p 207.84p
Net asset value per share (debt at fair value) 255.40p 211.81p
Share price (mid market) 231.50p 187.80p
(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 2024 the Company purchased 11,596,895
Ordinary Shares for cancellation for an aggregate consideration of
£24,245,000 adding +0.2% to AGT's NAV.
*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.
(±) MSCI All Country World Index, please refer to the Glossary in the
Half-Year Report and Accounts for further information.
CHAIRMAN'S STATEMENT
Having traded in a range of approximately 180p-200p since the beginning of
2022, the share price increased steadily following a dip in October 2023 and
ended the period at over 230p. Over the six months from 30 September 2023 to
31 March 2024, the share price total return(1) was +16.0%, while the NAV total
return(1) was +13.9%, a commendable return which was driven by some notable
successes which are described in more detail in the Investment Manager's
Report.
Over the six months under review, stock markets reacted positively to
macroeconomic news, which was better than had previously been expected, with
fears of recession and inflation abating. Market returns were driven both by
this news and by continued excitement around the prospects for Artificial
Intelligence ('AI'), which drove up the share prices of a small number of very
large companies which form a high proportion of our benchmark index. The
return on our comparator benchmark, the MSCI AC World Index, was +16.1% over
the six-month period. Our Investment Manager has a broad-based approach and
focuses on investing in companies which, in general, combine growth prospects
with attractive share price valuations and, while not focusing on the
fashionable parts of the market, was able to deliver strong returns for
shareholders.
Revenue and dividend
Revenue earnings for the period were 1.38 pence per share. The Board has
elected to pay an interim dividend of 1.2p 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 and, while we do aim to grow
the dividend over time, I would like to repeat my previous statement that the
portfolio is managed primarily for capital growth.
Share price rating and marketing
AGT has a substantial marketing budget and the Board works closely with AVI as
it seeks to generate demand for the shares. Each month AVI produces an
informative fact sheet which is available on our website and I encourage you
to register on the site to receive these when they are published. AVI is also
active in the media - both traditional and increasingly social media - as we
seek to promote our investment proposition to a growing investor base. The
Board is pleased to note that our marketing efforts have resulted in a
substantial increase over time in the number of shares owned via retail
investment platforms, and indeed these platforms make up four of our top five
shareholders.
In common with many investment trusts, our shares continued to trade at a
frustratingly persistent discount. We use share buybacks when the discount is
unnaturally wide and when the Board believes that buying back shares is in the
best interests of shareholders. This is also an approach that our Investment
Manager encourages for many of our investee companies. There are periods when
we buy back shares on most working days and, during the six months under
review, 11.6 million shares were bought back, representing 2.3% of the shares
in issue as at the start of the period. As well as benefiting 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, of approximately 0.2%.
In April we announced that Panmure Gordon had been appointed as the Company's
corporate broker. We look forward to working with the team at Panmure Gordon,
particularly in seeking to find new shareholders. I would also like to thank
our previous corporate brokers, Jefferies, for their help and support over the
last several years.
In the 2023 Annual Report I raised the issue of the unintended consequences on
the investment trust industry of recent regulatory pronouncements relating to
Consumer Duty in respect of cost disclosures. In particular, the inclusion of
costs embedded in our underlying investee funds in the overall cost figures
disclosed in relation to your Company is misleading. The apparent lack of
understanding associated with this disclosure and the consequent
misinterpretation puts us at an unreasonable disadvantage when it comes to
assessing the value of investing in the Company. This could lead to a reduced
demand for our shares. For example, the Board is aware that both the potential
for new investment in the Company and the reinvestment of dividends issued by
the Company have been blocked for investors using the fidelity.co.uk platform.
We have requested the management of the Fidelity platform to explain the
reasons that have caused them to suspend investment in your Company's shares
on their platform. Rest assured we have taken this extremely seriously and
have raised the issue and in particular the lack of transparency with the
Financial Conduct Authority and our trade body the AIC. More broadly, efforts
also continue to find a solution to correct the misleading approach to cost
disclosure by putting pressure on government and regulators. We remain hopeful
that the result will be a fair and logical outcome although recognise that the
UK General Election may cause delays in any decisions to change the disclosure
regime.
Annual general meeting
All resolutions at the Company's AGM on 20 December 2023 were passed by a
large majority and I would like to thank shareholders for their continuing
support. It was good to meet a number of shareholders at the meeting. We
welcome the opportunity to engage with shareholders and if you have any
questions or points that you would like to raise with the Board, please send
an email to aviglobal_cosec@linkgroup.co.uk
(mailto:aviglobal_cosec@linkgroup.co.uk) or write to: The Company Secretary,
AVI Global Trust PLC, 65 Gresham Street, London EC2V 7NQ.
Outlook
Stock market returns over the six months under review were very strong but I
would caution that economies and markets are not immune from further
headwinds. While better than expected economic news helped to propel markets,
there is a risk of setbacks and the geopolitical background remains unstable,
both of which could cause markets to fall.
Against this background our Investment Manager describes a number of
opportunities for growth in the investment portfolio. Their focus on acquiring
stakes in companies at attractive valuations has proven resilient and their
persistence in pursuing value was demonstrated, for example, by the takeover
bids for Hipgnosis Songs Fund in April. As ever, there will be unexpected
events along the way but we are optimistic that the portfolio and investment
process are well set to continue delivering attractive returns.
Graham Kitchen
Chairman
4 June 2024
(1) An Alternative Performance Measure: see Glossary in the Half-Year Report
and Accounts.
INVESTMENT MANAGER'S REPORT
PERFORMANCE REVIEW
Your Company's NAV is some +23% higher than when we wrote to you this time
last year. At the time sentiment was dour; investors were fretting as to the
potential fallout from the collapse of Silicon Valley Bank; inflation remained
stubbornly high; and the deeply inverted yield curve was flashing red that the
most anticipated recession in recent history was about to bite.
A year on and there has been no real contagion from the regional banking
crisis, with the actions of the United States Federal Reserve having ensured
financial stability. The picture on inflation has certainly improved, but we
are not off the mountain just yet. And a recession remains the watched pot
that hasn't boiled, with the economy proving much stronger than many had
anticipated.
These better-than-expected developments, combined with strong share price
performance of a narrow-band of US technology companies, that are thought to
be beneficiaries of AI, has propelled markets to new all-time highs.
For the interim period since September, AGT has produced a NAV total return of
+13.9%. This was slightly behind the performance of our comparator benchmark,
the MSCI AC World Index (£), which returned +16.1%.
From the very wide levels observed in October 2023 - when the portfolio
weighted average discount hit 37.0% - discounts have started to narrow, such
that the weighted average discount at period end stands at 31.5%. We have
taken advantage of this, fully exiting positions in Pershing Square Holdings
and Godrej Industries, and reducing positions in strong performers, Schibsted,
FEMSA, KKR and Apollo.
KKR was the standout performer adding +253bps to returns. Having initiated a
position in the company in 2020, we have held a decidedly different view to
the market on the durability of the company's earnings power and growth
prospects. The market has been coming round to our way of thinking, with the
shares up by +319% over that time, and we have been reducing the position.
We continue to believe this is a stock picker's market, and a market where a
focus on events, catalysts, and activism to crystallise value is important.
Illustrative of this is Schibsted, which has undergone significant structural
simplification (detail below) and was one of the strongest performers over the
period.
Over the six-month period we have been adding to News Corp, D'Ieteren, Bollore
and Entain, all of which have attractive underlying fundamentals and NAV
growth prospects combined with potential catalysts.
Despite Hipgnosis Songs Fund being a detractor over the interim period and
requiring a lot of work and intensive engagement from our investment team, a
takeover battle subsequent to the period end has resulted in an excellent
outcome for shareholders. We expand on this below.
Contributors and Detractors for the six months ending 31 March 2024
Contribution*
Contributors
KKR and Co 2.53%
Schibsted 'B' 1.77%
D'Ieteren Group 1.21%
Godrej Industries 1.08%
News Corp 1.07%
Detractors
Symphony International Holdings -0.82%
Aker ASA -0.52%
Entain -0.46%
Hipgnosis Songs Fund -0.39%
Keisei Electric Railway -0.12%
* Contribution is the percentage amount that a position has added to the
Company's net asset value over the six-month period.
More generally, over the last 18 months our exposure to closed-end funds has
increased. There is a structural lack of interest in such companies, almost
entirely for non-fundamental reasons, and we believe this to be an attractive
opportunity set with discounts at wide levels where we can add value through
activism.
The opportunity for engagement in Japan also remains compelling. Long-term
readers of our reports will know that we have spent a significant amount of
focus on Japanese small-cap equities since 2016/17, when it became clear to us
that the winds of change had begun to blow, and that the corporate governance
reform agenda had gained critical momentum.
2023 was something of a (re) coming out party for Japanese equities - which
are becoming increasingly relevant again to international equity investors,
who have grown to appreciate the very clear agenda of the Tokyo Stock Exchange
('TSE') and other authorities in unlocking corporate value. As is to be
expected, flows have concentrated on larger cap companies, which have
outperformed smaller caps. For unhedged international investors (such as
ourselves) the continued depreciation of the Yen has proved a headwind. We do
not expect this to persist indefinitely.
Far from the madding crowd of increasingly concentrated equity markets, it
remains an exciting and fruitful time for our approach to investing. Discounts
have started to narrow but remain relatively wide by historical standards and
we are finding a high number of attractive opportunities from all parts of our
universe. Reflective of this, net gearing (debt at fair value) has continued
to increase and stands at 9.6% as of the period end.
As we look ahead, we remain humble in the unpredictability of financial
markets and macro events. Our conviction, however, is built from the bottom
up. We have assembled a concentrated-yet-diverse collection of companies that
should compound NAV at attractive rates; discounts are generally wide and
across the portfolio there are numerous potential corporate catalysts to
unlock value. We believe this to be an attractive medley.
CONTRIBUTORS
KKR & Co
(Discount: 5.4%/Contribution: +2.53%)
KKR was the largest contributor to AGT's returns over the six-month period,
adding 2.53% to NAV as its share price soared +64%. Since the position entered
the portfolio in 2020, it has been a very strong source of returns for AGT.
Our thesis back then was that the listed alternative asset management sector
was systematically undervalued, and that KKR (and Apollo, which we also own)
was itself undervalued relative to peers.
While the market seems to have since come closer to our way of thinking, the
level of share price volatility suggests alternative asset managers are still
perceived as high beta plays on risk assets. While we concede that both KKR
and Apollo have more on-balance sheet risk than peers, our contention is that
the market underestimates the defensive characteristics of scale-advantaged
managers that earn fees on long-dated committed capital, and the powerful
tailwinds for structural growth across the industry. This volatility has
inured to the benefit of AGT shareholders as we have opportunistically added
to our shareholding in periods of weakness.
During the period, KKR announced it was to acquire the 37% of life insurer
Global Atlantic that it did not already own. This was taken well by the
market, as was the accompanying announcement of a further shareholder-friendly
change to the company's compensation structure.
In the words of KKR co-CEO Scott Nuttall, Global Atlantic - in which KKR
acquired a majority stake in 2020 - has been a 'home-run investment'. With
Global Atlantic's assets more than doubling from the point of acquisition to
today, it is hard to argue otherwise, with KKR's ownership also helping scale
its real estate credit and asset-based finance businesses whose assets sit
well on insurance company balance sheets.
The remaining stake in Global Atlantic was purchased at book value, the same
multiple as the original acquisition and a low valuation for a mid-teens ROE
business. Crucially, the $2.7bn acquisition price was funded entirely in cash.
There had been some fears, given the right the minority shareholders had to
force KKR to either list the business or acquire it from them, that KKR would
issue shares to pay for it. This is where KKR's remarkably strong balance
sheet came into play, with the company having $3.8bn in cash and with
long-term fixed rate debt in place (at a weighted average interest rate of
3.9% and maturity of 2041).
We attended KKR's Investor Day in New York City in April 2024, at which
management laid out a clear path to more than tripling net income per share
within ten years or less with multiple routes to achieving this forecast. In
particular, Asia, Infrastructure, and Private Investment Grade Credit were
identified as key market/asset classes given their capacity and where demand
is spiking higher.
Blackstone's success in raising capital from private wealth channels has
materially raised the total addressable market for the alternative asset
managers. While KKR's presence in this space is still relatively nascent, they
have invested heavily in distribution and expect 30-50% of new KKR capital to
be sourced from private wealth channels over the next several years. The size
of the market is so vast that even a small up-tick in allocations to
alternatives could have seismic results, with an expected increase from 2% in
2022 to 6% in 2025 translating to an additional $11trn of inflows. We expect
there to be only a few winners in this space, consisting of the largest
managers with the most recognised brands. Given this, it was highly
encouraging to learn at the Investor Day that 2024 YTD inflows to 1 April 2024
had already reached $2.8bn, a very sizeable increase on Q4 of 2023's $1.4bn.
Given the material re-rating in the shares, our investment in KKR is closer to
its end than other still-heavily discounted names in our portfolio. That said,
2023 saw Blackstone become the first alternative asset manager to enter the
S&P 500, and we believe it is a matter of time before KKR and Apollo are
also selected for inclusion. This could lead to as much as 20% of their free
float being bought by index-tracker and 'index-aware' investment vehicles.
Schibsted ASA
(Discount: 8.0%/Contribution: +1.77%)
Schibsted was the second largest contributor, adding +177bps to AGT's NAV.
It has been a busy period for the company which has undergone significant
change and taken considerable steps to unlock value.
In the most recent Annual Report (page 41) we explained that Permira and
Blackstone had entered negotiations to take Adevinta private. In November
2023, this came to fruition with a 115 NOK per share offer. The transaction -
which is due to complete in Q2 of 2024 - will see Schibsted sell 60% of their
28% stake for 24bn NOK, which accounted for 48% of the preannouncement market
cap (based on the B share price). Schibsted will retain an 11.1% stake in
Adevinta post-transaction, which, at the 115 NOK per share value, equates to
16bn NOK (31% of Schibsted's preannouncement market cap).
Shortly thereafter, in early December 2023, Schibsted positively surprised
both us and the market with the announcement that the Tinius Trust, the
controlling shareholder, intends to acquire Schibsted's legacy News Media
division and Schibsted's stake in Polaris Media for a combined value of 6.3bn
NOK. This is a significant positive development that removes a terminally
challenged, capital consuming problem child from the group structure. This
will lead to an improvement in the consolidated financials, boost margins,
reduce capex, increase returns on capital employed and improve cash
conversion.
The combination of these two transactions has realised gross proceeds
approaching 30bn NOK. 20bn NOK will be returned to shareholders, as special
dividend, with a further 4bn NOK in buybacks and 5bn NOK used to extinguish
net debt.
These steps have reduced structural complexity and shone a light on
Schibsted's Nordic Marketplace assets - which have hitherto been overlooked.
These businesses have dominant market positions, are under-monetised versus
international peers, and have significant room for margin expansion, with
EBITDA expected to grow at close to +20% p.a. over the coming years.
Reflective of the significant re-rating in the shares our position has been
reduced by approximately 50% from its peak, such that Schibsted was a 5.1%
stake as at the end of March 2024.
To date the investment - which was initiated slightly under two years ago -
has delivered an IRR of +50% (in NOK).
D'Ieteren
(Discount: 32.6%/Contribution: +1.21%)
D'Ieteren was a meaningful contributor to returns during the interim period,
adding +121bps to performance. Over the interim period the shares rose +29%,
which was a function of +14% NAV growth and narrowing of the discount to 33%
from 40%.
As readers may remember the bulk of the value (61% of NAV) lies in Belron, the
global no.1 operator in the Vehicle Glass Repair and Replacement ('VGRR')
industry which readers might be more familiar with as Autoglass (UK), Safelite
(US) or Carglass (EU).
Belron is many multiples larger than competitors with more than 40% US market
share, resulting in significant scale advantages in terms of purchasing
economies of scale and cost leadership, as well as relationships with
insurance partners who are industry gatekeepers and account for c.70% of jobs.
Moreover, scale has allowed for technological investment, which has become
increasingly relevant as advanced driver assistance system ('ADAS')
recalibrations - which require more expensive capital equipment - have grown
to become a larger proportion of replacement jobs. 'Mom and pop' operators are
increasingly ill-suited to meet the increased technical complexity required
for new vehicles.
As such, we expect Belron to continue taking share and driving growth. For
FY23 Belron grew sales by +9% organically with a further boost of +2% from
M&A. A positive mix effect and price increases saw operating margins
increase +226bps to 20.5%, which led operating profits to increase +22% year
on year. For the year ahead, management are forecasting sales to grow at
mid-to-high-single digits and margins to continue towards what for some time
now has appeared a relatively modest 2025 margin target of 23%. We expect
Belron to provide updated targets at next year's Capital Markets Day - which
will be the first since Carlos Brito became CEO.
In 2021 a consortium of private equity investors (led by Hellman &
Friedman) became minority shareholders in Belron at a €21bn enterprise
value. We estimate that the enterprise value is closer to €24.5bn today (17x
our 2024 estimated EBIT), and D'Ieteren's 50% equity interest accounts for 61%
of D'Ieteren's NAV.
In due course we expect a liquidity event for these investors to help
highlight Belron's significant value, and like to invest in situations such as
this where we are aligned with highly incentivised PE co-owners and management
teams. As such we see scope for a further narrowing of D'Ieteren's 33%
discount, as well as NAV growth underpinned by strong earnings growth
prospects. We added to the position by some +25% over the last six months.
Godrej Industries
(Discount: 59.7%/Contribution: +1.08%)
Godrej Industries - the Indian holding company - added +108bps to returns
during the interim period as the discount narrowed meaningfully. We took the
opportunity to exit the investment.
Since 2019 AGT generated an ROI/IRR of +41%/+9%, in Sterling, having suffered
from a -17% FX headwind and -10% return on account of a widening discount. The
return was broadly in line with the MSCI ACWI (£) over the same period
(+43%), however underperforming the MSCI India (+60%), with the discount
widening having been an impediment to returns.
Whilst Godrej Industries owns a fundamentally attractive collection of
underlying assets, and the controlling family have shown themselves to be good
long-term stewards of capital, we took advantage of relatively fleeting
liquidity in the shares. This has allowed for capital to be recycled into
investments, such as those described in these pages, with clearer catalysts
for discount narrowing.
News Corp
(Discount: 38.7%/Contribution: +1.07%)
In 2023 we initiated a position in News Corp, the Murdoch family controlled
holding company. The shares have performed strongly, adding +107bps to returns
over the period. Today News Corp is your Company's largest position (8.3%
weight) and embodies what we look for in an investment: attractive quality
assets, trading at a discounted valuation, with prospective catalysts to
unlock value.
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 20(th) - 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 38.1% discount to our
estimated NAV. The NAV is principally comprised of the following assets: a 62%
listed stake in REA Group (41% of NAV), the Australian real estate classified
marketplace, and unlisted assets Dow Jones, HarperCollins and Move accounting
for 37%, 10%, and 7%, respectively.
In particular, Dow Jones is a crown jewel asset that has successfully evolved
the Wall Street Journal into a thriving digital consumer business, whilst both
organically and inorganically building a high quality Professional Information
business that warrants a premium multiple, reflective of its sticky and
growing revenues, high margins, and minimal capex requirements. The 2021
acquisition of OPIS for $1.1bn marks a step-change in the importance and
materiality of Dow Jones' Professional Information business. The value and
quality of this business is misunderstood by the sell side and ignored by the
market.
Adjusting for the stake in REA, the stub trades at an implied value of $5.4bn,
or approximately 4.7x next year's EBITDA. We estimate that Dow Jones alone is
worth ~1.6x the implied stub value and note that the New York Times trades at
15x and Info Services peers trade between 19-29x. Management have become
increasingly vocal about the undervaluation.
As CEO Robert Thomson described on the last earnings call, the company is
engaged in "serious introspection about structure…and how to fully monetize
a precious, prestigious portfolio that has an obvious growth trajectory. That
is indeed not an evolution, but a revolution".
At current prices, the market is seemingly ascribing a low probability to 'a
revolution', with significant upside if management do indeed take concrete and
tangible steps to unlock value. Combined with strong operating and earnings
momentum, prospective returns appear attractive.
DETRACTORS
Symphony International Holdings
(Discount: 49.8%/Contribution: -0.82%)
Symphony International ('SIHL') was our largest detractor over the period with
a -24% decline in its (US Dollar denominated) share price exacerbated by a
Sterling rally from the lows reached during the brief Liz Truss-led
government. The share price decrease was almost entirely due to a widening
discount which expanded from 36% to 50%.
To recap, SIHL is a London-listed investment company with a focus on
predominantly unlisted (85% of current NAV) Asian consumer and real estate
businesses. The investment, initiated in 2012, has been weak in absolute and
relative terms with an IRR of just over 5% over our holding period. As the
largest independent shareholder, we have worked to improve corporate
governance at the company and unlock value trapped in the persistently wide
discount at which the shares have traded. This culminated in a 2021 public
campaign to Save Symphony
(https://www.assetvalueinvestors.com/campaign/save-symphony/) . In September
2023, the company announced it would pursue an orderly realisation of its
investments.
As such, our ultimate returns from SIHL will depend on the prices at which it
realises its investments and the timeframe over which these realisations take
place, rather than its share price on the screen at any particular point in
time. SIHL's shares trade at a sizable bid-offer spread (10% at 31 March
2024), are tightly-held and thinly traded, and are heavily impacted in both
directions by relatively small order sizes. Indeed, since the half year-end,
the shares are up +13% as at 30 April 2024.
That SIHL's shares trade at such a wide discount despite the company having
adopted a managed wind-up strategy reflects, in our view, scepticism around a
management team that has historically prioritised its own interests over those
of shareholders; uncertainty over the timeframe over which realisations will
take place; and - as is often the case with investment companies with unlisted
assets - wariness over whether the carrying values of assets are an accurate
reflection of realisable values.
We understand these concerns. However, we contend that while the management
team continues to add to their already substantial shareholdings, they have
little incentive to maintain or increase reported valuations to artificially
high levels and that an incentive may in fact exist in the opposite direction.
That said, they also have little incentive to expedite asset sales and returns
of capital while they still believe there is stock available to purchase to
add to the over one-third of the company held by management and the board.
Noting the pace of management purchases has slowed recently in the face of low
volumes, we may not be far from the point where their attention turns to
unlocking the value in their shareholdings trapped by the huge discount to
NAV. Based on secondary market transactions, it is plausible that a sale of
SIHL's minority stake in Vietnamese logistics player Indo-Trans Logistics
could generate proceeds covering well over half of the company's current
market cap.
Aker ASA
(Discount: 23.5%/Contribution: -0.52%)
Aker was a detractor over the interim period. The shares declined by -3% on a
total return basis, as a -4% decline in the NAV was ever so slightly cushioned
by a small narrowing of the discount to 24%. AGT suffered from a -490bps
weakening of the NOK versus Sterling.
Sluggish NAV performance is largely attributable to Aker BP (60% of NAV),
which has underperformed peers and rising oil prices - particularly in the
calendar year 2024, during which period the shares declined by -6% whilst oil
prices have risen by +13%.
Production guidance for 2024 was slightly softer than the market had
anticipated, with increased uncertainty regarding the eventual plateau of the
Johan Sverdrup oilfield and whether this would occur in late 2024 or during
2025. With Johan Sverdrup having consistently outperformed expectations since
production started in 2019 this has been digested poorly by the market, with
Aker BP shares now trading on a 9.4% dividend yield - a level rarely observed
in the company's history. This appears good value to us for a
low-cost-low-emission producer operating in a stable and attractive fiscal
regime. We believe that operators such as Aker BP, with a long-dated
production schedule, are likely to prosper in a world where oil will play an
important and elongated role in the energy mix, and there is limited supply.
Accessing this on a 24% discount with a strong alignment of interest and a
controlling shareholder with a track record of significant value creation is
highly attractive.
Entain
(Discount: 33.7%/Contribution: -0.46%)
During the interim period, we started to build a position in Entain, the
London-listed sports betting and gambling company. The shares continued to
fall throughout the period as we averaged down, detracting 46bps from returns.
We came across Entain through our long-standing investment in IAC (3% of AGT
NAV), which has a stake in MGM Resorts International; in turn, Entain and MGM
are joint venture partners in BetMGM, one of the leading online sports betting
and iGaming brands in the nascent US market. We believe this to be a highly
desirable asset in a rapidly growing market that, we believe, will coalesce
around a handful of operators.
Today, Entain has three principal assets at different stages of maturity, with
the true value being masked by the current structure of the company. These are
the online operations (68% of portfolio), retail operations (11%) and the 50%
equity accounted stake in BetMGM (21%).
Entain's online operations have undergone a significant period of regulatory
change across multiple key markets, with the UK being the most notable. In the
short-run regulation can be hugely disruptive for gambling companies, but in
the long-run it acts as a barrier to entry and entrenches the position of
incumbents, such as Entain.
That said, Entain's handling of these UK changes has been subpar, taking a
more tailored approach to the regulation than rivals which has added
complexity and confusion, particularly for customers. The broader
implementation of these regulatory changes has not been universal, with Entain
(and other tier-one operators) ceding market share to tier-two and tier-three
rivals, who have yet to put these changes through. With the new rules likely
to be enforced in September 2024, expectations are for some degree of reversal
in market share losses. Management has set aside £40m in marketing spend in
anticipation of this.
BetMGM has continued to see its estimated market share erode, with the gap to
industry leaders widening over 2023. The key culprit for this erosion has been
a product gap with peers. Given that Entain provides the technology for
BetMGM, it was up to them to come up with solutions. Through organic
investment and some small M&A, BetMGM's product has improved materially
over 2023, closing the product gap. Management now has a degree of confidence
in the product, indicating that 2024 will be a 'year of investment' focusing
on marketing to try to claw back some market share.
Given the equity-accounted nature of BetMGM, we do not believe that its true
value is currently being captured in Entain's valuation. Based on our carrying
value, BetMGM makes up an estimated 52% and 29% of Entain's market cap and
enterprise value, respectively. As a result, we estimate the stub trades at
9.1x NTM* EBIT versus a peer group average of 12.9x and Entain's longer-term
average of 14.2x. This equates to an implied 9.3% FCF** yield.
Since December, there has been significant change at both the managerial and
board levels. Jette Nygaard-Andersen stepped down as CEO, having successfully
guided the company through an HMRC investigation but whose limited gambling
experience started to show. She was replaced by Stella David, an independent
board member, on an interim basis, with positive early impressions.
After the interim period ended, it was announced that the chairman of the
board, Barry Gibson, is to step down with Stella replacing him. We view these
changes positively, and another step in repairing some of the damage done over
the last couple of years.
We believe that organic growth, earnings, sentiment and valuation are at the
lows. With a swarm of activists on the shareholder register - and indeed now
on the board - we do not believe that the current valuation will persist
indefinitely with numerous potential paths to unlock value, not least from
BetMGM which is a highly strategic asset.
* NTM EBIT = forecasted EBIT for the next twelve months
** FCF = Free cash flow (Operating Cash flow - Capex)
Hipgnosis Songs Fund
(Discount: 24.8%/Contribution: -0.39%)
While Hipgnosis Songs Fund ('SONG') may have been a detractor over the period
covered by this report, events after the period end have resulted in
substantial gains for AGT shareholders.
A bidding war was triggered in April 2024 when Concord - a music rights firm
backed by Apollo - announced a binding offer for SONG at a price of
$1.16-$1.18 per share. Blackstone, the majority owner of Hipgnosis Songs
Management (the Manager of SONG), ultimately prevailed with a bid of $1.30 per
share. This represents a premium of +47% to the undisturbed share price.
This marks the end of a highly successful investment for AGT, in which we
played a key role in fighting off the proposed related-party sale of a portion
of SONG's catalogues and also making the case against the company continuing
in its present form. Resolutions proposing each matter were heavily defeated
at shareholder meetings. With two directors resigning on the eve of the AGM
and the then-Chairman suffering a resounding vote against his re-election, we
and other shareholders engaged with the remaining rump to push for the
appointment of two new directors - Robert Naylor and Francis Keeling - who had
just stepped down from SONG's peer company Round Hill Music Royalty Fund
('RHM') following its acquisition by Concord. Both were appointed with Robert
immediately installed as Chairman.
We are delighted with an outcome that has not only generated a very strong
return for AGT's shareholders but has demonstrated again both the value of
shareholder activism and the critical importance of having the right people on
Boards. The new directors joined the company at a time of crisis and
engineered an excellent outcome for shareholders in a timeframe few would have
felt possible at the time of their appointment. With no viable future as an
ongoing listed vehicle, the key task facing the new appointees was how best to
generate competitive tension in a situation where, under the terms of the
Investment Management Agreement, the Manager had a call option allowing them
to purchase the portfolio in the event of their termination. The investigatory
work conducted by the Board and their advisors, some of the fruits of which
were made public, led to an understandable perception that there existed more
than sufficient grounds to terminate the Manager 'for cause', which would
invalidate the option.
We think it likely that this, alongside other measures introduced by the
newly-reconstituted Board, gave Concord the confidence to make their initial
bid and resulted in a higher price ultimately being achieved for the company
than would otherwise have been the case. We applaud the new directors'
fortitude and shrewd handling of a highly complex situation.
AVI's involvement with SONG began several years ago. Following research on
French holding company Vivendi and its investment in UMG, we could see the
attractions of the music rights asset class. As a pure play on catalogue, SONG
had its attractions and we established a small position in late-2020 with part
of our thesis being that SONG would likely be a takeout target once it had
achieved scale. That element of the thesis broke down in October 2021 with the
acquisition of a majority stake in the Manager by Blackstone. Given
Blackstone's deep pockets, we felt the Manager's call option over the
portfolio was much more likely to impede any competitive sales process in the
future. When combined with growing concerns over transparency, earnings
quality and governance, we took the decision to exit the position and sold
over 60% of our shareholding in late 2021/early 2022 at modest profits on our
purchase price before the share price began to decline rapidly along with
other alternative income vehicles deemed to be interest-rate sensitive. We
were left with a residual shareholding that equated to a 0.8% stake in the
company.
Our full attention turned back to the company following Concord's bid for RHM
in September 2023, just ahead of SONG's continuation vote and its proposal to
sell a portion of its catalogues to Blackstone in a related party deal. We
increased our stake almost ten-fold over the following six months and
generated a return on our overall investment of almost double that of AGT's
MSCI AC World benchmark. We sold out of our position in Hipgnosis late May
2024, and generated a +39% total return/+73% IRR on the position acquired in
late 2023/early 2024 (vs +13%/+24% respectively for the benchmark.
Keisei Electric Railway
(Discount: 31.6%/Contribution: -0.12%)
Keisei Electric Railway was a small detractor over the period, shaving off
-12bps from AGT's NAV as the shares have returned -2% since we initiated our
position on 6 November 2023.
We initiated a position in the Japanese railway operator due to its 21% stake
in the listed theme park operator - Oriental Land ('OLC') - which accounts for
167% of Keisei Electric's market cap pre-tax.
OLC offers exposure to Japan's largest theme parks - Tokyo Disneyland and
Tokyo DisneySea - which are also two of the most visited theme parks in the
world (#2 and #4). OLC also owns six high-quality Disney-themed park hotels, a
further three hotels through subsidiary Milial Resorts, and the facilities
surrounding the park area - monorail, shopping mall, and theatre.
All of this is built upon a 2,000,000m2 bank of land owned by OLC (roughly the
size of Monaco) which is located close to central Tokyo and within easy reach
of approximately 30m high income households.
In the context of wider corporate governance reforms, we felt that Keisei
Electric's stake in OLC could become a potential target for unwinding given
the lack of synergies between the two companies and the outsized proportion of
value that it represents to Keisei. Given the underlying business quality of
both the railway operations and of OLC, we felt that we could be patient and
await any unlocking of this value.
On 7 March 2024, the company announced that it would be cutting its stake in
OLC by 1 percentage point from 22.15% to 21.15%. This news disappointed the
wider market, which had clearly been hoping for a more significant stake sale,
sending the shares down by -9% on the day.
We consider this news to be a significant step-change, however, demonstrating
that the company does not view OLC as a sacred asset, and that this could open
the door for further stake sales in the future. Should we see any further
unwinding of OLC, this will likely lead to outsized prospective returns from a
significant unlocking of value.
Joe Bauernfreund
Asset Value Investors Limited
4 June 2024
INVESTMENT PORTFOLIO
At 31 March 2024
Company Portfolio classification % of IRR ROI Cost Equity Exposure(4) % of net assets
investee
£'000(3)( )
company (%, GBP)(1) (%, GBP)(2) £'000
News Corp Holding Company 1.0% 25.7% 18.0% 64,701 75,982 6.7%
Oakley Capital Investments Closed-ended Fund 8.9% 22.3% 117.9% 32,408 72,562 6.4%
D'Ieteren Group Holding Company 0.7% 31.1% 34.2% 49,618 65,852 5.8%
Princess Private Equity Closed-ended Fund 10.0% 16.4% 15.1% 58,183 63,764 5.6%
Hipgnosis Songs Fund Closed-ended Fund 7.5% -8.1% -6.1% 71,665 62,198 5.4%
Schibsted 'B' Holding Company 1.1% 36.3% 47.7% 34,838 58,174 5.1%
Bollore Holding Company 0.4% nm 5.3% 54,685 57,556 5.0%
Aker ASA Holding Company 1.6% 15.9% 70.2% 57,155 55,496 4.9%
FEMSA Holding Company 0.2% 28.1% 91.3% 28,970 54,782 4.8%
Pantheon International Closed-ended Fund 2.9% 21.4% 23.8% 34,648 43,243 3.8%
Top ten investments 486,871 609,609 53.5%
Christian Dior Holding Company 0.0% 25.9% 110.6% 21,120 41,442 3.6%
Apollo Global Management 'A' Holding Company 0.1% 34.1% 114.2% 19,240 41,441 3.6%
Chrysalis Investments Closed-ended Fund 7.7% nm 5.9% 36,118 38,263 3.4%
KKR and Co Holding Company 0.1% 40.2% 218.1% 9,686 35,145 3.1%
IAC/InterActive Corp Holding Company 1.0% -23.8% -33.8% 64,482 34,905 3.1%
Third Point Investors Closed-ended Fund 4.3% 7.4% 40.9% 23,728 31,251 2.7%
Entain Asset-backed Special Situation 0.6% nm -14.6% 33,872 28,920 2.5%
GCP Infrastructure Investments Closed-ended Fund 4.4% nm 7.9% 26,088 27,474 2.4%
Nihon Kohden Asset-backed Special Situation 1.5% 4.5% 5.5% 26,028 27,302 2.4%
Dai Nippon Printing Asset-backed Special Situation 0.4% 25.5% 15.7% 23,390 26,990 2.4%
Top twenty investments 770,623 942,742 82.7%
EXOR Holding Company 0.1% 11.7% 47.7% 13,574 24,780 2.2%
Kyoto Financial Group Asset-backed Special Situation 0.6% 42.7% 35.5% 18,288 24,471 2.2%
Symphony International Holdings Closed-ended Fund 15.7% 5.2% 31.2% 26,636 23,314 2.1%
Toyota Industries Asset-backed Special Situation 0.1% nm 20.2% 18,135 21,835 1.9%
Irish Residential Properties Asset-backed Special Situation 4.2% nm 1.2% 19,565 19,792 1.7%
Frasers Group Holding Company 0.5% nm -5.1% 20,811 19,753 1.7%
Hachijuni Bank Asset-backed Special Situation 0.5% 44.5% 51.6% 10,114 15,008 1.3%
Wacom Asset-backed Special Situation 2.8% -11.7% -25.0% 21,437 14,895 1.3%
Abrdn European Logistics Income Closed-ended Fund 5.8% nm 4.2% 14,007 14,592 1.3%
Shiga Bank Asset-backed Special Situation 1.1% 22.1% 25.1% 10,577 12,984 1.1%
Top thirty investments 943,767 1,134,166 99.5%
Keisei Electric Railway Asset-backed Special Situation 0.2% nm -9.0% 14,065 12,790 1.1%
Cordiant Digital Infrastructure Closed-ended Fund 2.6% nm -4.0% 13,328 12,760 1.1%
Balanced Commercial Property Trust Closed-ended Fund 2.2% nm 5.5% 12,046 12,617 1.1%
Kyocera Asset-backed Special Situation 0.1% nm -8.6% 13,430 12,322 1.1%
Konishi Asset-backed Special Situation 2.0% 9.8% 50.3% 8,107 11,709 1.0%
SK Kaken Asset-backed Special Situation 1.8% -9.0% -37.6% 19,056 11,257 1.0%
TSI Holdings Asset-backed Special Situation 3.0% 22.9% 15.5% 9,548 10,949 1.0%
Haw Par Corporation Holding Company 0.8% -3.6% -3.8% 11,360 10,543 0.9%
DTS Asset-backed Special Situation 0.9% 10.4% 30.2% 6,957 8,802 0.8%
LG Corp. Holding Company 0.1% nm -6.5% 8,845 8,085 0.7%
Top forty investments 1,060,509 1,246,000 109.3%
VEF Holding Company 2.3% -12.0% -14.9% 4,525 3,417 0.3%
Seraphim Space Investment Closed-ended Fund 2.9% 3.6% 4.6% 3,213 3,362 0.3%
JPEL Private Equity Closed-ended Fund 18.4% 19.8% 99.3% 1,219 2,865 0.3%
Shin Etsu Polymer Asset-backed Special Situation 0.3% 14.8% 20.6% 1,681 1,812 0.2%
Better Capital (2009) Closed-ended Fund 17.4% 22.0% 41.1% 1,962 903 0.1%
Third Point Investors Private Investments Closed-ended Fund 0.1% nm nm 582 545 0.0%
Ashmore Global Opportunities - GBP Closed-ended Fund 0.0% 4.8% 10.7% 31 185 0.0%
Equity investments at fair value 1,073,722 1,259,089 110.5%
Fair value and gross market exposure of investments4 Equity Fair Value £'000 % of net
exposure £'000 assets
Total Return Swaps long positions 39,903 4,470 0.4%
Brookfield Class A 39,903 4,470 0.4%
Total Return Swaps - short positions
Brookfield Infrastructure Partners Units (2,286) 279 0.0%
Brookfield Renewable Partners (2,567) 591 0.1%
Brookfield Asset Management Class A (18,360) (3,725) (0.3%)
(23,213) (2,855) (0.2%)
16,690 1,615 0.2%
Investments and total return swaps 1,090,412 1,260,704 110.7%
Other net current assets less current liabilities 39,925 3.5%
Non-current liabilities (161,230) (14.2%)
Net assets 1,139,399 100.0%
(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. For a full
description of the exposure to Brookfield, please see page 44 of the Annual
Report for the year to 30 September 2023.
FURTHER INFORMATION
AVI Global Trust Plc's Half Year Report for the period ended 31 March 2024
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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