REG - AVI Global Trust PLC - Monthly Factsheet

AVI Global TrustAnnouncement

13/02/2023 16:45

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RNS Number : 7723P  AVI Global Trust PLC  13 February 2023

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 31 January 2023.

 

This Monthly Newsletter is available on the Company's website at:

https://www.assetvalueinvestors.com/agt/content/uploads/2023/02/AGT-JAN-2023-1.pdf
(https://www.assetvalueinvestors.com/agt/content/uploads/2023/02/AGT-JAN-2023-1.pdf)

 

Performance Total Return

 

This investment management report relates to performance figures to 31 January
2023.

 

 Total Return (£)    Month  Calendar Yr  1Y    5Y     10Y

                            to date
 AGT NAV(1)          6.0%   6.0%         2.2%  47.7%  137.6%
 MSCI ACWI Ex US(2)  5.6%   5.6%         2.8%  23.6%  94.3%
 MSCI ACWI(1)        4.7%   4.7%         0.3%  51.2%  184.3%

( )

 1  Source: Morningstar. All NAV figures are cum-fair values.
 2  From 1st October 2013 the lead benchmark was changed to the MSCI ACWI ex US
    (£) Index. The investment management fee was changed to 0.7% of net assets
    and the performance related fee eliminated.

 

 

Manager's Comment

 

AVI Global Trust (AGT)'s NAV increased by +6.0% in January.

 

Markets have been ebullient, with the MSCI AC World index up +6.5% (in local
currency) following a weak December and painful 2022. Every man and his dog
knows that there's lots to worry about - from continued monetary policy
tightening, to deteriorating consumer balance sheets and risks to corporate
earnings. This, however, is how markets operate: they climb the wall of worry
and dumbfound consensus opinion.

 

The consensus worries might well be right, and certainly the risks appear
finely balanced, but markets are forward looking and can move higher despite
this. That is not to say we are out of the woods yet - we are not - simply
that the macroeconomic and broader market outlook remains deeply unclear, with
a number of crosscurrents. As such we try to not let it impact our investment
decisions - which are formed from the bottom up.

 

In this regard, it has been a busy start to the year for us at AVI, with a
number of new positions having been added to the portfolio, and several
existing positions boosted. The opportunity set is rich and varied. We have
added materially to Spectrum Brand Holdings (now 3.1% of NAV), on which we
elaborate below. We also continued to add to Nihon Kohden, the Japanese
medical equipment company (3.6%) and built a basket of Japanese regional banks
(2.4%), the share prices of which are yet to reflect the changing Japanese
monetary policy environment. As well as this, we have increased our positions
in Oakley Capital (7.9%) and Schibsted (7.6%) such that they are now the two
largest positions. As such, for the first time in over a year, we have
deployed a more substantial portion of our borrowings, with net gearing
standing at 5.8% at the end of January. Whilst recognising that the future
will be volatile and unpredictable, we feel selectively optimistic.

 

 

Christian Dior

 

Christian Dior ("CDI") was one of the strongest performers over the month,
contributing +85bps to returns. The shares rose +16% - slightly behind the NAV
(which rose +18%) - and as such the discount widened modestly from 13% to 15%.

 

The proximate cause for CDI's outperformance was China, with luxury goods
companies 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%. On a recent earnings call alongside LVMH's
full year results - published at the end of January - 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 Q4/FY 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 the why mega-brands are
likely to continue outperforming, with significant scale advantages in an
industry with high fixed costs. In the short-term mega-brands go through
periods where they underearn as spending runs far above "inflation opex", but
in the long run the brand equity is increased and growth extended. Smaller
mono-brands simply cannot compete with this, with our estimates indicating
that Louis Vuitton's incremental opex in 2022 is of a similar magnitude to a
smaller mono-brand'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 and driving
NAV growth. On top of this there is further upside if and when the family
decide to simplify the group structure.

 

Spectrum Brands Holdings

 

During the period we continued to boost our position in Spectrum Brands
Holdings ("Spectrum Brands") - a US conglomerate where the protracted sale of
its locks business to Assa Abloy has led the market to apply a punitively low
value on its remaining businesses, the most attractive of which is a US pet
chews business.

 

Over the last five years the company has taken considerable steps to simplify
its strategy, selling non-core assets and focusing on its Pet Care and Homes
& Gardens businesses. The most significant part of this process came in
September 2021, with an agreement to sell their Hardware & Home
Improvement division to Assa Abloy for an enterprise value of $4.3bn - which
sent Spectrum Brands shares >$100.

 

However, shortly thereafter the Department of Justice ("DOJ") opposed the case
on anti-trust grounds with the shares falling some -60% from their highs,
allowing us to initiate a toe-hold position at $44 in the Autumn of 2022.
Frustratingly, before we had fully built the position, Assa Abloy announced
material concessions in the form of planned divestures which have increased
the likelihood of the deal passing, sending Spectrum Brands shares +27% in one
day. We have subsequently fully built the position with the shares in the low
$60s.

 

Our thesis is simple: in a scenario where the deal goes through the shares are
still far too cheap (trading at an implied 7x EBITDA vs. peers at 10-13x), and
in a scenario where the deal is blocked there was a long-list of other
potential buyers and a break fee payable equating to 13% of Spectrum Brand's
market cap.

 

So where are we now? The ball is currently in the DOJ's court, with an
announcement as to whether they will pursue litigation or accept Assa Abloy's
remedies, due imminently. Failing an agreement at this stage, the case will
move to trial in April, with a scheduled June completion.

 

Our base case is that this proceeds to court and that the deal ultimately gets
approved. If approved, net proceeds of $3.5bn equate to 126% and 61% of
Spectrum Brand's market cap and enterprise value, allowing the company to
de-lever and return capital to shareholders through buybacks. Our estimates
suggest they will have enough capital to buyback 45% of their outstanding
shares at these levels, with current authorisation for 28%. A multiple of 10x
EBITDA - in-line with closest peer Central Garden & Pet Company - yields a
share price of $90 and +32% upside from here.

 

 

Contributors / Detractors (in GBP)

 

 Largest Contributors        1- month contribution  % Weight

                             bps
 KKR                         94                     5.9
 Christian Dior              85                     5.9
 Schibsted ASA               84                     7.6
 Oakley Capital Investments  62                     8.2
 Brookfield/Short SPY        53                     5.3

 

 Largest Detractors               1- month contribution  % Weight

                                  bps
 Aker ASA                         -27                    6.6
 Symphony International Holdings  -17                    2.7
 Third Point Investors/MF         -14                    4.2
 D'Ieteren                        -7                     2.3
 VEF                              -6                     0.4

 

 

Link Company Matters Limited

Corporate Secretary

 

13 February 2023

 

LEI: 213800QUODCLWWRVI968

 

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