REG - AVI Global Trust PLC - Monthly Factsheet

AVI Global TrustAnnouncement

09/03/2023 16:30

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RNS Number : 4910S  AVI Global Trust PLC  09 March 2023

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 28 February 2023.

 

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

https://www.assetvalueinvestors.com/agt/content/uploads/2023/03/AGT-February-2023.pdf
(https://www.assetvalueinvestors.com/agt/content/uploads/2023/03/AGT-February-2023.pdf)

 

 

Performance Total Return

 

This investment management report relates to performance figures to 28
February 2023.

 

 Total Return (£)    Month  Calendar Yr  1Y    3Y     5Y     10Y

                            to date
 AGT NAV(1)          -0.3%  5.6%         6.0%  50.6%  47.6%  132.5%
 MSCI ACWI Ex US(2)  -1.9%  3.6%         2.9%  23.1%  23.3%  84.4%
 MSCI ACWI(1)        -1.2%  3.4%         1.7%  35.9%  51.0%  168.9%

( )

 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 declined -0.3% in February in what was a weaker
month for equity markets.

 

Within this context EXOR and FEMSA were the most notably strong performers. On
the other side, Schibsted was the most significant detractor, followed by the
Brookfield/Short SPY trade and a new position we have been building that will
be discussed in due course.

 

FEMSA

 

During February, FEMSA concluded its strategic review and took considerable
steps to unlock the sum-of-the-parts discount at which the company trades.
This drove the shares +5% over the month, bringing year to date returns to
+18%.

 

As 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.

 

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 smaller non-core assets,
the most notable of which is US speciality distributor Envoy Solutions and
return excess capital to shareholders.

 

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.

 

To date, AGT has generated a GBP +24% IRR / + 43% ROI from its investment in
FEMSA. Prospective returns continue to appear attractive and as such we remain
owners of the shares.

 

EXOR

 

EXOR shares returned +7% during February as a +6% increase in the NAV was
boosted by a slight narrowing of the discount from 45% to 44%. During the
month, all three main assets - Ferrari, Stellantis and CNH - reported Q4/FY
results.

 

Results from Stellantis (the autos company that resulted from the merger of
Fiat Chrysler  FCA  and PSA) were particularly impressive, leading to a +15%
share price return over the month. In 2H22, sales and operating profit grew
+19% and +17% year on year, both coming in +4% ahead of consensus
expectations. The broad trends that typified 2021 and 1H22- 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
businesses 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.

 

Nihon Kohden (NK)

 

Over the last few months we have been building a position in Nihon Kohden
(NK), which now accounts for 3.5% of AGT's NAV. NK is a £2bn market cap
medical equipment manufacturer famed for its high quality and world-class
award-winning products, including patient monitors, ventilators, and
defibrillators. NK has achieved a 20-year compound sales growth of 5%, with
sales declining in only three of the past 37 years. We expect this growth to
continue as NK benefits from structural growth from an ageing population,
commensurately higher healthcare expenditure, and a shift to higher value-add
digital solutions.

 

Trading on a forward EV/EBIT multiple of 11x vs peers' 17x, we do not believe
NK's growth potential and quality are being recognised by the market. This is
in part a reflection of a bloated balance sheet with net cash and investment
securities accounting for 26% of the market cap, suboptimal IR disclosure, and
a misperception surrounding NK's overseas growth opportunity.

 

Alongside addressing the undervaluation, we have identified several
operational improvements which we believe would allow NK to grow sales at a
faster rate and expand margins to 15% from sub-10% currently. These range from
enhancing digital solutions, exploring a post-hospital wearable device
offering, increasing consumables and in-house manufactured products, and
addressing seniority-based pay and excess SG&A costs. NK's shareholder
register should be supportive of improvements, with 44% of the company owned
by foreigners and no presence of allegiant shareholders.

 

So far, we have met with IR, the Head of Accounting, the Head of Japan
Operations, and the President (Grandson of the Founder). Our meetings have
been fruitful and included discussions on how to rectify the share price
undervaluation. NK has all the attributes we look for: an undervalued
high-quality growing business, and cash-rich balance sheet, with an engagement
angle to unlock the value. We believe there is as much as +200% upside by 2027
and will work with management to achieve NK's potential.

 

 

Contributors / Detractors (in GBP)

 

 Largest Contributors        1- month contribution  % Weight

                             bps
 EXOR                        41                     5.5
 FEMSA                       31                     5.2
 Oakley Capital Investments  20                     8.2
 KKR                         17                     6.2
 Pershing Square Holdings    13                     6.0

 

 Largest Detractors               1- month contribution  % Weight

                                  bps
 Schibsted ASA                    -51                    7.2
 New Position                     -44                    2.7
 Brookfield/Short SPY             -44                    4.9
 IAC                              -20                    2.9
 Symphony International Holdings  -17                    2.6

 

 

Link Company Matters Limited

Corporate Secretary

 

09 March 2023

 

LEI: 213800QUODCLWWRVI968

 

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