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AVI Global TrustAnnouncement

07/07/2023 16:45

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RNS Number : 3976F  AVI Global Trust PLC  07 July 2023

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 30 June 2023.

 

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

https://www.assetvalueinvestors.com/content/uploads/2023/07/AGT-JUNE-2023.pdf
(https://www.assetvalueinvestors.com/content/uploads/2023/07/AGT-JUNE-2023.pdf)

 

 

Performance Total Return

 

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

 

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

                           to date
 AGT NAV            0.5%   2.0%         7.1%   44.9%  40.1%  131.9%
 MSCI ACWI Ex US    1.9%   3.6%         7.7%   19.8%  23.4%    89.7%
 MSCI ACWI          3.1%   7.8%         11.3%  32.9%  53.3%  176.1%

( )

 

Manager's Comment

 

AVI Global Trust (AGT)'s NAV increased by +0.5% in June.

 

The hedged position in Brookfield Corporation (+12%), Apollo (+15%), FEMSA
(+10%) and KKR (+6%) were the largest positive contributors. Schibsted (-11%),
Wacom (-16%) and Oakley Capital (-6%) were the most meaningful detractors.

 

D'Ieteren

 

Over the last few months, we have been adding to our position in D'Ieteren on
share price weakness, such that the company is now a 4.2% weight in the
portfolio.

 

Since reporting what we considered to be a strong set of full year results in
early March the shares have declined -13%, underperforming the MSCI Europe by
-11%. Whilst operating profit for D'Ieteren's underlying assets "beat"
consensus expectations, investors were perturbed by significant working
capital build-up and correspondingly low free cash flow generation. We believe
such fears are undue, with the key culprit being D'Ieteren Autos (9% of NAV),
where free cash flow swung from €108m to negative €101m as VW accelerated
deliveries during the last two weeks of the quarter. This led to a €155m
working capital outflow - or as management described it on the earnings call
"a photo finish that was not very pleasant". This is a heavy-handed tactic we
have seen from VW before (e.g. 2018), but one that normalises over time.

 

In our December newsletter
(https://www.assetvalueinvestors.com/content/uploads/2023/01/AGT-December-2022.pdf)
we focused on D'Ieteren's key asset, Belron, which accounts for 63% of NAV
following its payment of a €1.1bn dividend earlier this year. As discussed
then, Belron has considerable scale advantages and benefits from the long-term
growth trend of the proliferation of Advanced Driver Assistance System
("ADAS") cameras and increased windshield complexity.

 

Whilst Belron will remain the key asset in terms of NAV growth and investment
case, we are increasingly encouraged by D'Ieteren's newer smaller assets,
namely TVH Parts (TVH) and Parts Holding Europe (PHE). We believe the
successful operation of these assets has the potential to boost management
credibility and alleviate investors' concerns about re-investment risk /
capital allocation, thereby reducing the wide discount at which the shares
trade.

 

Although TVH is the larger and higher quality of the two assets, we believe
the 2022 acquisition of PHE - a predominantly French automotive spare parts
distributor - appears to be a particularly astute one, with D'Ieteren
acquiring the business from Bain following a failed IPO.

 

Automotive spare parts flow from manufacturers, through distributors to retail
and service centres and eventually end customers (drivers). The spare part
aftermarket is divided between the Original Equipment Manufacturers (OEM)
aftermarket and Independent Aftermarket (IAM), in which PHE operate. In the
OEM aftermarket, automakers sell premium-priced branded parts, most typically
for newer generation in warranty models, which are principally distributed
through their dealer networks. The IAM on the other hand, operates
independently of automakers and is much broader, covering cars typically aged
>5 years old, with the average car served by PHE circa 13 years old.

 

Unlike the auto industry at large, demand for spare parts is highly defensive
and stable with the bulk of sales non-discretionary in nature. Moreover, there
is an element of counter-cyclicality, in so far as customers are more likely
to "make do" and repair during times of economic hardship. Within this the IAM
is in turn even more predictable, as the stock and flow of the existing car
parc and its resultant demand can be modelled out for many years to come: 100%
of the vehicles PHE expects to service in 2025, and ~50% of those in 2030, are
already on the road.

 

In distribution businesses (relative) scale is a key determinant of success.
PHE are a top three customer to most large suppliers, resulting in
considerable purchasing economies of scale compared with smaller operators.

 

In distribution businesses (relative) scale is a key determinant of success.
PHE are a top three customer to most large suppliers, resulting in
considerable purchasing economies of scale compared with smaller operators.
Scale also creates distribution centre density and allows for automation of
complex logistics processes, both of which support best in class delivery
times, with 90% of SKUs deliverable in two hours and some customers receiving
up to six deliveries per day. Combined with inventory breadth, this gives PHE
an unmatched ability to have the right part in the right place at the right
time. In turn this translates to >40% gross margins, which drop down to
high single digit operating margins.

 

Sales have grown at c.6% p.a. since 2010, although a decent chunk of this has
been in-organic as PHE have rolled up many small operators. The market remains
highly fragmented, particularly compared to the US, and we expect PHE to
continue to pursue a consolidation strategy, with considerable synergies as
acquirees are plugged into PHE's procurement systems. In the main these will
likely be funded through internal cash flows, but over time there could be
opportunities for D'Ieteren to deploy more meaningful amounts of capital.

 

D'Ieteren's acquisition of PHE came at an enterprise value of €1.7bn and an
initial equity outlay of €571m. This equated to a trailing EV/EBITDA
multiple of 7x and ~11x free cash flow. This represents a significant discount
to listed peers, as well as M&A transactions, with GPC and LKQ having paid
10-11x EBITDA for Alliance and Rhiag in recent years. To complete the deal the
EU mandated the disposal of PHE's windscreen repairs activities for just over
€100m. As such the net equity outlay for PHE equates to less than 5x this
coming year's profit before tax. We believe this represents a steal and
should, combined with the acquisition of TVH, help ameliorate some of the
market's concern surrounding re-investment risk (which became a valid
criticism for the company following its ill-fated, and now immaterial,
acquisition of Moleskine in 2014).

 

Returning to D'Ieteren, the decline in the shares combined with NAV growth
means the company now trades at an 42% discount to our estimated NAV. Belron,
TVH and PHE collectively account for 79% of NAV and exhibit largely
non-discretionary demand drivers; combined with the prospect for margin
expansion at Belron and accretive bolt on acquisitions at TVH and PHE we
believe the prospects for NAV growth are attractive, with potential further
upside from discount narrowing. Given the presence of private equity
co-ownership at Belron we believe some form of corporate event is probable in
the coming years, with management highly incentivised to increase the equity
value, which should act as a catalyst for D'Ieteren shares.

WACOM

Wacom detracted 65ps from performance, with a -16% share price return that was
especially painful in a buoyant market. It's hard to link the share price
weakness to a specific event, with all the weakness coming in June after the
full-year results announcement in the middle of May. We suspect the weakness
was driven by selling pressure from one of Wacom's largest shareholders who
announced a reduction in their stake.

 

Although management are listening to our suggestions and have committed to a
buyback program for up to 20% of their shares, the operating environment has
weighed heavily on profits. Despite sales growing +4% last year, cost
inflation dragged gross profits -21% lower, while SG&A investments led to
a -85% fall in operating profits. The weakness came entirely from the consumer
business which saw a swing in operating profit from Y8.7bn to a -Y4.0bn loss
this year.

 

Operating profits are expected to rebound +124% next year and recover to the
FY03/22 levels in around three years. The pace of recovery is being hindered
by Wacom's continued investment in future growth to which we are not
necessarily opposed.

 

The difficult operating environment has already been reflected in the share
price, and we still believe that Wacom has a technological advantage which
will bear fruit as the digital writing market grows. We will continue engaging
with management to enhance Wacom's corporate value and seek ways to recover
the share price weakness.

 

 

Contributors / Detractors (in GBP)

 

 Largest Contributors                           1- month contribution  % Weight

                                                bps
 Long Brookfield Corp/Short Listed Underlyings  66                     5.5
 Apollo Global                                  53                     5.0
 FEMSA                                          44                     6.4
 KKR                                            35                     6.2
 IAC                                            31                     3.5

 

 Largest Detractors               1- month contribution  % Weight

                                  bps
 Schibsted ASA 'B'                -75                    6.8
 Wacom                            -65                    2.4
 Oakley Capital Investments       -48                    7.9
 Pantheon International           -27                    4.1
 Symphony International Holdings  -19                    2.8

 

 

Link Company Matters Limited

Corporate Secretary

 

07 July 2023

 

LEI: 213800QUODCLWWRVI968

 

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