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AVI Global TrustAnnouncement

09/08/2023 14:45

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RNS Number : 8385I  AVI Global Trust PLC  09 August 2023

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

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

 

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

https://www.assetvalueinvestors.com/content/uploads/2023/08/AGT-JULY-2023.pdf
(https://www.assetvalueinvestors.com/content/uploads/2023/08/AGT-JULY-2023.pdf)

 

 

Performance Total Return

 

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

 

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

                           to date
 AGT NAV            4.4%   6.5%         6.3%  51.4%  44.0%  133.8%
 MSCI ACWI Ex US    2.8%   6.5%         7.3%  25.3%  23.2%  86.8%
 MSCI ACWI          2.4%   10.4%        6.8%  37.3%  51.5%  169.8%

( )

 

Manager's Comment

 

AVI Global Trust (AGT)'s NAV increased by +4.4% in July.

 

Schibsted (+12%) and Aker (+6%) were the two largest positive contributors
(with a further fillip from a +5% appreciation of NOK against Sterling),
followed by our Japanese Banks basket and IAC (+9%) - both of which we discuss
below. Godrej Industries was the only notable detractor (-8%).

 

In last year's annual report
(https://www.assetvalueinvestors.com/content/uploads/2023/03/AGT-Annual-Report-2022-1-1.pdf)
we detailed how 2022 was something of an annus horribilis for IAC. The company
suffered a dual shock of significant NAV weakness and discount widening as it
was caught in the perfect storm of a rising cost of capital and deteriorating
fundamentals. This made it your company's largest detractor in FY22.

 

In 2023 the shares have started to make a recovery, rising +57%, with a +25%
increase in our estimated NAV boosted by a narrowing of the discount from 45%
to 31%. Having added to the position by about a third in early January,
averaging down our cost base, IAC has been one our best performers this year.
NAV growth has been almost exclusively driven by MGM (37% of NAV) and Angi
(18% of NAV), shares in which have returned +51%, and +65%, respectively.

 

In IAC CEO Joey Levin's quarterly letter at the start of the year, he talked
of a "back to basics" strategy. This has clearly been evidenced at Angi, the
homeservices marketplace. Since becoming CEO of Angi a little under a year ago
Joey has steadied the ship. Measures to reduce the cost structure have been
implemented, with a -14% year-on-year reduction in sales team headcount and
-50% reduction in capex in Q1. He has started to simplify the product offering
and ambition, reducing losses from Services (from -$19m to -$2m as they exit
un-economic offerings). Arguably this is the "easy" bit and the next stage of
showing the business can successfully drive top-line growth is the hard bit -
with the jury very much still out as to whether this is possible. That said,
the "easy" bit is not to be sniffed at - after all the company churned through
three CEOs in five years who couldn't do it! With earnings starting to ramp
up, we believe this creates a base from which value can be grown and
extracted. At the current $2.3bn enterprise value - which equates to 1.3x
trailing sales and ~10x 2025 EBITDA -we believe the business could be of
interest to financial buyers given the attractive cash generative nature of
the core Ads & Leads business and room for cost cutting from non-core
areas. This would be an attractive outcome for IAC shareholders, giving the
company significant capital to allocate. Alternatively, although sceptical, we
remain open minded to Joey Levin continuing to drive fundamental improvements,
re-igniting growth and margins - something to which the market doesn't appear
to be assigning a high probability.

 

Turning to Dotdash Meredith (11% of NAV) - the digital media company that was
established in 2021 when IAC's Dotdash acquired the storied media brands of
the Meredith Corporation - there are also signs of improvement. Whilst 2022
had always been billed as a transition year, a deterioration in ad markets,
compounded by a much slower and more complex than anticipated integration,
meant the first twelve months of ownership were ones to forget. In 2023 the
integration issues are now behind them, with the focus now solely on
navigating a challenging macro environment. In aggregate, management describe
the ad market as being in a state of "stable weakness", albeit with
significant variation by category. We remain somewhat cautious on the heavy
lifting that the second half of the year will have to do for Dotdash Meredith
to reach management guidance of $250-300m adjusted EBITDA but, given the high
incremental margins the business earns, are excited about the prospects for
meaningful recovery in earnings and growth over the medium term - validating
the acquisition.

 

Despite the strong share price performance, the stub remains lowly valued, at
an implied $1.5bn (inclusive of Dotdash Meredith level debt). At this price
you are paying 5.6x this years depressed EBITDA for Dotdash Meredith and
receiving every else for free.

 

History shows that IAC shares perform well when the market wakes up and starts
valuing the "for free" part. In this vein we are particularly excited about
Turo (9% of NAV), a car sharing marketplace where guests can rent cars from a
community of hosts akin to Airbnb. The business has many of the hallmark's IAC
look for: 1) large addressable market with long-growth runway; 2) network
effect protected competitive position; 3) capital light business model with
attractive unit economics. Earlier this year IAC increased its stake in the
company from 26% to 31% at an implied $2.3bn valuation (whilst they also own a
warrant which could see their stake increase to a further 10%). Recently there
have been rumours that the company - which filed an S1 in early 2022 - might
be looking to IPO, with the rally in equity markets having created a more
hospitable environment. We believe this is exactly the kind of event that can
help drive IAC shares higher and combined with the prospects for improved
fundamental performance and earnings growth at Dotdash Meredith and Angi,
makes us optimistic about prospective returns. Indeed, management seem to
share our optimism and have become more aggressive at deploying the company's
balance sheet, buying back 3.7% of the outstanding shares between February and
early May (at an annualised rate of c.18%).

 

Earlier this year we built a small basket of four Japanese regional banks
(£37m at cost). Such companies have been textbook value traps over the last
decade-plus: optically incredibly cheap - but for a reason. Cash and
securities that dwarf their market caps, but with management teams unwilling
to improve capital efficiency; and margins constrained in the zero-interest
rate world of Yield Curve Control.

 

On both fronts we felt the prospects for change were underpriced by the market
- with increasing activist pressure (as evidenced by recent proposals at the
Bank of Kyoto AGM) and a seemingly inevitable requirement for changes to
Japanese monetary policy in-light of evidence of sustained inflation.

 

At the end of July, the Bank of Japan (BOJ) did indeed adjust its policy
stance, widening the rate at which it will purchase government bonds to 1.0%
from 0.5% previously. Whilst the Bank were keen to stress the extent to which
this isn't an abandonment of YCC - in bank speak they are technically moving
from a "rigid" 0.5% limit to a "reference" limit - it is a sign of the
changing inflationary and monetary policy environment in Japan.

 

Over the month shares in the four banks we hold rose between +13% and +24%,
adding +62bps to AGT's NAV. In total since inception the basket has generated
a ROI of +25% (IRR: +58%). Although the depreciation of the Japanese Yen has
resulted in a significantly more modest +9% ROI in Sterling terms, we see
scope for this Yen headwind to reverse. Indeed, there is an element of
synthetic leverage to our position in the banks in so far as higher yields
should beget higher bank share prices and a stronger Yen.

 

We believe our basket of banks - which collectively have net cash and
securities totalling 133% of their market caps - are fundamentally cheap with
catalysts for both improved shareholder returns and fundamental performance.
To put that in our vernacular: we see room for both NAV growth and discount
narrowing.

 

Contributors / Detractors (in GBP)

 

 Largest Contributors      1- month contribution  % Weight

                           bps
 Schibsted ASA 'B'         116                    7.7
 Aker ASA                  63                     6.2
 IAC                       34                     3.7
 KKR                       30                     6.3
 Pershing Square Holdings  28                     5.3

 

 Largest Detractors        1- month contribution  % Weight

                           bps
 Godrej Industries         -28                    2.7
 SK Square/Short SK Hynix  -9                     2.0
 D'Ieteren                 -9                     4.0
 Nihon Kohden              -7                     3.7
 Christian Dior            -6                     4.2

 

 

Link Company Matters Limited

Corporate Secretary

 

09 August 2023

 

LEI: 213800QUODCLWWRVI968

 

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