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AVI Global TrustAnnouncement

09/07/2024 15:45

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RNS Number : 7372V  AVI Global Trust PLC  09 July 2024

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the “Company”) presents its Update, reporting
performance figures for the month ended 30 June 2024.

 

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

https://www.assetvalueinvestors.com/content/uploads/2024/07/AGT-JUNE-2024.pdf
(https://www.assetvalueinvestors.com/content/uploads/2024/07/AGT-JUNE-2024.pdf)

 

Performance Total Return

 

This investment management report relates to performance figures to 30 June
2024.

 

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

                           to date
 AGT NAV            -1.2%  7.3%           25.0%  28.0%  71.5%  170.6%
 MSCI ACWI          3.0%   12.2%          20.1%  28.1%  67.8%  204.0%
 MSCI ACWI ex US    0.6%   6.6%           12.3%  10.8%  31.9%  97.2%

 

Manager’s Comment

 

AVI Global Trust (AGT)’s NAV declined -1.2% in June

 

Cordiant Digital Infrastructure was the most significant contributor, adding
+38bps to NAV, followed by Oakley and Dai Nippon Printing which contributed
+22bps and +21%, respectively.

 

There was a relatively long list of detractors. Bollore was the most
significant with a -10% return detracting -56bps as French equity markets fell
following President Macron’s decision to call a snap election. We do not
believe the fundamental outlook for Bollore has changed and took advantage of
this to add to the position.

 

Reckitt Benckiser

 

In recent months we have built a new position in Reckitt Benckiser, the
UK-listed consumer goods conglomerate which trades at an 39% discount to our
estimated NAV. It is currently a 3.9% weight.

 

Already trading at a discounted valuation, in March 2024 the company was hit
by a litigation shock. The company’s US infant nutrition business, Mead
Johnson, was ordered to pay $60m compensation to the mother of a baby who died
of Necrotising Enterocolitis (“NEC”) – a bowel disease that mainly
affects premature babies - who had been fed Enfamil pre-term baby formula.
This led to a -15% one-day decline in Reckitt’s share price as investors
struggled to price the potential liability and capitulated.

 

We do not intend to get into the minutiae of the case here but at a high level
the facts are as follows. NEC occurs in c.10% of all premature (pre-37 week)
babies and 1 in every c.2000 full-term births. It typically occurs within 2-3
weeks after birth & results in death in 15-40% of cases. Mead Johnson hold
a >40% market share in the oligopolistic US infant nutrition business,
accounting for c.9% of Reckitt’s sales. Within this, the pre-term formula
– to which the case relates – is a small portion and immaterial at the
group level. Whilst mothers’ milk and then donor milk are the first and
second choices for premature babies, cows’ milk formulas and fortifiers are
necessary options where parents of premature babies are unable or unwilling to
breast feed and donor supply is limited. This is standard medical practice and
the decision to use such products is made by a medical professional in a
neonatal setting.

 

From as early as 1990 medical research has showed that incidence of NEC
increases when cows’ milk-based infant formula is used. That is – however
– not causality. It is widely recognised that human milk offers the best
prevention against NEC, although the risk can never be eliminated and can
occur in conjunction with any kind of feeding. The Illinois Court ruled that
a) there is a link between cows’ milk-based formula usage and NEC, and b)
that Mead Johnson were negligent as their labelling did not adequately warn of
the risks. The NEC Society
(https://necsociety.org/wp-content/uploads/2024/04/Statement-on-Watson-v-Mead-Johnson-Verdict.pdf)
have spoken out against the ruling, and medical professionals continue to use
the product.

 

We are humble enough to realise that we do not possess any competitive
advantage in analysing the legal merits of the case. However, 1) with close to
$10bn of market cap eroded, the market appears to be discounting an
excessively pessimistic scenario versus reasonable estimates; 2) the company
maintain that legally the liability is non-recourse to Reckitt PLC thereby
putting an at least theoretical cap on it; 3) our mandate and organisational
structural does give us a competitive advantage in owning out of favour or
even stigmatised companies compared to more institutional peers.

 

Turning to the underlying business, we believe there is a lot to be excited
about. Reckitt owns a collection of trusted brands which exhibit meaningful
barriers to entry, high margins, and attractive growth prospects. This is
split across Health (42% sales), Hygiene (42%) and Nutrition (16%). Over 70%
of revenues are derived from brands that hold #1 or #2 positions in their
respective category and – with more than 30 million products sold daily -
will be well known to readers such as Nurofen, Durex, Strepsils, Dettol,
Finish and Vanish. Across the group, underlying categories should grow at an
average of 3-4% and management target mid-single-digit organic growth. The
business generates industry leading gross margins (60%), healthy operating
margins (23%) and strong cash generation (2023 free cash flow £2.2bn / ~15%
of sales).

 

That said, there is certainly room for improvement. Having had two CEOs from
1999 to 2019 the business is now on its third CEO in five years. Former
employees talk of confusion around the prioritisation of gross margins or
growth, and the 2017 Mead Johnson acquisition led to a loss of focus and
neglect of the Consumer Health division. Certainly, it is an open question
whether more focused management would be beneficial, with the company having
explored splitting the business up in 2018. Moreover, we believe there is
potential for further improvements in operating margins – something with
which management seems to agree given their target to boost margins by
+200bps.

 

Following the sell-off, on this year’s numbers the shares trade an EV/EBIT
multiple of 11x, a PE ratio of 13x and a 7.4% free cash flow yield. These are
the lowest levels in over a decade and represent the steepest ever discount to
peers.

 

For investors with a longer-time horizon, we believe this offers highly
attractive value, and one that is unlikely to persist indefinitely without
attracting the interest of strategic buyers and other activist shareholders. A
resolution of the legal liability is the key catalyst for the shares, and the
2025 Federal litigation is likely central to this. With the continued pace of
the buyback there is a path to £4 of earnings per share in 2026. As the dust
settles the market will likely capitalise this at a fairer multiple than that
implied by the share price.

 

Schibsted

 

During the month we exited Schibsted following a re-rating in the shares.

 

As readers may remember, we first invested in Schibsted in June 2022. At the
time the company was trading at an 45% discount to our estimated NAV, with its
listed stake in Adevinta accounting for c.70% of Schibsted’s market cap. We
believed this inefficient group structure masked the highly attractive and
valuable unlisted Nordic Marketplace business, with the stub assets trading at
an implied c.6x forward EBITDA.

 

It was our contention that resolving the stake in Adevinta was crucial to
unlocking value, and indeed this is what occurred. In November 2023 Blackstone
and Permira agreed to take Adevinta private at 115 NOK per share. The
transaction saw Schibsted crystalise 24bn NOK (48% of its then market cap)
whilst also retaining an 11% stake worth 16bn NOK (32%).

 

Shortly after, Schibsted delivered a second transformational transaction,
selling the legacy News Media assets to its controlling shareholder, the
Tinius Trust. This removed a capital consumptive and terminally challenged
asset from the group and transformed Schibsted into a purer play classified
marketplaces business.

 

Taken together these actions simplified the group structure and forced
investors to pay attention to the Nordic Marketplace assets, which have
re-rated to trade at >20x forward EBITDA.

 

Whilst we believe there is still considerable value to be extracted from
increasing monetisation in-line with international peers and improving
margins, as well as from the unlisted stake in Adevinta, this is better
reflected in the valuation. When we initially invested and were adding to the
position, the valuation was inordinately wrong. This is no longer the case
and, as such, it makes sense to exit the holding.

 

Over the course of the investment Schibsted generated a +67% ROI and +47% IRR
which compares favourably to the +31% / 22% returns of the MSCI AC World Index
over the same period (all figures in NOK).

 

 

Contributors / Detractors (in GBP)

 

 Largest Contributors             1- month contribution  % Weight

                                  bps
 Cordiant Digital Infrastructure  38                     4.2
 Oakley Capital Investments       22                     7.0
 Dai Nippon Printing              21                     2.6
 Partners Group PE                19                     5.9
 News Corp                        18                     9.1

 

 Largest Detractors     1- month contribution  % Weight

                        bps
 Bollore                -56                    4.7
 Toyota Industries      -27                    2.6
 FEMSA                  -23                    4.8
 Entain                 -21                    2.7
 Chrysalis Investments  -19                    3.2

 

 

Link Company Matters Limited

Corporate Secretary

 

9 July 2024

 

LEI: 213800QUODCLWWRVI968

 

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other than the content of the Newsletter referred to above, is neither
incorporated into nor forms part of the above announcement.

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