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AVI Global TrustAnnouncement

13/12/2024 16:30

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RNS Number : 1026Q  AVI Global Trust PLC  13 December 2024

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

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

 

This Monthly Newsletter is available on the Company's website at:
AGT-NOVEMBER-2024.pdf
(https://www.assetvalueinvestors.com/content/uploads/2024/12/AGT-NOVEMBER-2024.pdf?mc_cid=af297fa45c&mc_eid=335e1499b3)

 

 

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

 

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

                           to date
 AGT NAV            2.8%   8.5%         15.5%  20.1%  69.9%  167.3%
 MSCI ACWI          4.9%   20.7%        25.6%  30.0%  74.3%  199.3%
 MSCI ACWI ex US    0.2%   7.9%         12.6%  13.3%  32.4%  93.6%

 

Manager's Comment

AVI Global Trust (AGT)'s NAV increased +2.8% in November.

For the second consecutive month Apollo (+105bps) was the top contributor and
we provide an update on the investment below. News Corp (+74bps) and Chrysalis
(+70bps) were also meaningful contributors.

 

At the other end of the portfolio, a relatively new holding in Rohto
Pharmaceutical was the most significant detractor (-51bps). We have been
adding to the position and introduce the investment case below. Dai Nippon
Printing (-36bps) and FEMSA (-21bps) also detracted.

 

Apollo Global Management

 

Apollo ("APO") shares continued their ascent, rising a further +22% over
November, buoyed first by stellar Q3 results and then - just a day later - by
a US election result that poured rocket fuel on the US financials sector as a
whole - and the alternative asset managers (AAMs) in particular - on optimism
around a revival of deal activity and the prospect of a more benign regulatory
environment. The shares ended the month at $175. Remarkably, we took the
opportunity to add to our position at $100 as recently as August 2024, when
the shares overreacted to a Q2 earnings miss.

 

We believe APO's share price has led the post-election charge amongst its
peers for two specific reasons.

 

Firstly, there had been growing concerns that its life insurance business,
Athene, (more accurately described as Retirement Services), may become subject
to increased regulatory oversight given an increasing media focus on "private
equity owned insurers". While even this label is highly misleading, suggesting
as it does that insurers like Athene either sit within limited life funds -
they do not - and/or that their balance sheets are loaded with private equity
investments managed by their owner - in most cases, certainly in Athene's,
they are not - the fact is that the election result reduces the probability of
tightened regulation to close to zero.

 

Secondly, there is a heightened prospect of alternative investments being
allowed into the $12trn 401(k) US pension market. While there are no legal
restrictions on such pension plans investing in private assets, fears of
litigation have prevented any such moves to date. Such fears are likely to be
diminished under a more permissive regulatory regime.

 

We note APO CEO Marc Rowan's comment some time ago that "we are likely one
administration away" from changes here. It is very possible that the US
election result may well mean that administration has arrived. With its
experience in retirement services via its ownership of Athene and having been
first to identify what Rowan terms the Fixed Income Replacement Opportunity
(replacing a portion of the ~$40trn public investment grade market with
private investment grade credit), APO is best placed of all its peers to
capitalise on an opening up of the 401(k) market.

 

We bought APO in 2021 at a time when we believed the AAM sector was
misunderstood and undervalued; when valuations for balance sheet heavy
companies like APO and KKR (AGT also owned KKR until recently) within the
sector were overly penalised; and when APO's share price was suffering from
the scandal around former CEO Leon Black's links to Jeffrey Epstein. Our
thesis was that the market viewed the companies as levered plays on financial
markets when, in fact, the bulk of their value, resides in their high-quality,
visible, recurring, and predictable streams of fee-related earnings derived
from management fees charged on long duration capital.

 

In the specific case of APO, there were also concerns ahead of its merger with
its sister company, Athene. Life insurance businesses are, understandably,
often lowly rated by the market. But the reasons why they are so -
unpredictable liabilities with tail risks (e.g., long-term care) and
hard-to-hedge liabilities such as Variable Annuities - simply do not apply to
Athene which has a highly focused business model predominantly centred on
fixed annuities.

 

As such, Athene can be looked at as effectively a spread-lending business,
earning a spread between the rates paid on annuities and the yields earned on
its investments. Its fixed income portfolio (95% of total assets) is 96%
investment-grade, with Athene seeking to earn a return premium from complexity
and illiquidity rather than from taking duration or additional credit risk and
targeting a mid-to-high-teens return on equity. Life insurance businesses are
also correctly perceived as being capital intensive, and this was a source of
some disquiet when the Apollo/Athene merger was announced. But capital
intensity is not a bad thing if one is earning high returns on that capital;
and, as we understood at the time, a material proportion of Athene's growth
was likely to be funded by third-party "sidecar" vehicles.

 

While consensus estimates of forward earnings have increased over our holding
period, the bulk of returns have come from multiple expansion as the market
has favourably re-assessed the company's earnings quality and the duration of
its growth opportunity.

 

With our view and that of the market now much more aligned, we sold our
position in the first half of December just after the announcement of APO's
inclusion in the S&P 500. This long-awaited event was met with a
disappointing reaction by the market, perhaps because the shares being on the
cusp of inclusion for so long means it was more priced in than we thought.

 

We are still pleased with overall returns of +166% and an IRR of +41% over our
three-and-a-half year holding period vs. +28%/+9% for the S&P 500 and
+42%/+13% for the S&P 500.

 

Rohto Pharmaceutical

 

Rohto Pharmaceutical ("Rohto") is the largest skincare and eye-drop
manufacturing company in Japan. We first initiated into the company in June
2024 and it is currently a 4.3% weight in the AGT portfolio.

 

Rohto exhibits many of the qualities we look for at AVI, with an investment
case predicated on 1) Rohto's underlying business quality, having grown its
top-line consistently at +12.8% P.A over the last five years and generating a
mid-teens EBIT margin; 2) the company's position as the number one player in
the domestic self-selection skincare and eye-drop industries; and 3) despite
the business' superior underlying quality and stronger growth versus other
Japanese skincare peers, the company continually traded at a steep discount.

 

Rohto has a portfolio of very profitable brands in multiple categories. Japan
and Asian account for around 90% of total sales, and the company enjoys
operating margins of between 15-16% in the region. Elsewhere, the company has
benefitted from strong global customer growth, with revenue growing at an
annual rate of +15% in the US and +10% in Europe. Since Kunio Yamada, the
current Chairman, assumed the role of CEO in 1999, the skincare business has
grown strongly, and with a 5-year track record of growing operating profits at
+13% CAGR. We believe by refocussing management's efforts, there is potential
for an even higher sustainable earnings growth rate, going forward. Despite
significantly outperforming its peers, based on its profitable and stable
brand portfolio, Rohto trades at an EV/EBIAT multiple of 13.0x compared to the
peer group average of 18.2x.

 

From our research, it is AVI's belief that Rohto's undervaluation could be
explained by the lack of focus on its core businesses, misleading IR
communication, and lower allocation to shareholder returns than its peers.
Specifically, management needs to reallocate its R&D spending from
low-profit business areas such as the prescription drug business and
regenerative medicine business, towards its high-value, high market share
product lines, such as skin care products (e.g., Obagi, Melano CC, Hada Lab).
Despite having a +14% operating margin, outperforming the peer average of +6%,
Rohto's inadequate IR communication about its business portfolio and growth
story contributes to its significant relative undervaluation. Finally, Rohto's
total shareholder return ratio is just +22% vs peers +64%, leading the market
to perceive the company as having low awareness of increasing shareholder
value through the realisation of an optimal capital structure and appropriate
shareholder returns. Positively, corporate governance is improving, and with a
diverse Board in terms of experience, age, tenure and gender, we look forward
to engaging with the company with constructive suggestions to rectify the
undervaluation.

 

Rohto was the largest detractor over the month, detracting -52bps from AGT's
NAV, following a weak set of 1H results with operating profit coming in well
below consensus. While the top line grew steadily, the weak earnings was
reflective of management's continued lack of focus on the core business,
allocating resources to the non-core, low-margin regenerative medicine
segment. We intend to leverage our long track-record of active engagement to
form a constructive relationship with management, remedy the company's
failings and unlock substantial value for all shareholders.

 

Contributors / Detractors (in GBP)

 

 Largest Contributors   1- month contribution  % Weight

                        bps
 Apollo Global Mgmt.    105                    5.4
 News Corp              74                     8.9
 Chrysalis Investments  70                     6.0
 Partners Group PE      41                     5.5
 Harbourvest Global     38                     4.6

 

 Largest Detractors          1- month contribution  % Weight

                             bps
 Rohto Pharmaceutical        -52                    4.3
 Dai Nippon Printing         -36                    2.6
 FEMSA                       -21                    2.9
 SoftBank Group              -18                    5.5
 Oakley Capital Investments  -15                    5.3

 

 

Link Company Matters Limited

Corporate Secretary

 

13 December 2024

 

LEI: 213800QUODCLWWRVI968

 

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