REG - AVI Global Trust PLC - Portfolio Update

AVI Global TrustAnnouncement

10/03/2025 17:15

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RNS Number : 0709A  AVI Global Trust PLC  10 March 2025

 

AVI GLOBAL TRUST PLC

 

Monthly Update

 

AVI Global Trust plc (the "Company") presents its Update, reporting
performance figures for the month ended 28 February 2025.

 

This Monthly Newsletter is available on the Company's website at:
AGT-FEBRUARY-2025.pdf
(https://www.assetvalueinvestors.com/content/uploads/2025/03/AGT-FEBRUARY-2025.pdf?mc_cid=f121c7ac6f&mc_eid=335e1499b3)

 

This investment management report relates to performance figures to 28
February 2025.

 

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

                           to date
 AGT NAV            -0.3%  0.4%         7.4%   32.2%  87.7%  165.8%
 MSCI ACWI          1.9%   2.2%         15.6%  38.5%  85.2%  193.4%
 MSCI ACWI ex US    0.1%   4.9%         10.2%  22.0%  46.0%  96.7%

 

Manager's Comment

 

AVI Global Trust's (AGT) NAV declined -0.3% in February.

 

Gerresheimer AG ("GXI") - a relatively new position in the portfolio which we
discuss below - was the top contributor over the month (+30bps), followed by
Tokyo Gas and Entain which added +23bps apiece. Rohto Pharmaceutical was the
most significant detractor (-64bps), with the shares declining -18% over the
month. The company remains undervalued relative to skincare peers, trading at
a forward EV/EBIT of 12x vs the 21x peer average, despite the business'
superior underlying quality and growth. We continue to engage with the
company, seeking to shift management's focus to the profitable skincare and
eye drops businesses, whilst enhancing capital efficiency and IR
communications. There was one other detractor of note, Symphony International
which detracted -23bps. Symphony is undergoing managed windup. As such, our
ultimate returns will depend on the prices at which it realises its
investments and the timeframe over which these realisations take place, rather
than its share price on the screen at any particular point in time.

 

Gerresheimer AG ("GXI")

 

In recent months we have built a position in Gerresheimer AG, a £2.3bn German
conglomerate that offers exposure to a leading player in the oligopolistic
pharmaceutical primary packaging market with high barriers to entry and
attractive growth prospects. These merits are not currently reflected in the
group's valuation, with the company trading at a steep discount to our
estimated NAV. We see multiple potential paths to improve the depressed
valuation and unlock value, with the company currently undertaking a strategic
review of its Moulded Glass division, as well as confirmed private equity
interest in the business.

 

The origins of the company date back to 1864, as a small glass factory in
Düsseldorf. Today the business is a leading player in both Containment
Solutions ("getting drugs to the patient"), such as vials and ampoules, and
Delivery Systems ("getting drugs into the patient"), such as syringes and
injector pens. Drug containment and delivery is an oligopolistic industry,
benefiting from significant barriers to entry. Switching costs are high (how
drugs are packaged and administered is mission critical but a low proportion
of total cost), whilst the strict regulatory environment and importance of
trust-based relationships entrench incumbents, as does the capital required to
build local manufacturing presence close to the customer.

 

The industry also offers attractive growth with the global injectable drug
container market expected to grow +9% p.a. from 2022 to 2026, underpinned by
the rise of biologics, GLP-1s (obesity drugs), and trends toward increased
drug complexity and high value solutions (e.g. Ready-To-Fill vials). As such,
companies operating within it are typically rewarded with attractive valuation
multiples (peers WestPharma, Stevanato and Schott Pharma trade at 30x/26x/18x
2025 EV/EBIT respectively).

 

The recent history of the company is defined by Dietmar Siemssen, who was
appointed CEO in 2018. Under his leadership, the business has been on a
strategic transformation, moving up the value chain, to focus on High Value
Solutions, and transitioning away from GXI's historic focus as a low-cost-high
volume supplier. This transition has involved a considerable capex build,
totalling c.14-18% of sales in recent years, resulting in negative free cash
flow.

 

Evidence would suggest that the strategy is bearing fruit. Organic growth -
which had been an anaemic +1.9% p.a. from 2013-18 - has accelerated, reaching
6.8% p.a. from 2018 to 2024 and management are now guiding for long-term
growth of +7-10% (inclusive of the dilutive Bormioli acquisition). The
business mix is shifting to higher margin solutions and capex payback periods
have been greatly reduced. Importantly, and of great strategic value, GXI have
now established deeper relationships with key pharma companies' and their
development pipelines - as is exemplified by their crucial role in GLP-1s.

 

This progress, however, is not reflected in the shares. When we initiated our
position in late 2024, the shares were some -40% below their 52-week high and
not all that much above the level when Dietmar was appointed CEO, back in
2018. The shares currently trade a 43% discount to our estimated NAV. With the
entire business trading at 7.5x 2025 EV/EBITDA, we estimate that the
Containment & Delivery business is trading at an implied single digit
multiple, once one adjusts for a reasonable valuation for the under
strategic-review Moulded Glass business. Whilst some discount is warranted,
this seems inordinately wide.

 

As we see it, there are several reasons for GXI's undervaluation. 1) a
significant conglomerate discount, where the lower-growth-higher-capital
intensity Moulded Glass business acts as a drag on valuation; 2) a lack of
credibility in communication with the market, as exemplified by the September
2024 profit warning and compounded by the current reporting structure; 3) weak
free cash flow given the multi-year capex spending cycle and scepticism about
the long-term cash generation of the business; 4) investor concerns about the
development of the GLP-1 market generally and Novo Nordisk's CagriSema
specifically and 5) increased leverage (3.8x) following the acquisition of
Bormioli.

 

In our assessment these problems are, by and large, internal and fixable.
Moreover, with the shares (then) trading at a >50% discount to our
estimated NAV, significant bad news was embedded in the price, and the market
appeared to be overlooking the potential for management to take sensible steps
to unlock value. In our view, the key here is the strategic review of the
Moulded Glass business, where an exit has the potential to improve the group
financial profile, ameliorate (part of) the conglomerate group discount and
reduce leverage.

 

Interestingly, we are not the only ones to notice the discounted valuation.
Two activists have declared stakes in excess of 5%, and in early February it
was confirmed GXI had received interest from private equity, and latterly
there have been press reports of industrial buyers also looking at the
business. Whilst our investment case was never predicated on a buyout, this
could accelerate the re-rating process. Alternatively, if a bid fails to
materialise, we see multiple other paths to a re-rating - most notably from
the aforementioned strategic review. We have been adding to the position over
the month such that GXI is a 4.4% weight, and we own a 2.2% stake in the
company across our funds. With attractive quality assets, a discounted
valuation and catalysts on the horizon, GXI has the ingredients for a
successful investment.

 

Reckitt

 

During the month we exited our position in Reckitt. It was a relatively short
and successful investment, generating an ROI/IRR of +17% and +26%, which
compares to an ROI of +14% and +7% for the MSCI AC World Index and FTSE 100
over that period.

 

As detailed in our June 2024
(https://www.assetvalueinvestors.com/content/uploads/2024/07/AGT-JUNE-2024.pdf)
writeup, the investment case was predicated on the low valuation at which the
company traded, extreme levels of investor pessimism and aversion, and the
growing pressure we felt management were under to unlock value. Indeed,
shortly after we initiated our position, management launched a sweeping
overhaul, with plans to exit the Essential Home business & Mead Johnson
and to boost margins. Combined with positive news flow on the NEC litigation,
this helped the shares re-rate from a c.40% discount to one in the low 20s.

 

From the current discount level, we view the risks as more balanced,
particularly with regard to operational complexity and dyssynergies of asset
sales, and a growing concern over the valuation at which Essential Home can be
monetised. As such we took the opportunity to exit the position. We believe
the investment demonstrates AVI's contrarian approach to investing in
companies undergoing structural and strategic change to unlock discounted
valuations.

 

Contributors / Detractors (in GBP)

 

 Largest Contributors             1- month contribution  % Weight

                                  bps
 Gerresheimer                     30                     4.4
 Tokyo Gas                        23                     3.0
 Cordiant Digital Infrastructure  23                     4.3
 Entain                           23                     4.0
 IAC                              23                     3.2

 

 Largest Detractors               1- month contribution  % Weight

                                  bps
 Rohto Pharmaceutical             -64                    3.3
 Symphony International Holdings  -23                    1.9
 D'Ieteren                        -19                    6.7
 Dai Nippon Printing              -12                    3.0
 Christian Dior                   -12                    2.9

 

 

MUFG Corporate Governance Limited

Corporate Secretary

 

10 March 2025

 

LEI: 213800QUODCLWWRVI968

 

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