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
Performance Total Return
This
investment management report relates to performance figures to 30
June 2024.
Total Return (£)
|
Month
|
Calendar Yr
to date
|
1Y
|
3Y
|
5Y
|
10Y
|
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 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
bps
|
% Weight
|
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
bps
|
% Weight
|
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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announcement.