MONTHLY LETTER APRIL 2019
Madrague performed well in April: +5.6%.
Sectors of note in April:
Long positions in Byggmax, Anheuser-Busch, Swatch and Zalando were among the top performers in our retail portfolio in April. On the short side both Ahold and Royal Unibrew produced a net positive contribution in an otherwise very strong equity market. The strong market and good performance gave us the opportunity to churn the portfolio a little bit. We sold out of our long positions in Swatch, Zalando and Cloetta. We also covered our shorts in Ahold and Royal Unibrew. All in all, a very good month for the Retail sector with excellent performance where a few of our investments reached intermediate targets which opened up for new positions. We kept our long position in Byggmax and Anheuser-Busch. Byggmax delivered a q1 report which was very close to consensus. Full year estimates for 2019 has come down c40% in the last 2 years and we believe there has been a lot of bad news priced into the share price. The company has been facing cost pressure from increased timber prices and a sluggish buildings materials market. Timber prices are now showing signs of stabilization and we believe the company’s restructuring program is starting to indicate a turnaround in operational performance.
Long positions in Ovzon and STM were the biggest positive contributors. On the negative side was our short position in SAP. We initiated our investment in Ovzon around the capital raise the company did in the beginning of the year. Ovzon has a revolutionary technique to deliver mobile broadband services via satellite. We met the company when it was IPO’d in late spring 2018. At that point we were a bit surprised that it was brought to the market with a clear need for capital to execute on the business plan. We kept the company on our radar screen with the intention to invest when the next capital raise was to come. The capital raise in January was a hard-fought victory for the company as it was heavily discounted and not very well covered. Our humble opinion is that a lot of investors were not aware of the cash needed for the next growth stage. Market cap is up more than 50% since the rights issue, but the implied probability of success is still very low. Ovzon plans to launch its first own satellite in 2020. A successful launch in 2020 should triple the current price of equity. The plan then is for another 2 satellites. We continue to hold the position and continue to see significant upside. Apart from that we covered our short in SAP and re-entered a short in Ericsson on elevated expectations regarding the financial benefits from US sanctions on Huawei.
This is one of our smallest sector verticals with only 3 positions and a gross exposure of 6% of assets under management. It is one of the sectors most exposed to the current trade dispute between the US and predominantly China, but expectations are that Europe and possibly Japan will be next on the auto front. Our long positions in Valeo and BMW clearly outperformed our short in Autoliv. We sold out of the BMW position and continue to be long Valeo vs. Autoliv. Valeo has halved in value since the trade war started at the same time as the earnings expectation for 2019 is halved. This could be the right thing to do from the market, but unless you believe the current environment will prevail and become the new normal there is definitely value in Valeo. Production assets are still there. Organisation intact and we would argue earnings power is not unencumbered but clearly higher than current expectations. There is of course an added complexity with the transition from fossil powered to electrically powered cars. Valeo however, should be well positioned though. Where we believe 3 out of their 4 business segments (Comfort & Driving, Thermal Systems and Visibility systems) should benefit from megatrends in the car industry.
Our long positions in Credit Suisse, Erste Bank and ING were the biggest contributors. On the negative side were short positions in HSBC, SHB and Nordea. We re-entered our long Credit Suisse position towards the end of last year, but it has been one of our favoured long positions since we started to see the results from Tidjane Thiam’s work as CEO. Costs in the investment banking division were down 11% between 2016 and 2018 while top line was down 8%. Working with declining revenue is not easy, but we do think it is a testament to the company’s discipline that it has managed a positive jaws (difference between change in top line vs. change in costs) in this type of environment. On a group level costs in 2019 are expected to be 13% below 2017 levels with revenues +2%. If the company meets those expectations it will be trading below 10 times earnings for a world class franchise. In our book this is a clear purchase. The additional upside from rising interest rates are not included. We exited our Erste position and decreased our net exposure in the sector from 6.6% of AuM to 2%.
Gross exposure was increased slightly from 188% to 191% in April. The increase in the gross exposure is entirely explained by the rally in the equity market as both long and short positions rose. We decreased the net exposure from 39% to 29%. Our option protection shows the same characteristics as always, i.e. a gap move down 5-10% and we would have zero net exposure to the equity markets.
As always, you are more than welcome to contact us should you have any comments or questions on our investments or the views expressed in this letter.
Chief Investment Officer