Monthly Letter February 2018

Madrague had a poor month in February: -2.36%. Sectors of note in February:

Retail: +0.6%

Our long position in Oriflame and our short position in Matas were the main drivers of positive return.
Oriflame has been a core position for us for quite some time now as the faithful reader of our monthly letters already knows. The company has delivered very solid results for a couple of years. A few hiccups with Russian tax authorities during this period has to be mentioned, but that has not been operational issues. In February the company released q4 figures that beat market expectations. The ongoing shift in their regional exposure where China is becoming an ever increasing share of sales has a material impact on the group margin. We estimate the gross margin in China to be c80% vs the group margin at c74%. As the regional shift continues we believe there is scope for margin increase on the group level. Matas on the other hand is in the other side of the retail spectrum. The company retails cosmetics in bricks and mortar stores. The concentration of shops is absolutely astounding: 274 stores in Denmark. That equates to 1 store for every 18000 Dane including children and pensioners. The company was IPO’d in 2013 and has had a rather rocky ride since the listing. At the time of listing most investors (including Madrague) was worried about online competition. Strangely enough it proved that the toughest competitor so far has turned out to be another retailer with physical stores, the chain Normal. This will most likely change in the near future as cosmetics is perfectly suited for online retailing. The company is experiencing tougher competition and it is showing in top line and margins. As the company is quite levered (net debt to ebitda 2.7 times for 2018) we believe the dividend is at risk and the yield story is over. Both positions are still in the portfolio.

Auto: +0.3%

Short positions in Cummins and Valeo were the main positive contributors. Towards the end of the month
Valeo reported q4 2017 numbers that were a real disappointment. The company has been very stable and
a bit of a darling in the auto sector trading at c13 times 2018 earnings expectations. The report resulted
in a downgrade of earning of c10% for the full year 2018. With free cash flow at c 1.9% for 2017, limited
operational leverage despite organic growth of 7% and the fact that their capitalization of R&D is starting to hurt them. Good for earnings when you capitalize but less good when you amortize, non-cash of course but the market sometimes tend to like/get fooled by these accounting tricks.

Construction: +0.1%

A few short comments on this sector as well even though the performance was very close to flat. Our
overall sector position is one of our larger gross exposures (c18%) with very limited net exposure (c2%).
Our biggest position is long in Skanska the Swedish construction company. We entered this after the profit warning in January. This is a value case that has had a hiccup operationally combined with poor sentiment to anything property/building related. On the short side our most interesting case is Citycon. The company manages retail properties, malls etc. and is at risk due to the ongoing shift in consumer behaviour (i.e. online). A revamp of the malls would be very costly but might be necessary.

Telecom: -0.9%

After a good month in January the sector gave back more than those gains in February. Main culprits were Hellenic Telecom and Veon. Both positions have been in our portfolio for a few years. They have materially different performance though. Hellenic has been delivering good results and continued improvements throughout the Greek crisis. After a good run in February the stock gave back some of the gains from January. We did not alter our position as we still view the company as materially undervalued. Veon is quite a different case. We have been struggling with the investment for many years now and it has turned out to be a real value trap up to this point. In February they released their q4 2017 figures. The numbers were a real disappointment and consensus earnings for 2018 has been reduced by c22% since the report and guidance was announced. We continue to hold the position as we see value at this level.

Media: -0.9%

Long position in Schibsted and short position in TDC we the biggest drag on performance. Schibsted reported their q4 2017 numbers which were more or less in line with expectations and revisions of the expected 2018 numbers were negligible. The stock was still down 15% in February. We believe it could be attributed to rumours of increased competition coupled with ongoing talk of Amazon and Facebook attacking this vertical. We are of the opinion that Schibsted market position in online classifieds is very strong and that it would be very costly for anyone attacking it even if the presumed predators have very deep pockets. In February TDC and MTG announced a merger which would include all MTG assets apart from the e-sports. We have had a long position in MTG for quite some time and the thesis has been that the e-sport business is undervalued and a rare asset even on a global basis. We bought more MTG and shorted the number of TDC shares that would leave us long the remaining e-sport assets in MTG. The deal was exactly what we had hoped, but was ruined by Danish pension funds that had teamed up with Macquarie and made a cash bid for TDC instead. It is strange bid as it is purely financial with, as we understand it, no strategic agenda for the company. We covered our short in TDC in the first hour of trading when the rumour broke. This was very fortunate as the bid was 20% higher than our purchase price. A bitter loss that could have been a lot worse. We are back to being long MTG with no position in TDC. We decreased our gross exposure slightly from 171% to 168% in February while we increased our net exposure from 26% to 39%. 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.

Lars Frånstedt
Chief Investment Officer

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