Monthly Letter June 2018

June Sector Comments

Madrague had a good month in June: +1.01% which takes the year to date figure to +1.50%. Sectors of note in June:

Business Service: +0.5%

The biggest contributors were our long positions in Nobina and Jackpotjoy. Nobina has been in our portfolio for a couple of years now. In June the stock had big run into the quarterly figures, which made us sell the entire position ahead of earnings. The stock dropped more than 20% after the figures. There is always some luck when you manage to time an exit that well, but to a certain extent it was also a testament to our exit process: When a company reaches our target we sell the position and look for better value elsewhere. Jackpotjoy announced in June that the shares of the company will be moved from a standard listing to a premium listing on the London Stock Exchange. There is no fundamental change and our investment case has not changed because of the announcement. What is important though is that the company signals to the world that it will adhere to the more strict reporting rules of the Premium Listing. As a fairly small and, what we would categorize as an under researched company, it seemed to work as a catalyst for other investors. We still see material upside in the company although we have decreased our position somewhat due the move in share price.

Media: +0.5%

Not one of our biggest sectors, but it has been a steady contributor for quite some time. We wish that all our sectors performed the way Media did in June; 6 positions (long and short) and all contributed with positive returns. Biggest contributors were long positions in MTG and Schibsted together with our short position in Prosieben. MTG and Prosieben have been in our portfolio for more than 2 years now. The basic thesis is still the same: MTG is ahead of Prosieben when it comes to changing their business model to the new media landscape. MTG is also one of the few companies in the world where you can get a proper exposure to eSports without paying skyhigh valuation for it. The company has indicated they will split the company in two, in order to crystallize the value of the separate divisions (read the eSports division). When Goldman Sachs recently published a report on the world of eSports they named Activision, Nvidia, Electronic Arts, Amazon and Sony as the best investment ideas if you want to gain exposure to the world of eSports. However, these companies only gets a small part of their revenue from eSports, while MTGx will be one of the few pure play companies on this theme. On a global basis. For us old timers it is almost inconceivable that we would sit down in our sofa and watch somebody else play a video game. Well it is happening already. Netflix has produced a 20 minute long program explaining eSports. The viewing is now on par with large professional sports league (NFL, NBA, MLB and NHL). The prize pool is expected to grow 30% CAGR 2017-2022. The viewers are young and affluent which means they will be in charge of advertising money in the near future. All three of the mentioned positions were still in the portfolio as of the end of June.

Retail: +0.4%

Long positions in Anheuser Busch and Qliro coupled with our short position in Clas Ohlson were the biggest contributors. We commented on Clas Ohlson in our last monthly update so just want to mention that the company struggles with on line competition and that their cash flow probably won’t cover the expected dividends going forward. We hear arguments that Clas Ohlson is now trading with a dividend yield of 8% which is too high. It is too high, but it is not sustainable. Qliro is a small on line retailer. We believe it has a good platform, but they need scale. In June there were rumours surfacing that there are bidders around for one of their platforms, Nelly. The bidders would be traditional retailers lagging in their repositioning from bricks and mortar to online. Lindex, KappAhl, Ellos and Åhlens were among the rumoured buyers. We continue to hold our position in Qliro, ABI and Clas Ohlson.

Chemicals: +0.3%

We have had a lot of meetings in the sector lately. On a European trip we met with 8 of the biggest European chemicals companies and travelled to Oslo to meet with Elkem which is one of our biggest positions in the portfolio. Wacker Chemie has been hit hard on the news last months that China would stop subsidizing solar panels. We were very surprised to see how much the market penalized Wacker on the China news. Elkem also came down on the back of this even though the company almost has zero exposure to that segment. Elkem is in an absolute sweet spot at the moment with capacity shortage which will take at least 2 years to close. The fact that the price of silicone metals fell on the back of the China solar policy change is actually good news for Elkem. We continue to be long Elkem, entered into a long position in Wacker Chemie and shorted Akzo Nobel in June.

Shipping: -0.2%

We initiated a small position in Maersk in June. The shipping and terminal company is asset heavy and a price taker in a large part of their business divisions. The company is also heavily exposed to the business cycle which might be coming to an end soon. Some of the more early cyclical companies are already showing signs of investor hesitation of the cycle. If you want to add a little extra worry to get the equity valuation down in Maersk you just need to mention the possibility of a trade war (we know the first steps have already been taken). These are some of the reasons why the stock is down more than 40% since the peak last summer and is now trading on a 30% discount to the sum of the parts. There is value in the share price at this level, but we are very cognizant about the risks. We will be looking at the company from the long side in the near future.
We increased our gross exposure slightly from 152% to 155% in June. Our net exposure increased from 46% to 50%. 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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