Portfolio Update

Disclaimer: Nothing in this post is investment advice. The author owns all the securities listed in the table below. His views may be biased, he may buy or sell any security mentioned atany time. The information posted is not to be relied upon. Please do your own research.

Over the last few weeks, I have not posted but nevertheless been active in the market and made some changes to the portfolio. I used the earnings season to read company reports, reassess position and research ideas. This is a summary post to decribe my activity and the thinking behind them rather. I will only touch upon each position briefly rather provide an in-depth write-up of a single idea. Normally, I would prefer to give these summaries quarterly at most and have a slower pace of portfolio turnover. I expect this post to be followed by more in-depth write-up of some of the newer positions.

I consider myself a steady, even somewhat stoic person and more an investor than a trader, so the activity feels a bit unusual. However, the Augustusville portfolio is still in the ramp-up phase which I expect to last another six months or so and which makes changes to the portfolio more frequent as I try, err and adjust and get the money to work in new ideas. As usual, all feedback is appreciated and all the data is as of 27 August 2022 (i.e. after the “Powell Dip Friday”).

The current portfolio is here:

There is a number of changes compared to my portfolio update per 30 June 2022 and I will spend the remainder of this post to explain the position changes, bucket-by-bucket. Also, at the time of writing, the portfolio performance in EUR since inception in early April 2022 stands at -0.2%, which includes some currency tailwind.

I am still struggling on how to define the categories in my portfolio. The special situation part is quite clear but the line between “Core” and “Speculative” may be a bit blurred. “Core” positions generally tend to reveal more conviction, a potentially more established and more mature business model and longer holding-period. “Speculative” positions may turn into “core”positions as my conviction grows. Also, core positions tend to have a higher weighing in the portfolio. With that, let’s jump in:

“Core Bucket”:

My core bucket has been pretty stable. Within the existing positions, I have not sold a single share but added selectively upon weakness (mostly in TIM and Admiral but also in ODET and Fairfax). 1H results in these positions have been decent and I also wrote most of them up on the substack (see here for Odet & Fairfax, Fuchs, TIM, DFIN and TIGO). Overall, these companies have performed in-line with my expectations so far. DFIN has been a bright spot, showing very resilient results despite slower capital markets activity, showing strong cash flow and recently increasing their buyback program.

Admiral’s results suffered as expected from the difficult environment in P&C insurance in general and UK motor in particular, yet results have been stronger than their competitors and I am confident the company as lean and efficient player may in the longer term benefit from this difficult market phase. For more thoughts on Admiral, Valueandopportunity is a great source.

The one, so far small addition which I am looking to accumulate further is in Sixt Pref shares. Sixt of Munich is one of the leading car-rental businesses globally. It is not just famous for its marketing campaigns featuring famous politicians (example below), has also been a long-term compounder which has grown roughly grown revenues by 2x, gross profit and book value per share by 3x and operating profit by 4x since 2021. The balance sheet looks solid and while there is some cyclicality in the business, I expect continuous high capital returns for Sixt. It is still controlled by the founding Sixt family and has one of the biggest pref-to-common discounts in the German market (common trades at 100 €, pref at 60€ as of writing). At the peak of the Covid crisis, this pref share test lows at around 30 € before climbing above 90 and falling back. If the economic situation becomes more dire, Sixt may suffer and I am looking to accumulate at lower prices. I may also do a write-up on Sixt.

There is one former “core” company which is no more part of the portfolio, Thryv. After digesting the company’s Q2 report, I was not that sure of the thesis anymore. While the numbers on marketing services were decent and this melting ice cube keeps generating cash for the time being, the buildout of the Saas appeared more challenging the more I looked at it. Customer acquisition is not trivial and while winning yellow-page clients is possible, itis not a given. Also, there is some competition in this space and I just do not know if Thryv will win here - they might, or they might not. I parted with my position and realized a small gain here.

Special Situations:

The performance of the portfolio would be much better if I had never heard of (or never touched after hearing of) Bausch Health (BHC). BHC, formerly aka Valeant, is a debt-laden company which recently separated and IPO’d 10% of its crown jewel, Bausch & Lomb (BLCO). The company was looking to spin most of remainder of BLCO to its shareholder and BHC traded at a discount to my estimate of its share in BLCO. Yet, BHC is also heavily indebted and will need to repay some of its debt before completing the spin. This was supposed to be achieved with cash flows from its pharmaceuticals business, Salix which is mostly driven by one drug, Xifaxan. Recently, the company was dealt a blow by an unexpected court decision which may pave the way to an accelerated appearance of a generic competitor to Xifaxan. If this happens, the entire spin logic is in jeopardy and the company may even face a bankruptcy scneario given the enormous amount of debt on its balance sheet. There are more friendly scnearios, but I am not inclined to play here any further. I have to become more disciplined when it comes to vulnerable balance sheets and my ~60% loss in BHC will remind me of this. I am moving on from here.

Another blow to the portfolio has been ALJ Regional’s announcement to delist from NASDAQ and move to the pink sheets. The company has net current assets of 128mm USD in cash, 64mm USD in total liabilities plus other assets (incl. current assets such as receivables) yet trades at 58mm USD market cap. By any normal standards, they should distribute their cash through dividends or buybacks, yet management, ledby a CEO with a mixed reputation is playing games. Not sure how this will end and it could indeed be a long wait, but I am not inclined to sell my position here but will rather wait and see.

Not all has been doom & gloom in special situations.

The merger arb in Tufin Software (TUFN) played out as expected and the deal closed last week with Augustusville picking up a few pennies in front of the proverbial steamroller. Also, I had a little position in Industrias Bachoco (IBA) which I was pointed to by reader/fwllow author Lollapalooza and which I opened at around 41 USD and closed at 47 USD. Thank you,Lollapalooza, beers are on me. Also, I remain optimistic on the merger arb situations in Citrix (CTXS) and Bluerock Residential Growth (BRG) which I expect to close during September/October.

The acquisition of Swedish Match (SWMA) by Phillip Morris International has received a lot of attention. I mentioned John Hempton’s opposition to the deal before here but the stakes were raised when Elliott Management entered the game . Given that PMI needs 90% of shareholders to tender their shares and almost nobody has tendered so far, I think it is pretty safe to assume the deal will not go through as announced (106 SEK/share). Either there will be a price hike or the deal will fail, potentially with a second try later on. I am currently working to better understand the business of Swedish Match and their perspectives as a stand-alone. If I become more comfortable, I may increase the position and my also consider it as “Core” at some point. If the deals fails, I would initially expect for the stock to drop as arbs are driven out whicht might be an opportunity if the business is convincing.

There is more interesting stuff going on in event-land. I decided to ride on the coattails of Valueandopportunity for his Exmar (EXM) idea and of Clarkstreetvalue for LMP Automotive (LMPX). It is great that such quality content gets shared for free, thank you very much.

Finally, the Twitter (TWTR) saga is dragging on with court hearings in Delaware now expected for October . Twitter gets covered very well by Yetanothervalueblog and there is a number of podcasts on Twitter. I stick with my position here.

Speculative Bucket:

Most of my new positions sit in the speculative bucket. Out of the seven positions, I have shared thoughts on Hostelworld (HSW) before. My thinking is prettymuch unchanged as I still like the company and its perspectives, yet at current prices, I would like to see more execution before buying more shares.

I am also planning to produce write-ups on some of the additions.

Geographically, they are an interesting mixture or more exotic emerging markets and very close to home. Generally, also given the currency, I tend to find US businesses slightly less attractive than before and have looked at other markets.

Delfi (P34) is a company I have watched for some time. The Singapore-listed company is the biggest supplier of chocolate products to Indonesia, an emerging country with a giant potential and (some may be surpirsed) the fourth largest population in the world. Delfi’s business model over the last few years has somewhat shifted. They used to be vertically integrated, i.e. doing everything from cocoa processing to product branding themselves have shed some of the early parts of the supply chain to become more of a branded FMCG company. Also, the tackled the Phillippines market (#13 by world population). The business suffered from Covid and it is no Lindt&Sprüngli at this point, but the performance has improved and the performance in H1 2022 has been strong .

Texhong (2678) feels even more like a contrarian play than Delfi. The company is listed in one of the world’s most unpopular markets, Hong Kong and is in the sexy business of textile production. I am sceptical of the Chineses/HK market due to property rights and lack of trust in management in many cases. And while I would not bet my house on Texhong, the setup looks pretty good. The business is led by the founder who is heavily invested and makes more in dividends than salary. They are internationally diversified and have even mentioned the idea of spinning off parts of their (non-Chinese) business. Texhong pays double-digit dividend yields and has generated great returns on capital. I think this one is worth a worth a wager just like…

My next position, RCS Mediagroup. Speaking of contrarian geographies, how about Italy? As the energy crisis makes some investors write off Europe as a whole, Italy is also - again - facing political instabiliy with elections around the corner and a right-wing populist government at the doorstep. What could be greater than investing in a dead industry (media) in such a country. RCS owns the biggest newspaper (Corriere della Sera) and the biggest sports daily (Gazzetta dello Sport) in the country. It organizes the Giro d’Italia and owns some interesting titles in Spain aswell (notably El Pais). Revenues are more and more digital, the company has shed more than half of ites net debt in the last five years and generates consistent double-digit returns on capital. It trades at 5xEBIT, 3.5x EBITDA, a 20%+ Free Cash Flow Yield and a 8% dividend yield. Again, I could not resist.

Finally, two positions that play to my home bias (Rhine area in the West of Germany). Invison (IVX) of Düsseldorf is a software company focused on software for workforce management in companies like call centers. They caught my eye as the largest position of TGV Rubicon, in my view an astute investor in Germany’s software companies. In recent years, the company has invested to develop its SaaS product injixo and came out with a plan to grow its revenues to 50mm EUR and an EBIT margin of 25% by 2025. They are incurring losses in 2022 and probably in 2023 as they ramp up their sales and explcitly mention a potential need for more equity - so this may get cheaper on the way.

Finally, Doccheck AG of Köln which was formerly known as antwerpes ag. This company started as a marketing agency focused on pharmaceuticals. They have leveraged their sales network into doctors to create a platform which medical professionals can use for knowledge sharing and gathering. Also, they added an online shop for pharma products and other medical supplies (exclusively for doctors) which was very successful during Covid. The share was a clear Covid beneficiary but has come down a lot. For now, this is a small starter position as I need to scuttlebutt some doctors I know about the product. Also, I still have question marks on capital allocation.

So much for now - any feedback is highly appreciated in particular if you think I get something wrong or have some new ideas.