Portfolio Update

State of Play - 24 March 2023

Disclaimer: This is not investment advice. The author hold all of the stocks listed and discussed in the below article. He may sell or buy at any time. Please do not rely on the information provided, but do your own research.

It has been a while since I last gave a general portfolio update. Markets have been very eventful this year with a rapid January rally which I could not not make sense of and more recently, stress in the financial sector becoming apparent over the last three weeks. Given the obvious stress in some market segments (banks, real estate), while at the same time central banks are not done yet with their hiking cycle and a probable recession, I think that equity markets are holding up surprisingly well and rather on the expensive side. But then, I held that view for most of the last decade and markets overall performed well.

So it is probably best for me to focus on the company level and not care about macro too much and that is what I am trying to do. And yes, there are still find good and cheap businesses out there. Still, given the perceived expensiveness, I still keep more cash than I would like and also hold a share of the portfolio in special situations.

With that market comment out of the way - drumrolls…….

Here is the Portfolio Overview:

I recently gave an update on the special situations bucket, so will in this post focus on some of the other positions which are either new or where I have seen recent developments.

Millicom is not a new position and I wrote it up last summer. It was one of my biggest losers in 2022 but has recovered in this year after in January a PE group around Apollo and Marcelo Claure announced talks to take the company private. A few weeks later, French tycoon Xavier Niel announced an increased 20% stake in Millicom and there might be a bidding war brewing. As another catalyst, the company is still working on the spinoff of its telecom towers which might still happen later this year. The Millicom Sage has been covered well by the “Alwayinvert” Substack here and here. At this point, Millicom remains a core position for me.

As I write this, the news of the weekend is that TIM SA, a Polish distributor of electrical equipment, is on the become the largest position before being eliminated from the portfolio. On Friday evening, Germany’s Würth Group announced a tender offer for the shares at 50.69 PLN. Management is on board and I am pretty sure this deal will go through. TIM closed on Friday for around 38 PLN and my entry price is 31.26 PLN. While this is a nice outcome for a holding period of less than a year, I am sad to lose a profitable company with a good growth runway. I will look for replacements both in Poland and in the electrical equipment distribution sector, two attractive ponds two fish in my view.

Compagnie de l’Odet remais one of my favourite holdings. The complexly structured group controlled by Vincent Bolloré is flush with cash after the completion of the sale of its African Logistics business to MSC. Recently, the group not only announced strong 2022 results, but also a tender offer by Bolloré SA for 9.78% of its own shares . Odet will not sale any shares in the tender and see its shareholding in Bolloré increase. If thi goes through, it should be value accretive to Odet and would raise my estimate of an Odet SOTP value from about 3,700 to 4,100 EUR. Happy to exchange my calculation with fellow investors. Given further ways to create potential value within the group capital structure, I remain optimistic on my Odet holding.

Fairfax Financial is a position I wanted to upsize this January, yet prices ran away from my limit orders. I believe the company with its large cash positions remains in a good postion to benefit from raising rates. In insurance, they have strong underwriting credentials and I overall consider Prem Watsa to be a skilled capital allocator. I also consider FFH fairly defensive. They did well in 2008/9 and, in case of a more severe crisis, might strike some good deals.

Another position I would be willing to upsize in case of a price weakness is Delfi Ltd. The Singapore-listed company is the leading chocolate producer and distributor for the Indonesian market. After a few years of top line stagnation to to internal issues and Covid, Delfi grew revenues at 19% , achieved a 13% EBIT margin and 18% RoE last year and I believe thing will get better from here. Delfi is trading at 12x LTM Net Income and 7x LTM EV/EBIT, so still moderatel priced. Michael Fritzell of Asiancenturystocks knows a lot about Delfi.

On the new postions, Funkwerk and Ibersol are the two I managed to write up a bit more deeply. There are some other new positions worth mentioning.

Legal & General is British Insurance company and asset manager. The company is UK market leader in the interesting sector of Pension Risk Transfer (PRT), effectively managing, acquiring or insuring defined benefit plans which once were popular across corporate Britain. I consider this sector quite promising and do expect some growth here. L&G also provides traditional life insurance. It operates one of the coutry’s biggest asset managers, which, if set up correctly, should also be a profitable business. Since 2009, L&G operated at annual RoEs between 13 and 24%. Over the last 10 years, they roughly doubled its book value from 100p to 200p per share, while in total paying out 150p in dividends. The stock trades around 230p for a P/B of 1.x, P/E just above 6 and dividend yield >8%. Seems too cheap to me for profitable business with growth opportunities.

I also took a position in First Pacific, a Hong Kong listed holding company whose opcos mostly sit in Indonesia and the Phillippines. The enterprising and original Emerging Value Substack has a good intro on First Pacific. While I continue to have concerns about both China and HK, the underlying businesses are in different jursdictions and defensive sectors (food, telecom) and should have some structural growth. Given the holding structure, some screeners do not provide correct numbers on a consolidated, diluted, look-through basis. Based on their latest presentation, the co generated 6.17 USc in recurring net profit per share in H1 2022, which is 0.50 HKD. They paid 0.105 HKD in interim dividend. At the same time, the stock trades at 2.40 HKD. Unless you believe in expropriation, this seems…well…very cheap.

Lastminute.com was mentioned by Jeremy Raper, but also by the Turtles Substack. The business was hampered by Covid, then by a fraud scandal in which the founder was detained. The company as of Dec-2022, should have roughly half its market cap (260mm EUR) in net cash, they should also be able to generate 50mm EUR in EBITDA. Also, given the ongoing consolidation, a takeover by a larger player, as suggested by Jeremy Raper, might be in the cards.

Finally, I took a small position in United Mobility after reading a good post on it by ToffCap . UMDK is a german nano-cap (11mm EUR market cap), its price swings are often wild (I am already down 20%) and the business is somewhat obsure. Still, the post does a pretty good job in connecting the dots and shedding some light on the structure. The business seems to be genuinely profitable (Net Income of 4mm EUR in 2021 and 5mm EUR in 2022) and with some improvement in investor communication, there is a chance for this to take off.

This concludes my March portfolio update. I hope it provides a lot of food for thought for my readers and I would gladly discuss on the names mentioned. Also, any pushback is appreciated!