SKAGEN Global Status Report July 2015

Transcription

1 SKAGEN Global Status Report July 2015

2 Summary July 2015 SKAGEN Global underperformed its benchmark by 1.0 % in July. The fund gained 0.7% while the benchmark MSCI All Country World Index gained 1.8% (both rounded to the nearest decimal and measured in EUR).* SKAGEN Global has returned 11.0% YTD (measured in EUR) which equates to 2.7% lower than the benchmark return. In July, Citigroup, Google, and AIG were the three best monthly contributors to absolute performance while Samsung Electronics, LG Corp, and Lundin Petroleum were the three main detractors. China Mobile was added as a new position and the fund also added to its existing positions in CK Hutchison Hld and Carlsberg. We exited Storebrand and OCI and trimmed the positions in Citigroup and TEVA after strong performance. SKAGEN Global s portfolio remains attractively valued both on an absolute and a relative basis. The fund s top-35 holdings trade at a weighted Price/Earnings (2015e) of 12.0x and a Price/Book of 1.2x vs. the index at 16.8x and 2.1x, respectively. Hence, the discount of the portfolio to the index is significant on both multiples. The weighted average upside to our price targets for the fund s top-35 holdings equals 33%. * Unless otherwise stated, all performance data in this report relates to class A units and is net of fees. 2

3 SKAGEN Global A results, July 2015 EUR, net of fees July YTD 1 Year 3 years 5 years 10 Years Since inception* SKAGEN Global A 0,7% 11,0% 9,9% 12,5% 11,3% 9,1% 15,1% MSCI AC World Index* 1,8% 13,7% 24,4% 16,9% 14,1% 6,6% 4,4% Excess return -1,0% -2,7% -14,5% -4,4% -2,8% 2,5% 10,8% Note: All returns beyond 12 months are annualised (geometric return) * Inception date: 7 August 1997 ** Benchmark index was MSCI World in NOK from 7 August 1997 to 31 December 2009 and MSCI All Country World Index from 1 January 2010 onwards 3

4 Annual performance since inception (%)* SKAGEN Global A has beaten its benchmark 14 out of 18 years Percent 135 SKAGEN Global A (EUR) MSCI AC World** (EUR) YTD 2015 Note: All figures in EUR, net of fees * Inception date: 7 August 1997 ** Benchmark index was MSCI World in NOK from 7 August 1997 to 31 December 1997 and MSCI All Country World Index from 1 January 2010 onwards 4

5 Markets in July in EUR (%) Denmark France USA (Nasdaq) Hungary Switzerland Belgium Netherlands Italy Finland Spain Austria United Kingdom USA (S&P 500) Germany Sweden India MSCI AC Index Japan SKAGEN Global A Norway Mexico Indonesia South Africa Poland Singapore Canada South Korea Turkey Hong Kong Russia MSCI EM Index Thailand Taiwan Brazil China (Local) China (Hong Kong)

6 Markets YTD in EUR (%) Denmark Hungary Japan Italy China (Local) Russia Switzerland France USA (Nasdaq) Netherlands Austria Belgium Hong Kong Germany Finland United Kingdom MSCI AC Index USA (S&P 500) Sweden India Norge Spain SKAGEN Global A South Korea South Africa Mexico MSCI EM Index China (Hong Kong) Taiwan Singapore Thailand Poland Canada Indonesia Turkey Brazil

7 Main contributors and detractors July 2015 Largest positive contributors Largest detractors Company NOK Millions Company NOK Millions Citigroup 224 2E+08 Samsung Electronics -174 Google 218 2E+08 LG Corp -67 AIG 145 1E+08 Lundin Petroleum -56 Teva Pharmaceutical 107 1E+08 Lenovo Group -55 NN Group 98 1E+08 Lundin Mining -50 Sanofi 91 9E+07 China Unicom Hong Kong -46 Microsoft 88 9E+07 Norsk Hydro -44 Philips 72 8E+07 EFG-Hermes -28 Roche Holding 66 7E+07 Autoliv -27 VimpelCom 61 7E+07 KazMunaiGas -22 Value Creation QTD (NOK MM): 1157 NB: Contribution to absolute return 7

8 Main contributors and detractors YTD 2015 Largest positive contributors Largest detractors Company NOK Millions Company NOK Millions AIG 440 # Samsung Electronics -175 Citigroup 423 # Norsk Hydro -168 Renault 289 # Afren -140 Nordea Bank 256 # Banrisul -122 Google 224 # Hyundai Motor -114 Sanofi 210 # KazMunaiGas -111 Roche Holding 191 # Global Telecom -84 China Unicom Hong Kong 186 # Lundin Mining -73 Cheung Kong Holdings 184 # Tata Motors -62 Volvo 156 # EFG-Hermes -61 Value Creation YTD (NOK MM): 3803 NB: Contribution to absolute return 8

9 Holdings increased and decreased during July 2015 Key buys in July As the spread between Samsung Electronics ordinary shares and the company s preference shares has narrowed, we have moved some of our position into the highly liquid ordinary shares. China Mobile was added as a new position in July. The liquidity driven panic sell-off in Chinese stocks enabled us to buy a solid (62bn USD in net cash), steady growing company, in a consolidated industry, at a Russian peer valuation. Further in-house analysis of CK Hutchison Holdings infrastructure assets has increased our conviction in the name. We took advantage of the liquidity driven panic sell-off in Hong Kong to add to our position. News over the past months has increased our conviction in Carlsberg s willingness to reduce costs. Renewed increases in Russian risk premiums enabled us to increase our position at attractive levels. Key sells in July As the spread between Samsung Electronics pref. shares and the company s ordinary shares has narrowed, we have moved some of our funds out of the less liquid preference shares and into the highly liquid ordinary shares. The Korean solar company, OCI, was sold out after an impressive run this year. OCI is a highly cyclical business, and after the strong share price performance, the riskreward now seems well balanced. As the strong result in Citigroup has not changed our fundamental target price, we reduced the position on back of the strong share price performance. We reduced our position in TEVA due to strong share price performance following the acquisition of Allergan s generics division in late July. Storebrand was sold out in July. While management is taking the right actions, Storebrand s fortune (share price) remains closely linked with the Norwegian interest rate curve. After the recent rally, we see the risk-reward as being more balanced and no longer tilted in our favor by a large margin. 9

10 Most important changes Q Holdings increased Holdings reduced Q1 General Electric Lundin Petroleum Columbia Property Trust AIG (New) (New) (New) Q1 Renault Baker Hughes Gazprom Yamaha Motor Weatherford Petrobras Mosaic UIE Renewable Energy Corp Afren Akzo Nobel Samsung Electronics Technip Toyota Industries Unilever Raiffeisen Bank Gap Talanx 10

11 Most important changes Q Holdings increased Holdings reduced Q2 Tyson Foods Sabanci Holding Cheung Kong Property Hld* Google Cheung Kong Hutchison Hld Hyundai Motor (New) (New) (New) Q2 Technip Talanx Raiffeisen Bank Cheung Kong Property Hld* Citigroup AIG Lenovo Group Volvo China Unicom Comcast Tyco International Samsung Electronics * Spin-off from Cheung Kong Hutchison Hld 11

12 Most important changes July 2015 Holdings increased Holdings reduced July Storebrand July China Mobile Samsung Electronics (Ord) CK Hutchison Carlsberg (New) OCI Samsung Electronics (pref) Citigroup Teva Pharmaceutical 12

13 Largest holdings in SKAGEN Global as of 31 July 2015 Holding Price P/E P/E P/BV Price size, % 2015e 2016e last target CITIGROUP 6,4 58,5 10,4 9,8 0,9 75 SAMSUNG ELECTRONICS 5, ,4 6,0 0, AIG 5,6 64,1 13,0 11,5 0,8 90 GENERAL ELECTRIC 4,8 26,1 20,0 16,9 2,4 34 NORDEA 3,5 107,5 12,4 12,5 1,5 150 ROCHE 3,2 279,1 19,8 18,2 13,9 380 STATE BANK OF INDIA 2,7 270,1 10,0 8,2 1,2 400 GOOGLE 2,7 625,6 21,7 18,8 3,8 600 MICROSOFT 2,7 46,7 17,6 15,3 4,7 58 LG CORP 2, ,0 9,0 0, Weighted top 10 39,9 11,6 10,6 1,2 35 % Weighted top 35 81,0 12,0 10,8 1,2 33 % MSCI AC World 16,8 15,0 2,1 13

14 Sector and geographical distribution vs index (July 2015) Sector distribution 3 Energy 76 Geographical distribution 3 Asia DM 10 Fund Index Materials Asia EM 7 19 Industrials Europe DM ex. The Nordics Consumer discretionary Europe EM 2 1 Consumer staples 4 10 Frontier Markets 2 0 Health 7 13 Latin America 0 1 Banking & Finance Middle East & Africa 1 1 IT North America Telecom 5 4 Oceania 0 2 Utilities Cash The Nordics Cash

15 Key earnings releases and corporate news, July 2015 Citigroup (6.4%) Clean up of costs and underperforming assets continues Summary: Overall revenues were down marginally YoY driven by a continued reduction of the bad bank (assets in Citi Holdings were down 20% YoY). With reduced operating costs (-7%) and lower credit cost (-2%), pretax earnings were up 10% YoY. Citi Holdings was once again profitable this quarter. The bank utilized 1bn USD of deferred tax assets (DTA) in the quarter. With earnings up, assets down (particular the capital expensive assets in Citi Holdings) and consumption of DTA, Tier 1 capital ratio increased to 11.4% from 11.1% last quarter. The leverage ratio increased from 6.4% to 6.7% and tangible book grew to 59.2 USD per share. Investment case implications: The quarter showed the underlying improvement we are looking for: i) stable revenues in Citicorp on ii) a lower costs- and iii) reduced asset base, combined with iv) consumption of DTA. All of these support our case for significant generation of free cash flow over the coming years. With Citi now allowed to return cash to shareholders, we think the market should start to realize that you buy an underlying growing free cash flow stream at a very attractive starting yield. On 2015e earnings, the stock trades at a 10% earnings yield but a 12%+ free cash flow to equity yield. GE (4.8%) GE execution on track in Q2 Summary: Industrial division s 2015 EPS lower range increased from $1.10 to $1.13. Gross margin expansion continues, up by 60 bps to 26.6% YoY as cost efficiency more than offsets negative mix. Industrial operating profit +5% (+11% organic) on flat revenues. Industrial segment order book +13% YoY where especially Aviation and Power & Water contributed strongly although Oil & Gas orders down 11 (vs +2% in Q1). Backlog is a whopping $272 bn, up high single digits. GE has provided the European Commission with a list of concessions to get the Alstom deal through. Decision now expected by mid-september. Investment case implications: Neutral. Business is ticking along OK even though the environment for US industrial multinationals is not easy (FX, energy, China). Gross margin expansion slow but steady is a good sign as the new CFO (who also acts like COO) has instilled a relentless focus on cost and cash flow. Cash flow in Q1 was surprisingly weak (due to temporary issues as per GE), so the pick-up in Q2 is helpful. The $200 billion garage sale of GE Capital assets is on-track and we expect further announcements down the road. 15

16 Key earnings releases and corporate news, July 2015 Samsung (5.7%) Strong semiconductor earnings offset by weaker mobile earnings Summary: Samsung reported mixed figures for 2Q The Semiconductor division continued to perform exceptionally well, with growing revenues and improving margins translating into more than 80% operating profit growth. Samsung was able to reduce cost at a faster pace than competitors due to its technological leadership. Operating profit in the mobile division was flat QoQ but down 37% from historically high levels last year, due to tougher competitive pressure. The display division saw sales increasing 5% YoY on unchanged operating margins due to strength in large LCD panels. Consumer Electronic operating margins turned back to positive territory due to strong high-end TV demand from North America. Investment case implications: In terms of the fundamental value of Samsung, the semiconductor division is more important than the mobile division. Thus, it was very positive to see Samsung continuing its strength in Semi and expanding its technological cost-leadership. The stock remains very attractively priced at a PE below 7x (pref. shares) despite a significant net cash position. Nordea (3.5%) Higher risk weights mitigate good operational performance in Q2 for the Nordic dividend machine Summary: Good operational results with net income margin up 2% vs. Q1, loan losses of 12 bps (lowest level since Q3 2008) and fee income margin up QoQ from 39 bps to 41 bps. Overall, net profit came in 9% ahead of consensus at EUR 952 mn. ROE at 13% and 47% cost income ratio. Nordea has received notice from the Swedish regulator that risk weighted asset requirements are likely to rise across the industry. In anticipation of the higher capital requirements Nordea has made a EUR 4.6 bn (50 bps) reservation. CET1 capital ratio at 16.0%. Finally, the bank has begun reviewing the set-up of its legal structure across the Nordics. Investment case implications: Neutral. When the regulator demands higher risk weights, a prudently-run bank immediately complies with the requirements and then moves on. Nordea s EUR 4.6 bn reservation shows that the bank understands the importance of staying on good terms with the regulator. Comments on the conference call could be interpreted as additional reservations may be needed, but we think they are likely to be less material. At risk of stating the obvious, the Q2 reservation is, on the margin, negative for distributions to shareholders. While this is a slight hiccough in light of the message at the recent capital market day, we don t think that anything has changed in the underlying business case other than the velocity (and near-term quantum) of dividends. Operationally, the bank has managed the environment relatively well given the inescapable headwinds from negative rates. Nordea s diversification in terms of geographical footprint and operational areas contributes to the robustness. The course charted by Nordea s Chairman Nalle Wahlroos looks attractive. We are happy to be passengers on the ship heading down this path as our interests are well aligned with that of the main shareholder. 6% dividend yield, 12.8x 2015 P/E, 1.6x P/B for 13-14% ROE with limited volatility still looks attractive in a global context. 16

17 Key earnings releases and corporate news, July 2015 Google (2.7%) Lower than expected costs, lower CAPEX, and no signs of slowdown in Google's search business Summary: Google reported much better than expected 2Q 2015 results. The core sites business (mainly Search but increasingly also YouTube) grew 21% YoY ex fx, and thus showing no signs of deceleration. OPEX grew in-line with revenues as hiring slowed down significantly from last year (hiring down 30% YoY). Capital intensity continued to drop with CAPEX to sales at 18% (down from 25% in 4Q 2014 and 21% last quarter, but it is still high in a historical context). Google had some interesting comments on YouTube: Growth in watch time on YouTube has accelerated and is now up over 60% year-over-year, the fastest growth rate we've seen in 2 years. Mobile watch time has more than doubled from a year ago" "On mobile alone, YouTube reaches more 18-to-49 -year-olds in the U.S. than any U.S. cable networks" "Once users are in YouTube, they are spending more time per session watching videos. On mobile, the average viewing session is now more than 40 minutes, up more than 50% year-over-year" Investment case implications: The quarter showed progress in all key aspects of our investment thesis and the stock was up more than 20% in July. Our investment thesis is based on three key differentiated views. i) Sites (Search and YouTube) is not a mature business ii) Current high capital intensity is temporary and will come down iii) OPEX will not continue to grow faster than revenues, as Google s main businesses are highly scalable. Roche (3.2%) 1H 2015 looks to be on track, despite strong CHF Summary: : The Swiss cancer drug giant Roche reported slightly better than expected 1H figures. In Pharmaceuticals sales increased 5% driven by the company s large core cancer products Avastin (+9%) is now used to treat seven different types of cancer. In the Diagnostics division, sales increased 7%, driven primarily by immunodiagnostic products. Investment case implications: Small positive. The cancer fighting franchise continues to deliver solid and steady growth despite the strong CHF (15% of cost base is in Switzerland). Thus, we still see the we see the name as a core holding with nearly 40% upside. 17

18 The 10 largest companies in SKAGEN Global Citi is a US financial conglomerate with operations in more than 100 countries worldwide. The bank was bailed out by the US government during the credit crisis and subsequently raised USD 50bn of new capital. Consists of two units: Citi Holdings which is a vehicle for assets that are to be run down and sold and Citi Corp which is the core of the going concern business. In Citicorp 60% of revenues are derived from outside the US - mainly from emerging markets.. Samsung Electronics is one of the world's largest producers of consumer electronics. The company is global #1 in mobile phones and smartphones, the world's largest in TV and a global #1 in memory chips. Samsung also produces domestic appliances, cameras, printers, PCs and air conditioners AIG is an international insurance company serving commercial, institutional and individual customers. The company provides property-casualty insurance, life insurance and retirement services. AIG was at the very centre of the financial crisis as the central bank for mortgage insurance it was bailed out in a USD 180bn bail out. The company has two core insurance holdings: Sun America and Chartis that it intends to keep.. Founded in 1892 by Thomas Edison et al., General Electric (GE) operates two divisions (GE Industrial, GE Capital) contributing approximately the same portion of group earnings. GE is the world s 10 th largest publicly-traded company and boasts the 6 th most valuable brand. The industrial segment is a play on global infrastructure with a high-margin service business and a large installed base producing a wide variety of capital goods ranging from aircraft engines and power turbines to medical imaging equipment and state-of-the-art locomotives. Nordea holds pole position in the Nordics with 11.2m retail costumers and 625,000 corporate clients. Nordea is the largest Nordic asset manager/wealth manager with EUR 224bn in AuM (EUR 138bn in managed funds). It is the most diversified among its Nordic peers. Total loans are EUR 346bn with the following split: Finland 27%, Sweden 26%, Denmark 24%, Norway 18%, and Baltics/Poland/Russia 5%. 18

19 The 10 largest companies in SKAGEN Global (cont.) Microsoft is the world s largest software company and delivers software to a number of applications from PCs to servers and cell phones its most famous product is Windows and the affiliated Office Software Suite. In recent years the company has also diversified into video game consoles, ERP systems, internet search and cloud-based computing. Despite a strong push for diversification 80% of the company s revenues and nearly all its profits come from three main areas: Windows OS, Windows Server and the business division (Office Suite). Roche is a leading pharmaceuticals and diagnostics company based in Switzerland. Half of group sales and 2/3 of EBIT is derived from the company s Big 3 oncology franchises: HER2 (breast cancer), Avastin (colorectal cancer), and MabThera/Rituxan/Gazyva (blood cancer), each about USD 7bn of revenue. These businesses all come from Genentech, in which Roche has been a majority owner since 1990, and bought the last 46% in LG Corp is the third largest conglomerate in Korea. It is a holding company which operates a number of listed subsidiaries: LG Chem (basic chemicals but it is also a leading manufacturer of batteries), LG Electronics (consumer electronics and home appliances), LG Uplus (wireless telecom services), and LG Household & Health (households and personal care products). The company also operates a number of unlisted companies. Google is the world leader in internet search through Google.com. The core business model of Google is built around its ability to generate advertising revenues from its own web-sites as well as partner web-sites. Aside from Google Search, the company possesses a number of world leading online properties (YouTube, Gmail, Google maps), browser (Google Chrome), operating systems for PC (Chrome), Mobile (Android) and Pads (Honeycomb), along with venture-like efforts in Music, Mobile Payment, TV, Healthcare, Fiber and Driverless cars. Most of Google businesses are not properly monetized yet. State Bank of India is the largest bank in India with a 22% market share. It has an unrivaled pan-india branch network and a very strong deposit franchise. The bank also has a sizeable overseas presence (15% of loan book). Aside from its core banking operation, the company is also involved in life insurance, asset management, credit cards, and capital markets. 19

20 China Mobile (941 HK) HKD Mean reversion Special situation Long term value builder 50% 25% 25% History and description of business China mobile is the leading mobile operator in China with more than 800 million subscribers. After losing out in 3G, the company is aggressively rolling out its 4G network. Business model and rationale for investment The crash in the Chinese stock market has enabled us to buy a solid, steady growing company, in a consolidated industry, at an attractive price. Given the low valuation, an exceptionally strong balance sheet combined with an attractive dividend yield, we think the fundamental downside risk is minimal the stock is already trading on par with Russian telecom companies. Triggers: Normalisation of excessive Chinese risk premium Migration to 4G will drive continued earnings and cash flow growth Increased dividend pay-out will lead to a revaluation of the stock Establishment of tower company leading to a more efficient use of CAPEX and improving FCF Risks Excessive competition, corporate governance, regulation Target price Our base case target is 110 HKD per share, which is 5x 2017 EBITDA Our bear case target is 85 HKD per share, which assumes EBITDA in 2017 is equal to the level in 2015 and the stock trades at Russian peer multiples of 4x. Our bull case target is 125 HKD per share, which is our base case 2017 EBITDA but using a GEM telco peer valuation of 6x EBITDA Key figures: Market cap USD 238bn Net debt (cash) USD (62 bn) No. of shares 20bn P/E x P/E x EV/EBITDA 15 4x P/BV trailing 1.6x ROE 15 13% Yield 3.2% Daily turnover USD 223m No of analysts 38 with sell/hold 37% Owners Chinese government 73% 20

21 For more information please visit: Our latest Market report Information on SKAGEN Global A on our web pages Unless otherwise stated, performance data relates to class A units and is net of fees. Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager s skill, the fund s risk profile and subscription and management fees. The return may become negative as a result of negative price developments. SKAGEN seeks to the best of its ability to ensure that all information given in this report is correct. However, it makes reservations regarding possible errors and omissions. Statements in the report reflect the portfolio managers viewpoint at a given time, and this viewpoint may be changed without notice. The report should not be perceived as an offer or recommendation to buy or sell financial instruments. SKAGEN does not assume responsibility for direct or indirect loss or expenses incurred through use or understanding of the report. Employees of SKAGEN AS may be owners of securities issued by companies that are either referred to in this report or are part of the fund's portfolio.