SKAGEN Global Status Report September 2015

Transcription

1 SKAGEN Global Status Report September 2015

2 Summary September 2015 SKAGEN Global underperformed its benchmark by 0.5% in September. The fund lost 5.4% while the benchmark MSCI All Country World Index fell by 4.9% (both rounded to the nearest decimal and measured in SEK).* SKAGEN Global has returned -4.2% YTD (measured in SEK) which equates to 3.5% lower than the benchmark return. In September, Samsung Electronics, GE and LG Corp were the three best monthly contributors to absolute performance while Citigroup, DSM and AIG were the three main detractors. The fund initiated a new position in the UK grocery retailer, WM Morrison. We also added to Google and Merck on short-term weakness. To fund the new investments made over the past two months, we exited 5 positions: Prosegur, China Communication Services, Varian Medical Systems, Hyundai Motor and Valmet. We also continued to trim LG Corp into strength as we see better risk-reward elsewhere in the portfolio. 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 12.1x and a Price/Book of 1.2x vs. the index at 15.2x and 1.9x, respectively. Following the general pullback in the global stock market, the weighted average upside to our price targets for the fund s top 35 holdings has increased from 42% in August to 49% in September. * 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, September 2015 SEK, net of fees September 3Q YTD 1 Year 3 years 5 years 10 Years Since inception* SKAGEN Global A -5,4% -10,8% -4,2% -1,7% 10,8% 8,4% 7,1% 14,8% MSCI AC World Index* -4,9% -8,8% -0,7% 8,1% 16,0% 11,5% 4,9% 4,2% Excess return -0,5% -2,0% -3,5% -9,7% -5,2% -3,1% 2,2% 10,6% 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 September in EUR (%) India South Korea Taiwan USA (Nasdaq) MSCI EM Index USA (S&P 500) Denmark Hungary Italy Hong Kong China (Hong Kong) Mexico South Africa Finland Thailand MSCI AC Index Belgium Poland SKAGEN Global A Switzerland France Austria China (Local) United Kingdom Norway Sweden Canada Russia Turkey Singapore Netherlands Germany Japan Spain Indonesia Brazil

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

7 Main contributors MTD 2015 Largest positive contributors Largest negative contributors Company NOK Millions Company NOK Millions Samsung Electronics 129 ##### Citigroup -103 General Electric 60 ##### Koninklijke DSM -85 LG Corp 29 ##### AIG -85 Tyson Foods 27 ##### Teva -64 Microsoft 26 ##### KazMunaiGas -62 Autoliv 25 ##### G4S -60 General Motors 24 ##### Gap -59 Columbia Property Trust 22 ##### Nordea Bank -53 Carlsberg 19 ##### HeidelbergCement -53 Lenovo 16 ##### Merck & Co -52 Value Creation MTD (NOK MM): -863 NB: Contribution to absolute return 7

8 Main contributors QTD 2015 Largest positive contributors Largest negative contributors Company NOK Millions Company NOK Millions Google 232 2E+08 Lundin Mining -161 NN Group 85 9E+07 Samsung Electronics -153 Microsoft 73 7E+07 Koninklijke DSM -111 Tyson Foods 53 5E+07 Lenovo Group -106 OCI Co 53 5E+07 Gap -102 Storebrand 46 5E+07 Merck & Co -101 Sanofi 43 4E+07 KazMunaiGas -93 Kingfisher 41 4E+07 Volvo AB -85 Teva 36 4E+07 Lundin Petroleum -84 General Electric 35 4E+07 Norsk Hydro -81 Value Creation QTD (NOK MM): NB: Contribution to absolute return 8

9 Main contributors YTD 2015 Largest positive contributors Largest negative contributors Company NOK Millions Company NOK Millions Renault 289 # Norsk Hydro -204 AIG 287 # Banrisul -197 Google 239 # Lundin Mining -183 Citigroup 169 # KazMunaiGas -181 Nordea Bank 167 # Samsung Electronics Ltd -154 Sanofi 162 # State Bank of India -153 General Electric 160 # Afren -140 China Unicom 152 # Gap -132 Roche 132 # Hyundai Motor -125 Akzo Nobel 115 # Tata Motors -118 Value Creation YTD (NOK MM): 1235 NB: Contribution to absolute return 9

10 Holdings increased and decreased during September 2015 Key buys in September WM Morrison, The company entered the portfolio as a new holding in September. The market fails to discount the margin recovery we predict over the coming years. We expect costcutting from the new CEO combined with an improved capital discipline across the industry to help margins recover from their currently depressed levels. Importantly, we think downside risk is limited by the company's real estate assets and its sound financial position (investment-grade rating). We used short-term weakness in September to increase our position size in the global technology company Google. The weighting in the US-listed global healthcare company Merck was also increased to take advantage of a more attractive valuation. Key sells in September To fund the new investments made over the past two months we have sold out of a number of positions. Our assessment shows that the names we have exited carry a less attractive risk-reward profile compared to our newly added portfolio holdings. We believe disciplined capital allocation is key to performance. Consequently, Prosegur, China Communication Services, Varian Medical Systems, Hyundai Motor and Valmet left the portfolio in September. For the same reason, the Korean conglomerate LG Corp was reduced in September as we took advantage of a rising share price to trim the position into strength. 10

11 Most important changes Q Holdings increased Holdings reduced Q1 General Electric Lundin Petroleum Columbia Property Trust AIG Q1 Renault Baker Hughes Gazprom Yamaha Motor Weatherford Petrobras Mosaic UIE Renewable Energy Corp (conv.) Afren Akzo Nobel Samsung Electronics Technip Toyota Industries Unilever Raiffeisen Bank Gap Talanx 11

12 Most important changes Q Holdings increased Holdings reduced Q2 Tyson Foods Sabanci Holding Cheung Kong Property Hld* Google Cheung Kong Hutchison Hld Hyundai Motor 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 12

13 Most important changes Q Holdings increased Holdings reduced Q3 Hyundai Motor Q3 G4S China Mobile Merck Storebrand Varian Medical Systems OCI Valmet Barclays Prosegur Credit Suisse China Mobile WM Morrison Supermarkets Samsung Electronics (Ord) Carlsberg Lundin Mining Tyson Foods Google China Communication Services Samsung Electronics (Pref) LG Corp General Motors Citigroup Google Sanofi Teva Pharmaceutical 13

14 Largest holdings in SKAGEN Global (Sep 2015) Holding Price P/E P/E P/BV Price size, % 2015e 2016e last target SAMSUNG ELECTRONICS CITIGROUP AIG GENERAL ELECTRIC NORDEA ROCHE GOOGLE MICROSOFT STATE BANK OF INDIA MERCK Weighted top % Weighted top % MSCI AC World As at 30 September

15 Sector and geographical distribution vs index (Sep 2015) Sector distribution 3 Energy 76 Geographical distribution 3 Asia DM 9 Fund Index Materials Asia EM 7 15 Industrials Europe DM ex. The Nordics Consumer discretionary Europe EM 2 1 Consumer staples 5 10 Frontier Markets 2 0 Health 9 12 Latin America 0 1 Banking & Finance Middle East & Africa 1 1 IT North America Telecom 3 4 Oceania 0 2 Utilities Cash The Nordics Cash

16 Key earnings releases and corporate news, Sept 2015 GE (5.4%) GE receives conditional EU approval for Alstom acquisition Summary: EU has given conditional approval for GE s 9bn (net) acquisition of Alstom s power business last year, the largest acquisition in GE s history. The acquisition will add 500 GW of power assets to GE s installed base of 1,000 GW and boost 2018 EPS by $ IRR estimated to be 16-17%. The approval requires GE to divest some of the heavyduty turbines and a few service contracts to the Italian competitor Ansaldo. Investment case implications: Positive. Sealing the deal with Alstom means another tick in the box for GE on its quest to become a pure industrial company. While GE has embarked on a $200bn garage sale of financial assets, there is also room in the house for some new industrial resources after many of the legacy financial items have been cleared out in recent months. The cited concessions primarily serve the purpose of appeasing the bureaucrats in Brussels and are largely immaterial from a business perspective (GE cedes aftermarket service of only 5% of the Alstom turbines). In stark contrast to its historical playground bully mentality with regulators (EU botched GE s $41bn take-over attempt of Honeywell in 2001 on anti-competitive grounds when GE refused to budge on concessions), GE has kept a low public profile this time and been a smooth operator in the negotiation process, a tactic which seemingly has borne fruit for shareholders. The equity story is on-track. Roche (3.4%) Roche announces positive Phase III trial results for multiple sclerosis Summary: Roche s Phase III study (ORATORIO) of the drug ocrelizumab used for treating primary progressive multiple sclerosis (PPMS) shows positive read-out. This subset of MS applies to 15% of the total patient population and so far no pharma company has ever succeeded in developing a drug with high efficacy and limited side effects in this area. Consensus estimates for 2020 peak sales will likely need to rise by % from c. $1bn, equivalent to mid-to-high single digit earnings upgrades. More information to be presented by the company on October 9 th. Investment case implications: Small positive. Roche is an R&D powerhouse in the pharma sector and that is a key attribute to sustain pricing power. The pipeline is stuffed with high-quality candidate drugs for which the market seems unwilling to pay up, thus creating a value opportunity for us as long-term investors. Valuation at a whole multiple turn (on P/E) below peers appears unjustified and hence we maintain a relatively large position in the name. 16

17 Key earnings releases and corporate news, Sept 2015 (cont.) Kingfisher (2.2%) UK performance is better while France is still in the doldrums Summary: Screwfix is doing well and the B&Q closures are going according to plan. Screwfix will open 200 new stores over the next few years taking the total to 600. Screwfix makes 33% of UK profits from only 20% of sales. Gross margin pressure in France was the main negative news. There could be measures from the French government to help the housing market as its bumps along the bottom. FY 2016 earnings guidance unchanged. Cash flow was strong and buy backs of 200mn is soon done ( 160mn YTD). Investment case implications: Neutral. No targets for the long term One Kingfisher plan has been put forward. This will happen at their Capital Markets Day at the start of We like the initiatives that new CEO Laury has set in motion. One Kingfisher is a plan to deliver a common product range across borders, common sourcing, and savings from purchase of goods not for sale (IT, advertising, distribution equipment, etc.). Kingfisher is very much a self-help story and will in our view - play out over the next 3 years. One might think there are too many initiatives at one time as Kingfisher has previously struggled with implementation. We believe the new management team is well aware of the previous mistakes and will be very focused on better execution this time. Balance sheet is solid with 500mn net cash (6.5% of market cap). Including leases, Net debt/ebitda is trading at 2.1x which is within the guided range of 2-2.5x. Share buy backs continue (2.5% p.a) and Kingfisher pays 3% dividend yield. We see the company earning 30 pence within 2-3 years. The stock could easily see a 14x multiple if the new One Kingfisher is successful, giving us an upside of 35%. Philips (1.8%) Restructuring costs keep mounting, but lighting divestment on track Summary: Not much news out of the Capital Markets Day but due to weaker macro and higher restructuring costs, the company revised guidance for 2015 margins and also provided margin guidance for 2016 both basically in line with consensus. Separation of the Lighting Unit is on track with an aim to divest in This is one of the major short-term triggers as this will move Philips from a capital goods classification into med-tech, a peer group which has higher valuation. Investment case implications: While Philips still clearly lags behind peers on operational prowess and holds a heavyweight title in posting recurring restructuring costs, the story remains interesting as the company aims to go from a conglomerate towards a med-tech company. This will be a volatile journey as the company needs to acquire (with risk of overpaying) some competence within cloud technology. However, the short-term trigger concerning the Lighting Unit divestment limits downside from current levels. 17

18 Key earnings releases and corporate news, Sept 2015 (cont.) Autoliv (1.1%) New Japanese JV in active safety to focus on automatic brake control Summary: Autoliv and Nissin Kogyo (TSE: 7230.T) will enter into a JV (Autoliv buying 51% control with cash) focusing on automatic brake control and brake apply systems. With manufacturing facilities in the US and Asia, this active safety JV will have 2,000 employees. The EV is roughly $550 mn and 2016 sales projected to be around $600m. Operating margin guided to be in line with Autoliv s long-term target of 8-9%. Pro-forma ND/EBITDA c. 0.7x. Investment case implications: Minor positive. The industry development toward active safety is inevitable and Autoliv is our preferred way of capitalizing on this structural trend. This JV looks particularly timely given yesterday s announcement that 10 large car producers (GM, Ford, BMW, Volvo, Tesla et al.), representing 57% of YTD sales, have agreed to make automatic emergency braking systems standard in new US cars. Autoliv is already strong in radar which is a key component of an integrated braking system. While the share price pullback witnessed across the automotive sector in response to the China slowdown is logical, we think Autoliv is much better positioned than the regular car producers who try to peddle what is largely becoming a commodity product (passenger cars). Columbia Property Trust (1.0%) Buyback program announced Summary: Columbia Property Trust has announced a USD 200m buyback program for the next two years. The company will also divest 3 non-core properties in Cleveland, Baltimore and New York (total proceeds c. USD 1bn) plus enter a JV with Blackstone for its Washington D.C. asset normalized FFO guidance raised to upper end of range given planned divestments. Investment case implications: Minor positive. The company continues to execute according to plan. The most encouraging part of the update is the buyback announcement. Although this decision should be a no-brainer given the share s large discount to NAV, we know from experience that companies sometimes struggle to make the right capital allocation decisions. The Columbia management team continues to execute well in spite of sector headwinds which we think will eventually subside. 18

19 The 10 largest companies in SKAGEN Global 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. 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. 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 that it intends to keep: Sun America and Chartis. Founded in 1892 by Thomas Edison et al., General Electric (GE) operates two divisions (GE Industrial and 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 customers 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%. 19

20 The 10 largest companies in SKAGEN Global (cont.) Roche is a leading pharmaceuticals and diagnostics company based in Switzerland. Half of group sales and 2/3 of EBIT are 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 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 websites as well as partner websites. Aside from Google Search, the company owns a number of world-leading online properties (YouTube, Gmail, Google maps), browser (Google Chrome), operating systems for PC (Chrome), Mobile (Android) and has venture-like efforts in Music, Mobile Payment, TV, Healthcare, Fibre and Driverless cars. Most of the Google businesses are not yet properly monetised. 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). State Bank of India is the largest bank in India with a 22% market share. It has an unrivalled 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. Founded in 1891, Merck & Co is a US large-cap pharma company (and #7 worldwide by revenue) with a broad pharma portfolio and a solid pipeline (R&D 16-17% of sales). HQ in New Jersey and 70,000 employees. Sales by division (2014, $42bn): Diabetes (14%), Infectious Diseases (18%), Vaccines (13%), Animal Health (8%), Oncology (2%), Other (45%). Consensus expects legacy drugs sales to shrink by single-digit % annually. 20

21 WM Morrison (MRW LN) GBp 168 History, business model and source of investment case William Morrison Supermarkets plc ("WM") retails groceries through a chain of supermarkets in England and is headquartered in Bradford. The company employees 115,000 people and has annual sales of around 17bn. Approximately half of WM's ~500 stores contain petrol filling stations. WM also has its own fresh food manufacturing and processing operations, thus allowing them to market a number of own label brands. The company has a market share of c.10% in the UK grocery market (#4 position) and competes with incumbents such as Tesco (~30% share) and Sainsbury (17%), and discounters such Aldi and Lidl. Unlike competitors, WM has maintained a high degree of balance sheet flexibility with c.90% of its store space kept as freehold. A new CoB and CEO recently joined the company, both with extensive industry experience from Tesco. The case was identified through SKAGEN Global internal proprietary research. Investment rationale The market fails to discount EBITA margin recovery from below 3% to 5%; the EBITA margin has historically been (very) stable at 6-7% until the market collapsed in Currently, WM is loss-making on fully-rented basis (vs. ~3% margin historically), but we see industry returns unsustainable at this low level. The operating company should be able to generate 1.5-2% margins even in a highly competitive grocery market, i.e., WM should be at ~5% with its asset base (= 9% ROCE). Cost-cutting opportunity to be addressed by the new CEO expected to support margin recovery. Indicative peer benchmarking suggests some 100bps margin potential driven by job cuts (up to 15,000 positions) and a reduction in store management layers from 7 to 4 leading to some 6,500 fewer middle managers. Capital discipline is improving in the company and, importantly, across the industry. WM invested c. 900m p.a. between FY , and now expects to spend more reasonable 400m p.a. (at level of depreciation). Investment levels are going down across the sector which will lead to a more benign competitive environment. WM currently trades at a discount to invested capital with EV/IC (lease adj.) of 0.86x and BV of freehold portfolio covering 150+% of MV. On normalized earnings, WM trades at 8.2x EV/EBITA and 7.9x P/E with a FCF yield of 13%. This is at a discount to peers despite its lower risk profile (both operational and financial). Downside risks are limited by WM s real estate assets and its sound financial position. Triggers New financial targets with the new leadership outlining their view on WM s margin potential (short-term) Improved trading in the UK grocery market. Growth in real disposable income is accelerating (medium-term) UK grocery market consolidation. WM is a potentially attractive piece of the consolidation puzzle (long-term) Risks Further market share losses to hard discounters. We see WM as less exposed than the other incumbents due to its focus on fresh food (and vertical integration). Expected major price investments have already taken place. Price target We expect to see 69% upside over 2-3 years on the back of a normalisation of WM s operating margin (recovery to 5% EBITA; 9% ROCE). In a downside scenario where the operating company only reaches break-even and capex is hiked, we see c.15% downside. A bull valuation of 12x normalized EBITA would result in c. 90% return. 21 Mean reversion 75% Special situation 0% Key Figures LT value creator: 25% Market cap GBP 3.9 bn Equity GBP 3.6 bn No. of shares o/s 2.3 bn EV/Sales 0.41x EV/EBITDAR 7.6x EV/EBITA 14.1x P/E 14.9x EV/IC (lease adj) 0.86x FCF yield 11% Dividend yield 3.1% Daily turnover GBP 22 mn No of analysts 23 with Sell/Hold 74% Owners Silchester 9.7% Morrison Family 9.5% Blackrock 5.2%

22 3U acid test Unpopular Investors have shied away from the UK grocery sector that is going through a tough time of deflationary pressure (it is not the first time in history this is happening). Traditionally stable earnings have been depressed to unsustainably low levels. WM trades at a discount to peers despite its strong risk profile. Lower financial gearing and less operational risks. 74% Sell/Hold at a low valuation unloved both on the sell-side and in the market. Underresearched Undervalued Brokers focus on weekly market share dynamics. In fact, there is little relevant indepth work done on WM compared to its peers. Sell-side analysts typically flat line their margin assumptions from current depressed levels. In contrast, we see margins returning to sustainable levels (although still below the historical range). WM is given very little credit for its strong balance sheet which gives the company a lot of freedom to manoeuvre the current storm in the market. WM is an out-of-favour company in an out-of-favour industry: myopic investors fail to see through depressed earnings. This means that the current valuation of 0.4x EV/sales is not reflecting the company s margin expansion opportunity. Downside risks are limited by a strong balance sheet (WM is the only of its peers that maintains an investment-grade rating). Currently, EV/BV of freehold assets is below 1x, which implies that the value of WM s operations is essentially less than nothing. 22

23 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.