TB Saracen Global Income & Growth Fund: Portfolio Activity – December 2019
The Global team take us through their December portfolio activity…
- 2 new holdings – eBay and Samsonite
At Saracen, we take a long-term view and try to avoid trading wherever possible. However, we have been active during December, adding two new holdings in businesses that we have followed for years and where the recent share price movements have provided an attractive entry point; namely eBay and Samsonite.
eBay appeared on our proprietary screen following its Board’s decision to pay a maiden dividend earlier in 2019. eBbay was the original online marketplace, starting more than 20 years ago as a simple place for buyers and sellers to connect. Over the following two decades, eBay evolved into one of the world’s largest e-commerce platforms with #1 or #2 market positions in most geographies (ex-China) – a global marketplace facilitating nearly $90 billion of transactions between over 180 million users and 25m sellers across 190 countries.
It may surprise readers that 90% of all products sold are not at auction (sold at fixed price), 80% of products sold are new and 70% ship within 3 days (mostly for free and no subscription required).
There is a lot going on at eBay now – Activist investors Elliott Management (4%) and Starboard Value (1%) have built stakes in the company and made some recommendations to the board about what to do earlier this year.
Their general thesis is that there is a massive conglomerate discount in the eBay share price. With StubHub tickets and the classifieds company in the portfolio, there is a view that these businesses would be worth much more to someone else and selling them would give management more time to focus on the company’s core offering which is the marketplace.
The Board listened, and StubHub is being disposed of for a blow-out $4bn price to Viagogo (NB eBay bought StubHub for $310m in 2007). The great news for SGIG is that the activists also agitated for the payment of a dividend, which has now materialised. Income funds such as ours can now consider buying the stock for the first time!
eBay ticks all the boxes we look for in SGIG – it is a high quality business that should be able to sustain attractive returns on invested capital, it is a global leading platform that offers long-term growth (underlying marketplace growth from the continued shift of shopping online plus $1bn opportunity from sellers promoting their own items and $2bn revenue opportunity from the launch of new payment platform in H2 2020 once the current deal with PayPal expires), the margins are strong, the Balance Sheet is robust, the valuation is attractive and the business is very cash generative.
The starting dividend is on the low side for SGIG, but the dividend is currently 5X covered by cash. This dividend could be grown significantly over the 5-year forecast period. With the shares trading on 12X Dec 2020 and a year 5 PER of 7.6X, we think these shares are very cheap and have bought a position for the fund.
Samsonite is the largest luggage company globally with a very diversified geographical footprint (39% North America, 35% Asia, 21% Europe and 5% Latin America) and has diversified further in terms of brands through M&A (e.g. the acquisition of Tumi in 2016).
The shares have fallen by more than 50% since April 2018 as the business has been impacted by the US/China trade war and specifically the 25% tariff imposed on luggage which is made in China and sold in the US. In addition, the continued fears about a global recession and disruptions in Hong Kong and France have impacted investor sentiment. However, these factors should get better in the next couple of years!
The investment case hinges on continued growth in global travel & tourism, which tends to grow slightly above global GDP.
Samsonite is well placed to participate in global growth rates of 3-5% and gain market share, which should result in 5%-7% top line growth. Operating margins are currently depressed predominantly due to the tariffs but will recover mainly as sourcing for the US market is moved outside of China.
We believe that Samsonite is a great fit for SGIG. It is emerging market listed, a global leader in luggage, very well diversified by geography and increasingly diversified in products. The shares trade on an attractive multiple of trough earnings (14.6X PER 2020) and a year 5 PER of 8.4X supported by an attractive dividend yield of 3.7%.
Feel free to contact us if you have any questions regarding the recent activity in the fund.
Many thanks for your continued support. We wish our investors a very Merry Christmas and best wishes for 2020.
David Keir (David@saracenfundmanagers.com)
Graham Campbell (email@example.com)
Co-Managers, TB Saracen Global Income & Growth Fund
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