TB Saracen Global Income & Growth Fund: Portfolio Activity – October 2018

Graham Campbell and David Keir, Co-Managers of TB Saracen Global Income & Growth Fund, discuss changes to the portfolio this month…

TB Saracen Global Income & Growth Portfolio Activity – October 2018 

  • 2 new holdings – Interpublic and Michelin
  • Funded by 2 sales – General Electric and SES

At Saracen, we take a long-term view and tend to trade very rarely.  However, our trading activity increases during periods of market volatility.  During October, we added 2 new positions in businesses where the recent share price movements have provided an attractive entry point – namely Interpublic and Michelin.  We have funded these purchases through selling 2 holdings where our worst-case analysis means that the risks of owning the shares are now too great – namely General Electric and SES.

Interpublic ($23.00)

Interpublic (“IPG”), is one of the world’s largest advertising and marketing services conglomerates (#4 after WPP, Omnicom, Publicis). Its flagship creative agencies include McCann Worldgroup and Lowe & Partners.  Interpublic also offers direct marketing, media services, and public relations.  Its largest clients include General Motors, Johnson & Johnson, Microsoft, Samsung, and Unilever.

IPG has been gaining accounts and market share in recent quarters to the detriment of WPP and Publicis.  IPG generates 60% of sales in the US and should be a main beneficiary of continued high consumer and business sentiment. Although US corporate tax rebates won’t necessarily be reinvested into marketing spend, there might be a slight increase, especially after the recent weakness vs. GDP growth.

The top 20 customers, which represent 25% of sales, have seen stronger growth rates in H2 and management is hopeful that this will translate into further market share gains with these clients.

IPG announced the acquisition of Acxiom’s AMS business in July for $2bn.  AMS is a data company that can “personalise ads”, i.e. it can aggregate, segment and model data according to audience buckets such as demographics, interests, purchase or lifestyle changes. One differentiating factor for AMS versus peers is its outstanding rating in privacy and security. Around 50% of the Fortune 100 companies are long term customers. AMS is a fee-based business with around 75-85% of revenue under long-term contracts and has grown around mid-single digit in recent years with 20% margin.

IPG thinks there are revenue synergies and a lift to margins as cross selling and a push internationally, which will work well with GDPR, will benefit both businesses. The deal is EPS accretive in year one even after dropping the share buyback for the rest of 2018.  Net Debt/EBITDA jumps to 1.8x this year but the company is comfortable with this and with the strong cash flow it will be almost net debt free by Year 5.

As the chart above highlights, the shares have de-rated significantly over the last 5 years from 22x to 14X Year 1 PER, and the yield has increased from 2% to 4%.  We have taken advantage of this to buy a position for the fund.

Michelin (€95.96)

Michelin produces over 187 million tyres in 68 production facilities in 17 countries. It is a premium player in the market and appears to be the price comparator for the sector. Unlike vehicles, tyres are rarely a purchase that can be deferred and 75% of the market is for replacement tyres.  We view the tyre business as a low growth utility.  There is huge pricing comparability at local levels and management respond to any competitor initiatives.  It is a zero-sum game as no additional tyres are sold, but industry profitability depends on competitor pricing behaviour.  The company will benefit from mix (larger tyres), tighter regulations, EV and a recovery in the mining sector.  Growth will rarely be dynamic, but this is a long-term leader and the recent underperformance provides a buying opportunity.  Given the strength of the BS and limited downside on Worst Case we bought the shares for the fund.

We funded these purchases through selling both General Electric and SES.

GE ($12.60)

We were forced to admit defeat in GE following unrelenting negative news flow in its power division.  As a reminder, this is a division that contributed $5bn to group profits and will now be loss-making in 2018.  Following a call with management it became obvious that the problems are more severe than we expected and will take much longer to fix than we forecast.  After our call, GE announced that John Flannery, CEO would be replaced with Jerry Culp, who is the senior independent non-executive director on the board.  Jerry Culp is well regarded in the market following his success as CEO of Danaher Group.  Given both Jerry’s initial comments that he will focus on de-leveraging the group, which in our opinion implied another dividend cut and our change of view on the recovery in the Power division, the worst case now became too severe and more likely and required a reassessment of our shareholding.  The share price appreciated significantly on news of the new CEO’s appointment and were sold into that bounce.

SES (€19.40)

SES shares have doubled from their recent lows in February 2018 following a change of management team, the core business returning to growth and the potential for them to be able to monetise their C-Band spectrum in the US.  As the chart above highlights, the shares have now re-rated to levels that are discounting material proceeds from the US spectrum auctions.  Given that the outcome of this is highly uncertain, the worst-case outcome is now very severe and therefore, we have sold the shares.

Updated Portfolio Thoughts

As we mentioned in our last blog entitled – “View from the Road – October 2018”, the outperformance of both the US market and growth stocks over the last few months had proven to be a difficult backdrop for fund performance.  However, the portfolio characteristics in the table below, highlight the value bias of the portfolio today which we believe represent a very attractive investment proposition for both existing and potential investors.

TB SGIG Characteristics vs. FTSE All World

  TB SGIG FTSE All World
Current PE 14.2 16.7
1Y FWD PE 11.4 13.7
Current Dividend Yield 4.2% 2.6%
1Y FWD Dividend Yield 4.5% 2.8%
Beta 0.95 1.0

Source: Bloomberg (31 October 2018)

 

Feel free to contact us if you have any questions regarding the fund.

Many thanks for your continued support.

David Keir (David@saracenfundmanagers.com)

Graham Campbell (graham@saracenfundmanagers.com)

Co-Managers, TB Saracen Global Income & Growth Fund

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