TB Saracen Global Income & Growth Fund: Portfolio Activity Update

Graham Campbell and David Keir, Co-Managers of the TB Saracen Global Income & Growth Fund, update on the latest sales and purchases in the fund following the recent market volatility…

TB Saracen Global Income & Growth Fund: Portfolio Activity Update

At Saracen, we take a long-term view and try to avoid trading wherever possible.  Markets have been volatile of late due to concerns over rising trade barriers, slowing growth and overvaluation in places.  We have no insight into how this will develop, but remain optimistic that common sense will prevail.  We tend to be relatively active during periods of market volatility as we look to take advantage of favourable price movements.  We view the recent set-back as an opportunity.  As ever, the key is to follow the investment process and make sure that we buy stocks that are cheap and sell shares that are expensive!

In the last few days, we have sold our holding in Amadeus IT and recycled the proceeds into Imperial Brands which is now a top 5 position in the fund.

Amadeus IT has been a core holding in the fund since 2014 as it ticked all the boxes that we look for in an investment.  It is a global leader in the travel industry with strong barriers to entry, a very attractive business model with very healthy margins and strong cash generation, has an underleveraged Balance Sheet and most importantly grows its dividend in-line with earnings.

The shares have more than doubled since purchase as the shares have re-rated on a significantly higher earnings number.  With the shares now trading on 24X current year price earnings ratio and yielding less than 2%, we now view the risk reward as unattractive and have sold our shares.

We have used the proceeds to significantly increase our holding in Imperial Brands, which has been our worst performing stock so far in 2018 and now looks anomalously priced.  It has been a perfect storm for Imperial Brands recently as the combination of rising bond yields, sterling strength and concern over the company’s exposure to next generation products has led to the shares de-rating to a current year Price Earnings Ratio of only 8.4X.  In addition, the dividend yield on the shares is now 7.9%.  It is worth pointing out that Imperial Brands is a solid business that enjoys strong margins and is very cash generative.  In addition, the Balance sheet leverage is now back below the 3X leverage target post the recent deal in the US.  Whilst we acknowledge that the current policy of growing the dividend at 10% per annum is not sustainable, we do believe that the dividend can easily be maintained.  Indeed, we would encourage Mgmt. to stop growing the dividend and use free cash flow to buy back their own shares.  If the current management team prove incapable of delivering shareholder value, we suspect that an activist investor or even another corporate will get involved.

In addition, we have used our available cash to top up our holdings in core positions, which in our opinion, have been hit disproportionately hard by the recent market movements and are very cheap.  We have topped up Dow Chemicals, Heidelberg Cement, HSBC, Roche and Saint Gobain.

 

If you require any more information, please feel free to contact us.

 Graham Campbell            graham@saracenfundmanagers.com

David Keir                            david@saracenfundmanagers.com

Co-managers, TB Saracen Global Income and Growth Fund

 

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