TB Saracen Global Income & Growth Fund: Portfolio Update
David Keir gives an update on his thoughts on the market and a new holding for the fund…
- Markets have recovered from December lows, but sentiment remains cautious
- Cyclical valuations are still attractive, despite the rebound in share prices
- Company Management teams remain relatively upbeat, despite the gloomy backdrop
- We expect more consumer staples companies to reset margins – the valuation of these stocks is at odds with company fundamentals
- One new addition to the fund with the purchase of Asahi Group in Japan
Update on Markets
Our last quarterly report focussed on the significant value on offer in both markets and the TB SGIG portfolio. We were astounded and frustrated that our portfolio of well-managed, global leading businesses could be trading on 10.7X Year 1 PER and with a forecast dividend yield of 4.8%. Thankfully, markets have recovered from their December lows, but we observe that investor sentiment remains cautious. The stock market recovery has been based on very low trading volumes and fund flows continue to be defensive in nature. There remains no sign of irrational exuberance!
Despite the sharp rebound, our research still finds more value in cyclicals stocks where share prices continue to price in a severe downturn.
Most of our companies have now reported their 2018 full year results and outlooks for 2019. In addition, we have met or had conference calls with the majority of them. In general, we have been pleasantly surprised by the resilience of the results, the relatively upbeat commentary and positive body language on display from management teams. Whilst growth has clearly slowed, our companies are still expecting it to persist in 2019. We outline below some highlights from management teams of our investee companies which highlight their cautiously optimistic outlook for 2019:
Evonik IR – “China is not as bad as everyone feared in October and November. We have made a good start to 2019”.
Saint Gobain CEO – “Now, on the outlook, first of all and it’s no surprise to me given the good exit rate we are starting the year well. And I would say that we’ll continue to see, globally, good trends for Saint-Gobain in 2019”.
Heidelberg Cement CEO – “We would expect that we will see result improvement and margin improvement in 2019. We would expect that I – what I understand is that the consensus is on an EBITDA of 5.5% – that’s the number which we feel for the moment pretty comfortable”.
Schnieder CEO – “So, all in all, we target in 2019 an EBITA growth in absolute value between 4% and 7%. This would be achieved with a combination of a growth between 3% to 5% and an adjusted EBITA margin between 20 bps to 50 bps in terms of organic improvement”.
Given that backdrop, we still find the valuation of those companies anomalous. Evonik, Heidelberg and Saint Gobain all trade on less than a 10X Year 1 PER and offer a yield in excess of 4%.
Another feature of the result has been the better than expected dividend announcements by a number of our companies. We view this as a sign of management confidence in the future of the business. For example, AXA which yields 6%, increased its dividend by 6%, Rio Tinto (6% yield) upped the full year dividend by 6% and announced a $4bn special dividend, and AIB (4% yield) increased its final dividend by 42%.
We have noted with interest the margin resets from a number of companies in the consumer goods sector, including Beiersdorf, Colgate, Henkel and Kraft Heinz. We will address this topic in a separate blog, but we remain wary of the sector given the disparity between the high valuation of these companies and the anaemic growth outlook. We would expect to see further companies having to reinvest more in their brands to try to drive top line growth.
We have recently added Asahi Group to TB Saracen Global Income & Growth Fund.
We previously owned Asahi in the fund but reluctantly sold the shares based on our “worst case scenario” analysis as we were uncomfortable with the Balance Sheet leverage (over 4X net debt/EBITDA) post acquisition of both SAB’s Western and Eastern European beer assets.
They have subsequently sold stakes in two businesses (20% stake in Tsingtao Brewery for $937m and a share in an Indonesian food business) and generated cash which has taken leverage down to a more manageable 3.0x (historic) and management expect it to fall below 2.0x by end 2020.
Asahi completely dominates the Japanese beer market with its Asahi beer and is turning this into a global premium brand alongside its recently acquired Peroni and Grolsch brands. It is also a market leader in its soft drinks and foods division. Whilst the domestic business is dull, it should offer steady growth. The real opportunity will be in the overseas division. The valuation looks incredibly cheap (on an absolute and relative basis) as the shares trade on 14X 2019 PER. Whilst the 2.2% yield is on the low side for SGIG, the pay-out ratio is only 30% today and will be increased from this level in the future which should lead to 9.4% dividend growth per annum over the 5-year forecast period.
We took advantage of the pull back in the shares (JPY 60 to JPY 46 over the last 12 months) to buy a position for the fund.
David Keir, Co-Manager, TB Saracen Global Income & Growth Fund
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