Ideaweek 2018

In February 2018, invited members of the MOI Global community will meet in St. Moritz, Switzerland for a week of skiing, discussion, and friendship. Ideaweek is a showcase of ideas, a platform for great conversations, and an opportunity to catalyze relationships with like-minded individuals.

Ideaweek brings together inquisitive minds to explore ideas of consequence in investing, business, and life.

Learn more (the 2018 event is fully booked).

European Investing Summit 2017

Great Instructors, Great Ideas

Investment Opportunities in Europe

December 15, 2017 in Featured, The Manual of Ideas

As we conclude another year, I am pleased to share with you the progress we’ve made building MOI Global into a unique membership community of intelligent investors.

The Manual of Ideas started out nearly a decade ago focused on content. As we went out to gather and generate uniquely differentiated content for value-oriented investors, we came to appreciate the tight-knit value investing community that had been developing for many years thanks to a strong nucleus formed by the Berkshire Hathaway annual meeting.

We realized this was not only a community of exceptionally gifted and successful investors, but that the vast majority of them were also willing to share with and learn from their peers. We were humbled to have the opportunity to bring the wisdom of investors like Tom Gayner, Howard Marks, Tom Russo, Mohnish Pabrai, Jean-Marie Eveillard, Guy Spier, and Ed Wachenheim to others in the community. We also saw an opportunity to leverage the internet to help broaden the appeal of value investing beyond its traditional U.S. base.

We now call this membership community MOI Global, with The Manual of Ideas constituting one component of the value we seek to bring to members. Other benefits include content shared on the new MOI Global website; curated idea presentations shared via online events such as the Best Ideas conference, Asian Investing Summit, Wide-Moat Investing Summit, and European Investing Summit; as well as offline experiences such as Latticework, The Zurich Project, Ideaweek, and member-run meetups in many cities globally.

All of the above benefits are now available to you as a member of MOI Global (at no incremental membership fee). In the past, our online events (formerly ValueConferences) generated revenue from ticket sales. Now they are not only complimentary to MOI Global members, but they are exclusive to members. The upcoming summit, Best Ideas 2018, is our largest online conference ever, with more than one hundred instructors from the community sharing their best ideas. Shai Dardashti and I have started recording some of the sessions, and we are thoroughly impressed by the quality of the presentations. The recordings will be released on January 11-13. The summit will also feature fourteen live sessions on those days (stay tuned for your access details).

As you probably know, we closed our doors to new members at the end of March 2017. We remain closed as we build up the internal resources needed to delight all of our members. We maintain a waitlist for those interested in membership, and we hope to invite selected high-caliber individuals to join MOI Global in the future. While new members may end up joining at a significantly higher annual membership fee, your rate will remain unchanged in recognition of your loyalty.

We strive for MOI Global to be a lifelong companion to our members, regardless of employment status, the market cycle, or other transient factors. If you are going through a tough period, it’s likely other members are either experiencing a similar phase or have done so at some point in the past. By facilitating the right kinds of introductions and interactions, we strive to support members on their personal growth path. Annual events like The Zurich Project and Ideaweek are near-ideal settings for fostering the kinds of exchanges and experiences that can have an enduring positive impact.

Thank you for allowing us to play a constructive role in your journey as an investor. Thank you also for being a part of the MOI Global journey as we pour our passion and resources into building a special kind of community.

In this issue, we focus on selected investment ideas presented at European Investing Summit 2017, the sixth annual online conference focused on uncovering ideas across Europe. More than thirty instructors participated in the event and shared their favorite ideas with MOI Global members.

David Marcus of Evermore Global Advisors made the case for dry bulk shippers in his characteristically witty, deeply knowledgeable way. David, a protégé of Michael Price, has focused on Europe for many years, getting to know some of the best owner-operators across the continent. David’s ability to identify great managers and to back them when the market ignores them has produced attractive returns, and it’s little surprise that Evermore’s AUM recently passed $1 billion.

David met Norwegian shipping magnate John Fredriksen a long time ago, setting the stage for revisiting the sector at a time of distress and despair. David tells the story of going to a dry bulk conference in 2016 and meeting an industry CEO:

“Before we even said hello, he saw my name tag and said, ‘Evermore!’ I said, ‘Yes?’ He said, ‘I bet you’ve never invested in this sector, and you probably didn’t even look at it until recently.’ I said, ‘You’re correct! What are you, a mind reader?’ He replied, ‘If you had invested any time before today, your name would actually be Nevermore.’ His point was this industry had crushed everybody.”

David shares his thesis on four dry bulk companies in which Evermore is a major shareholder: Scorpio Bulkers, Safe Bulkers, Navios Maritime Partners, and Songa. During the Q&A, David also explains why the container shipping industry may be at the same point dry bulk was eighteen months ago. Finally, David reveals he has started investing in Frontline, John Fredriksen’s tanker shipping firm.

Another highlight of European Investment Summit 2017 was Simon Caufield’s session on The Automobile Association, based in the UK. The AA is a market-leading roadside assistance business that enjoys the trust of its members and generates recurring revenue. It is a high return-on-capital business with strong cash flow. Formerly under private equity ownership, the company has been saddled with an uncomfortable amount of debt. In Simon’s view, as management continues to focus on debt reduction, value should accrete to shareholders at a swift pace. He likes the new CEO, with whom he has met recently:

“Simon Breakwell was a director for the previous four or five years and has an interesting, digital background. He worked at Microsoft to develop and launch the Expedia business. He also started the European operations of Uber. Simon doesn’t see any reason why the additional level of capex, beyond maintenance capex, should be required.”

Daniel Gladiš of Vltava Fund, an instructor whose focus on out-of-favor good businesses has produced one of the most impressive records at online conferences, unveiled his simple yet compelling thesis on a company well-known to everyone: BMW. A confluence of factors has caused BMW to trade at a market quotation that appears unjustified for a business of such quality. Daniel’s sum-of-the-parts valuation suggests attractive upside. His conclusion is straightforward:

“The market is offering us a top-class, financially strong, family-owned business at half of its value. How is this possible? It is difficult to say but investors or the market must either believe there is a hard recession just ahead, after which there will be no recovery, or Tesla will dominate the future and current car manufacturers will be marginalized. None of this will happen. BMW will probably end up with an even stronger position.”

Florian Schuhbauer’s session highlights the unique nature of MOI Global online conferences. Florian, formerly with major European private equity firm Triton Partners and now managing partner of Active Ownership Capital, has one of the strongest records of value creation in public companies, particularly in Germany. Despite this, he operates “below the radar” and does not generally discuss the activist situations in which he is deeply involved. Members of MOI Global enjoy a unique opportunity to benefit from Florian’s work.

At European Investing Summit 2017, Florian presented his case for two German companies in which his firm is one of the largest shareholders and actively involved in value creation, not through financial engineering but sustained profit improvement. Florian explains why franking machine (postage meter) manufacturer Francotyp-Postalia is a misunderstood business with the potential for organic and M&A-driven growth, and why wind farm developer PNE Wind has material underappreciated earning power.

According to Florian, Francotyp-Postalia’s “war chest” is a strategic asset in conjunction with the company’s under-appreciated expertise in encryption software:

“Francotyp has €100+ million in cash and financing lined up to acquire adjacent software businesses at the right valuation. The market quotations of document management and security software companies are completely insane at the moment. We have been looking to acquire software businesses that fit Francotyp for more than a year. Unfortunately, the asking prices are not what Francotyp should pay, so they will be patient. The money will be there when the next crisis hits and valuations come down.”

PNE Wind is a fairly typical neglected situation:

“For institutional investors PNE was uninvestable — a messy governance situation, bad track record, no value creation for shareholders, and the perceived share overhang. It led to an attractive valuation. On a pro forma basis, we bought shares at a negative enterprise value. PNE remains misunderstood and neglected. Most investors don’t look into it enough to also see the good side of it.”

Thomas Karlovits of Blackwall Capital is an MOI Global instructor whose knack for uncovering businesses that can compound value for long periods of time has made him a highly successful fund manager. Thomas is a regular participant of The Zurich Project, where he has shared his valuable insights into building a great investment firm.

At European Investing Summit 2017, Thomas unveiled his investment thesis on a software business that may be near a major growth inflection point due to new product adoption — RIB Software. Thomas sums up the case as follows:

“RIB offers the best BIM [building information modeling] software on the market, well ahead of peers. It benefits from IT spending increases in the construction industry and from regulatory changes. RIB has used technological leadership to smartly team up with Flex and Autodesk, big players in their industries. It is at the forefront throughout the construction industry via scale and economic share. Plus, we have long-term [new product] upside. The share price only discounts a good part of the core business, allowing for free options. I love free options. [RIB] has more angles than I’ve seen in a long time.”

Chris Rossbach of London-based family office J. Stern & Co. takes a multi-generational approach to investing, exploiting a “time arbitrage” advantage. Chris is an owner in the true sense of the word: When the founding family of Sika, a company Chris presented last year, agreed to sell their shares to Saint-Gobain without the same deal available to other shareholders, Chris teamed up with a fellow owner, the Bill and Melinda Gates Foundation Trust, to oppose the move. Chris’ efforts have borne fruit, as the original offer came at a share price of around CHF 3,000 and recently headed toward CHF 8,000 per share. MOI Global members have been uniquely positioned to benefit from Chris’s work.

At European Investing Summit 2017, Chris unveiled his thesis on Essilor, the leading prescription lens producer, which is merging with Luxottica, the leader in eyeglass frames and sunglasses. Chris lauds the complementary nature of the two scale-advantaged global businesses. He also points to the financial benefits of the merger:

“We view management’s €600 million synergies estimate as conservative. We estimate earnings growth of 8-9% over the next five years or, including growth synergies, 12-15%. It suggest that buying such a globally leading company at the recent market quotation may be a real opportunity.”

Jean-Pascal Rolandez of The L.T. Funds, a Geneva-based investment firm, is another MOI Global instructor who takes a long-term view. Jean-Pascal is not afraid to be contrarian in order to buy good businesses when they are shunned by the market. An example is his most recent European Investing Summit idea — DIA, the Spanish discount grocery retailer.

As a long-term investor, Jean-Pascal wants to get to know the “DNA” of companies, which is often shaped by their history. In DIA’s case, he describes the beginnings of the chain in the late 1970s, focusing on a single supermarket format with 600 square meters or less, no parking lot, but well-located in cities like Madrid. Jean-Pascal then takes us through a period during which DIA was owned by French giant Carrefour, illustrating how that episode derailed DIA but also set up the current opportunity as the company returns to its roots:

“Carrefour aimed for DIA to be its hard discounter across the globe, and it dragged DIA into places that were not natural for a Spanish company, such as Turkey and China. It was not natural for DIA to expand that way. Carrefour eventually realized the strategy was not working, and the Carrefour empire started to erode and even disintegrate. Carrefour decided to spin out DIA in 2011. As Carrefour was in need of cash, it took a huge dividend — about one billion euros — before spinning off DIA. DIA found itself with high gearing and a low valuation. It is when DIA’s own DNA took over. The Spanish company started to refocus on its natural turf — Iberia, Brazil, and Argentina. Carrefour realized it had made a mistake when it let its hard discount retail format in France go with DIA. Carrefour bought back the French operations of DIA, which helped DIA reduce gearing.”

Long-time MOI Global instructor Roshan Padamadan has added value to our community, not only through well-articulated ideas, but also through deep dives into industries with which our members may not be intimately familiar. Earlier in 2017, Roshan shared his long-term thesis on life insurance in India, a fascinating industry. At European Investing Summit 2017, Roshan assessed MiFID II, the regulatory framework that has implications for sell-side as well as buy-side firms. Roshan also presented his thesis on a company poised to benefit from those changes — Fidessa Group, a London-listed software firm:

“Fidessa has ‘efficient scale’, as Pat Dorsey calls it. Efficient scale keeps out new competition. Even for existing players, it’s hard to make clients switch from one system to another. A brand new player would find it daunting to come and compete. Fidessa’s core product is entrenched and has hidden pricing power. That will come through in an ability to keep raising prices by the rate of inflation or higher.”

Antonio Garufi of Decalia Asset Management was invited to become an MOI Global instructor two years ago due to the depth of his research. We were particularly impressed by his research into OraSure Technologies, which he articulated in early 2016. At European Investing Summit 2017, Antonio shared his view on Wizz Air, a leading low-cost carrier in Central and Eastern Europe. He sums up the investment case as follows:

“Wizz Air has outstanding management. It was founded by industry expert Bill Franke who manages PE firm Indigo Partners, which specializes in launching new airlines in the low-cost segment. The CEO, Jozsef Varadi, has strong credibility in the industry and has grown the company into one of the leaders. Wizz Air also has financial appeal due to low leverage and an affordable valuation [5x EV/EBIT, 12% FCF yield]. It generates cash at a strong pace and is a suitable takeover candidate.”

Investors with a penchant for “deep value” will appreciate the European Investing Summit presentation by Richard Simmons. While Richard shared two ideas, Daejan Holdings stands out as a steady, simple business trading at a discount. Daejan was founded in the 1940s and is a straightforward property-owning business in the UK, with most of the value coming from rents. Richard estimates liquidation value to be in line with net asset value of £102 per share:

“The good news is you don’t have to pay £102 per share. Recently, you could pay £58, a discount of 43%. The peers trade at much narrower discounts or even at premia. Daejan has often traded at a discount, ranging from 60% to as little as 0%. Presumably, because it’s a less liquid stock due to the family stake, Daejan shares have less marketability, and there is no likely takeover option. That doesn’t bother us. We’ve held Daejan for a long time, have done well with it, and it’s safer than the peers. It’s likely to continue to grow, and the deferred tax cushion provides downside protection and excess growth capital. If NAV continued to compound by 9% annually, it would reach £241 per share in a decade. If the share price went up to NAV during that period, an investor would compound at 15%.”

In addition to the sessions above, I encourage you to review other ideas presented at European Investing Summit 2017. To see a full list of ideas and listen to the session replays, visit https://moiglobal.com/eis (email [email protected] if you need help logging in).

This issue also includes selected interviews and articles featuring the wisdom of our global community. MOI Global instructor Richard Simmons delves into his investment approach, commenting on his favorite source of competitive advantage, how decades of investing have made him gravitate toward family-controlled businesses, and why “distraction” may be investors’ biggest mistake.
We also feature insights by Frank Martin, Gary Mishuris, Randall Abramson, and Matthew Sweeney.

Wishing you a joyful holiday season and
a year filled with good health, prosperity, and happiness,

JOHN MIHALJEVIC, CFA
Chairman, MOI Global

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