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Why We Initiated a Position in Shire

May 9, 2018 in Equities, Ideas, Letters

This article by Matthew Haynes is excerpted from a letter of 1949 Value Advisors, an absolute return-oriented global value investment firm based in Mahwah, New Jersey. Matt is a valued contributor to The Zurich Project.

[We initiated] a position in Shire plc following a 43% decline in its share price since August 2015.

We have not owned a pharmaceutical stock in many years. We have looked into several in the last year as almost all have suffered significant share price declines in recent years, but have elected to pass as key elements that we look for were missing.

With Shire plc, we believe that we’ve found an attractive investment opportunity in a high quality company suffering under a few short term clouds that should dissipate over time and unlock value. Its depressed share price and valuation at the time of our purchase implied very little potential downside, while its longer term prospects could provide meaningful upside. Good things often happen to cheap stocks, but we must first understand the issues.

First, its indebted balance sheet is the by-product of several recent acquisitions, the largest being its $35 billion purchase of Baxalta in 2016. Shire paid a hefty multiple for Baxalta (30X trailing EBIT, according to Bloomberg) and gained key products in hemophilia, but the debt burden has weighed heavily on Shire’s share price.

In addition, Baxalta’s leading drugs will face competitive pressure from the recent launch of Roche’s Hemlibra.

Fortunately, Shire’s other businesses generate significant free cash flow and the company allocates much of it toward debt reduction. Consensus estimates for free cash flow imply that Shire’s balance sheet could be debt free by year-end 2021. This deleveraging alone, assuming the current (depressed) multiple on EBIT remains constant, and using consensus EBIT estimates for 2021, could drive shares 67% higher over the next four years.

We would argue that post-deleveraging, the current depressed multiples on EBIT and earnings are no longer warranted and Shire shares should re-rate higher reflecting its diminished financial risk, providing additional material upside. Shire’s average EV/EBIT multiple over the last seven years has been 14, versus less than 10 at the time of our purchase, implying 100% upside over the next four years if consensus EBIT estimates are near the mark and deleveraging proceeds accordingly.

Lastly, Shire has been the subject of takeover speculation in recent months, following a failed bid by AbbVie in 2014 after the U.S. Treasury Department announced new rules taking aim at tax inversion deals. On January 1st of this year, Shire started accounting for its neuroscience business separately, implying the likelihood of a separation via tax-free spin-off or an outright sale. In either case, we believe that value would be unlocked as this business is worth considerably more than its implied value within Shire.

We would prefer a sale of this business as it would accelerate the company’s deleveraging, which we view as critical to realizing greater equity valuation. At the time of our purchase, we viewed Shire becoming a bid target as remote simply because of its size and the very limited number of global pharmaceutical companies large enough to acquire it.

To our surprise, shortly after building a full position, Takeda Pharmaceutical of Japan announced its interest in acquiring Shire plc. As of this writing, Takeda’s fifth offer in as many weeks is being considered by the Shire plc Board of Directors, representing a 50% premium to the undisturbed share price. If Takeda’s bid proves unsuccessful, it will have served to highlight the dramatic undervaluation of Shire plc.

We expect that the 50% premium offered by Takeda will have a significant positive impact on investor perceptions of the value of the company’s assets and cash flows.

Disclaimer: This summary does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made to qualified investors and only by means of an approved confidential private offering memorandum or investment advisory agreement and only in those jurisdictions where permitted by law. This summary reflects select positions of the current portfolio of a managed account advised by 1949 Value Advisors. There is no guarantee that a commingled investment vehicle or another investment account managed by 1949 Value Advisors will invest in the same investments set forth in this summary. The investment approach and portfolio construction set forth herein may be modified at any time in any manner believed to be consistent with the managed account’s overall investment objectives. While all information herein is believed to be accurate, 1949 Value Advisors makes no express warranty as to the completeness or accuracy nor does it accept responsibility for errors appearing in the summary. This summary is strictly confidential and may not be distributed

“Hay que buscar valor debajo de las piedras, donde poca gente más mira”

May 9, 2018 in Entrevistas exclusivas, MOI Global en Español

Tuvimos el gusto de entrevistar a Luis García Álvarez, CFA, gestor de renta variable en MAPFRE Asset Management. En MAPFRE AM, Luis y su equipo buscan compañías de cualquier capitalización bursátil, con ventajas competitivas sostenibles y equipos gestores excelentes. Además, Luis es un gran lector y nos recomienda bastantes libros de inversiones y neuroeconomía.

MOI Global en Español: Cuéntanos acerca de tu formación y tu trayectoria.

Luis García Álvarez:  Estudié una Licenciatura en Economía en la Universidad Francisco de Vitoria, en mi ciudad natal, Madrid. Una vez completada, tenía claro que quería seguir profundizando en mis estudios y por eso opté por realizar el Master en Economía y Finanzas del Centro de Estudios Monetarios y Financieros (CEMFI). Ésta ha sido, sin duda, una de las mejores decisiones que he tomado a nivel profesional. Se lo recomiendo a cualquier persona con interés en el mundo de la economía y las finanzas, que cumpla con los exigentes criterios de admisión y esté dispuesto a soportar un nivel de exigencia muy elevado durante dos años. A pesar de que el CEMFI no es tan conocido como algunas de las escuelas de negocios que tenemos en España, es un centro de enseñanza de primer nivel mundial, con profesores y alumnos que vienen de distintos países.

Al terminar el Master, comencé a trabajar en Banco Santander, en el departamento de Riesgos de Mercado. La experiencia allí fue realmente muy buena, pero quise intentar dar el salto al mundo de las inversiones y, por eso, seguí estudiando para conseguir la designación CFA Charterholder. Tenía la esperanza de que eso pudiera abrirme nuevas puertas en la industria y así fue. Nada más aprobar el tercer nivel tuve la oportunidad de incorporarme al equipo de análisis de renta variable de BBVA que, en mi opinión, es uno de los mejores que existen en España. Esa fue también una etapa clave en mi desarrollo profesional, ya que allí aprendí la gran mayoría de lo que sé en cuanto a analizar compañías. Los años como analista en el sell side fueron la mejor base para dar el salto a la gestión de activos.

Ese salto llegó unos años después, gracias a que José Luis Jiménez, director de nuestra área de inversiones, y Charo Montes consideraron que era la persona adecuada para incorporarme en ese momento al equipo de gestión de inversiones de renta variable en MAPFRE AM. Les estoy muy agradecido a los dos. Creo que el proyecto de MAPFRE AM es uno de los más interesantes que existen actualmente en nuestra industria a nivel europeo, así que es un privilegio poder estar aquí y formar parte de este equipo. Ya se han dado pasos importantes, como la creación de una SICAV en Luxemburgo, para poner al alcance de cualquier inversor minorista o institucional del mundo los mejores productos de MAPFRE AM, o la adquisición el año pasado de una participación en la boutique de inversión francesa La Financière Responsable. Es la primera vez que una sociedad española entra en el accionariado de una firma extranjera de gestión. Estos han sido dos eventos muy relevantes que marcan la buena dirección en la que estamos avanzando, pero quedan más por llegar.

En cuanto a cómo conocí el value investing, recuerdo con claridad que fue cuando yo aún trabajaba en Banco Santander. Por aquel entonces, ya estaba preparando los exámenes del CFA Institute y me enteré de que CFA Spain organizaba una conferencia con un analista de bancos españoles que se llama Santi López (Exane). Esa fue la primera vez que escuché hablar de Benjamin Graham y de The Intelligent Investor. Aquello me interesó tanto que decidí comprar ese libro y otros de los que nos había hablado Santi durante su ponencia, como Thinking, Fast And Slow de Daniel Kahneman o The Big Short de Michael Lewis. A partir de entonces, esa manera de pensar ha marcado completamente mi visión sobre las inversiones. Como han dicho otras personas antes, los conceptos básicos del value investing o bien se entienden y te convencen en los cinco primeros minutos, o no se entienden nunca.

Quedé totalmente convencido de que esa era la manera adecuada de enfocar la tarea del gestor de inversiones. Desde entonces, he seguido leyendo e intentando aprender todo lo que puedo, en un proceso que no tiene fin. Eso es lo que hace que este trabajo me parezca tremendamente atractivo. Si uno quiere, es imposible aburrirse.

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Solventis sobre Atalaya Mining

May 7, 2018 in Ideas de inversión, MOI Global en Español

NOTA DEL EDITOR: Esta idea de inversión es obtenida de un informe mensual de Solventis EOS.

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Precio: 2,12 GBP(31 marzo 2018) Precio adq. : 1,75 GBP
Capitalización: 287 mill. GBP
Deuda Neta ajustada: -38 mill. GBP
PER ajustado: 4x

¿Sabían que el origen del fútbol español está relacionado con la mayor mina a tajo abierto de Europa?

La historia minera en España es tan antigua como su civilización. Ya en época de los iberos, 3.000 aC, se explotaban minas de cobre en el sur de la península. Un resquicio de esa minería se mantuvo en las minas de Riotinto (Huelva), que en 1873 fueron adquiridas por un grupo de empresarios ingleses al estado español que las explotó hasta 1954. Durante ese período se creó la mina a tajo abierto más grande del mundo: Corta Atalaya.

Fruto de esa operación se creó Rio Tinto Company, empresa que actualmente cotiza en Londres con una capitalización superior a 94.000 millones de dólares. Como en esa época las minas no gozaban de buena comunicación, los fines de semana, dueños y trabajadores, empezaron a practicar un juego importado por los ingleses: el balón pie. Con el paso del tiempo y la buena aceptación en la región se funda en 1889 el Recreativo de Huelva, el primer equipo español, de aquí el nombre que recibe: “el decano”.

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Why We Invested in Oxford Square Capital

May 6, 2018 in Equities, Ideas

This article is excerpted from a letter by Jim Roumell, partner and portfolio manager of Roumell Asset Management, based in Chevy Chase, Maryland.

Oxford Square is a publicly-traded business development company (“BDC”) primarily engaged in providing debt capital to a wide-range of U.S.-based companies. It holds assets in syndicated bank loans and debt and equity tranches of collateralized loan obligations. OXSQ’s focus is primarily on small to mid-sized companies. OXSQ generally invests between $5.0 million and $50.0 million in each of its portfolio companies.

OXSQ has a good track record in underwriting credit risk. It is impressive that it has maintained a growing to relatively consistent net asset value (NAV) per share over the last two years. During this period many other credit BDCs saw NAV declines. At the end of the first quarter of 2016, OXSQ’s NAV per shar was $5.89. The NAV per share grew throughout 2016 and remained relatively consistent throughout 2017. At December 31, 2017 the NAV per share was $7.55. This NAV performance is particularly impressive given the fact that OXSQ pays a large quarterly distribution to shareholders that reduces NAV. This means that OXSQ had earnings and/or capital appreciation that either grew or maintained the NAV even after the large quarterly distributions to shareholders. The distribution was $0.29 per share in each quarter of 2016 and $0.20 per share for each quarter during 2017. The current $0.20 quarterly payment represents an annualized distribution yield of 13% based on the current $6.15 stock price.

As credit spreads remain tight, many credit BDC’s have chosen to reduce their quarterly distributions. Should OXSQ choose to do the same, to say $0.16 per quarter, the yield would still be slightly over 10%. While we find the yield attractive, that was not the primary basis of our investment thesis. Rather, it was the significant discount that the stock trades at relative to the underlying NAV of the company. The primary assets of the business are syndicated bank loans and debt and equity tranches of collateralized loan obligations which are carried at estimated market value. These market values are reviewed periodically by independent sources (external auditors) and filed quarterly with the Securities Exchange Commission on form 10Q and annually on form 10K. As such, we have confidence in the reasonableness of the reported market values. As noted above, the NAV per share at December 31, 2017 was $7.55. We purchased shares during the quarter at an average price of about $5.50. This represents a very attractive discount to NAV of approximately 27%. Even at the current higher stock price of $6.15, the discount to NAV is about 19%.

We have met with CEO Jonathan Cohen and have confidence in his leadership. We are particularly comforted by the fact that he has a substantial personal investment in OXSC and has never sold any shares. In summary, our thesis here is to purchase an asset trading at a substantial discount to its underlying NAV and get paid a double-digit distribution yield while we wait for the discount to close.

Disclosure: The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients, and the reader should not assume that investments in the securities identified and discussed were or will be profitable. The top three securities purchased in the quarter are based on the largest absolute dollar purchases made in the quarter.

Leucadia: Strategic Transactions Highlight Value

May 5, 2018 in Equities, Ideas, Letters

This article is authored by MOI Global instructor Patrick Brennan, portfolio manager of Brennan Asset Management.

As we have discussed in past letters, we followed Leucadia for years from a distance. While we were greatly impressed with value legends Joe Steinberg and Ian Cumming, we did not own the name until after the company purchased Jefferies and subsequently became deeply unpopular with its historical investor base. After examining Jefferies’ record over multiple market cycles, as well as evaluating some of the team’s early capital allocation decisions (including the HRG investment which we also own), we believed there was substantial upside in the company’s asset base and we believed the team could drive further value in the years to come. This viewpoint contrasted with the more negative consensus sentiment which essentially argued some combination of the following:

  • Joe and Ian created all the value…Rich and Brian are New York investment bankers/traders/ mercenaries and therefore are genetically incapable of being value investors (or something to that effect)
  • Jefferies and National Beef are lower quality assets and will unlikely earn much over an economic cycle
  • Investment banking is in cyclical decline
  • LUK has tons of assets, often looks weird on a GAAP basis and the entire business is far too complicated – who wants to simultaneously follow bonds, cows and car dealerships?

Well, the path has been far from smooth and both the beef business and bond business have faced greater challenges than we anticipated over the past couple of years. Both businesses, however, produced record results in 2017 with nearly $1 billion in pre-tax income between them. Importantly, Jefferies has also started upstreaming dividends to the parent company to repurchase shares or to acquire other businesses. Yes, there will be volatility associated with these dividends, but last time we checked, the wind sometimes blows in unexpected ways for property and casualty insurers who invest underwriting profits. National Beef struggled far more than we anticipated, but its earnings have also rebounded far faster and ultimately higher than we ever would have guessed. We won’t detail every LUK investment decision over the past 3 years, but we would argue that the hits (HRG, FXCM rescue, KCG sale, Jefferies turnaround, partial National Beef monetization) far outweigh any misses. These early results (not to mention Handler’s track record when Jefferies was a standalone company from 2000-2013) might suggest that it is not a metaphysical impossibility for certain bankers to be decent capital allocators. So, given the favorable Jefferies/National Beef results, Jefferies dividends and market rumors concerning a National Beef sale, investors (naturally) sold and drove shares down -14% in the first quarter.

Given the number and variation in holdings, many investors typically look to book value (~$27) and tangible book value (~$20) as a rough approximation of value. But, this range of values considerably understates the favorable risk/reward in the name, considering the low or nonsensical marks of some of the businesses. By far the most glaring discrepancy was National beef, which was marked at -$37 million on a tangible book basis despite earning over $500 million in EBITDA during 2017. It does not take hours of studying herd levels to ascertain a discrepancy. While not as large as National Beef, other investments (Berkadia, Garcadia, Linkem, Homefed) were marked at levels sometimes 50% or more below realistic market values and even HRG, which team LUK successfully liberated, looks cheap relative to the possible value of Spectrum Brands. As the quarter ended, shares traded below our best estimate of liquidation value and nearly 50% below fair value. And of course, this would be a static estimate. What happens if LUK’s management finds other opportunities? In our opinion, enormous buybacks were warranted.

In early April, LUK simultaneously announced the following:

  • Selling 48% of its National Beef business for $900 million in cash plus an additional $150 million in recent profits/acquisition adjustments. LUK retained 31% of the business (Implied value of over $1.9 billion vs. -$37 million tangible book value).
  • Selling Garcadia ($425mm equity value vs. $200 million marked tangible book value)
  • $190 million acquisition of Bakken assets by Vitesse Energy Finance, doubling its asset size
  • Increased buyback program to 25 million shares from 12.5 million. Pro-forma for the transactions, LUK will have a whopping $2.8 billion of liquidity at the holding company
  • Jefferies announced preliminary Q1 results (during a rocky market period) of ~$120 million pre-tax
  • Proposal for a name change to Jefferies Financial Group Inc. (New ticker JEF)

The sales were obviously far above marked book value and suggest that other assets (Berkadia/Linkem/HomeFed) may very well have meaningful upside to marked value. More importantly, the moves confirm that management is attempting to create a more focused company and narrow the gap between price and value. The National Beef transaction was a complete homerun as LUK paid $868 million to acquire 79% of National Beef, received cash of $1.6 billion and still retains a 31% interest. LUK has jumped since the initial announcement, but it is still down for the year and trades roughly 25-35% below our best estimate of current value, which gives no credit to possible value creation optionality. If shares continue to languish, we hope LUK quickly exhausts its buyback program.

Disclaimer: BAM’s investment decision making process involves a number of different factors, not just those discussed in this document. The views expressed in this material are subject to ongoing evaluation and could change at any time. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. It shall not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned here. While BAM seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark. Although BAM follows the same investment strategy for each advisory client with similar investment objectives and financial condition, differences in client holdings are dictated by variations in clients’ investment guidelines and risk tolerances. BAM may continue to hold a certain security in one client account while selling it for another client account when client guidelines or risk tolerances mandate a sale for a particular client. In some cases, consistent with client objectives and risk, BAM may purchase a security for one client while selling it for another. Consistent with specific client objectives and risk tolerance, clients’ trades may be executed at different times and at different prices. Each of these factors influences the overall performance of the investment strategies followed by the Firm. Nothing herein should be construed as a solicitation or offer, or recommendation to buy or sell any security, or as an offer to provide advisory services in any jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The material provided herein is for informational purposes only. Before engaging BAM, prospective clients are strongly urged to perform additional due diligence, to ask additional questions of BAM as they deem appropriate, and to discuss any prospective investment with their legal and tax advisers.

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