Patrick Brennan of Brennan Asset Management presented his theses on Jefferies Financial (US: JEF) and Permanent TSB (UK: IL0A) at Best Ideas 2019.

Summary:

Multiple financial names have experienced substantial declines over the past three months as leverage concerns, tax-loss selling and recession/interest rate fears have all led investors to quickly dispose of “risk off” names. Blind selling has driven shares of Jefferies Financial Group ($6.3 billion market cap) and Permanent TSB Group Holdings (~€730 million market cap) far below a reasonable fair value estimate.

Jefferies Financial Group: Despite CEO Richard Handler’s strong long-term track record at Jefferies, investors have never embraced the company following the 2013 merger with Leucadia. But, JEF trades (~70% of tangible book value) far below reasonable fair value estimates and below our downside valuation estimates.

A series of value enhancing actions (National Beef/Garcadia monetizations, capital return from Jefferies, aggressive share repurchases) should serve as a catalyst for a hated stock.

Permanent TSB: While depressing macro headlines, negative interest rates and no-deal Brexit fears dominate any discussion of European financial names, the Irish economy continues to post solid economic growth and experience a red-hot housing market. For Irish banks, this favorable backdrop is masked by government ownership stakes and high non-performing loan (NPL) ratios.

Trading at below 40% of tangible book, TSB’s bombed-out valuation offers substantial downside protection and allows investors several ways to win. Meaningful NPL reductions following recent securitization announcements should allow aggressive capital return in 2019/2020 with dividends amounting to a sizeable percentage of the bank’s total value. While interest rates have been low for years and may stay this way, even small increase would offer meaningful net interest income upside.

Finally, a sale is possible. Several U.S. financial names generated huge gains following government exits, and this could repeat in Ireland. A long-rumored sale of TSB could repay taxpayers, drive synergies and offer the highest shareholder returns.

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About the instructor:

Patrick Brennan is the founder and portfolio manager of Brennan Asset Management, LLC (BAM), a Registered Investment Advisory firm based in Napa, CA, which utilizes a concentrated value investing strategy. BAM manages separate accounts and is the sub-adviser for the Oceancross Capital Partners Fund. Patrick has given presentations at multiple value investing conferences, including presentations to The New York Society of Security Analysts (NYSSA), The Nebraska Society of Securities Analysts and presentations on various names at the VALUEx Vail Conferences. Patrick coauthored an article on tracking stocks with Lawrence Cunningham for The Financial History Magazine and Patrick was featured in a write-up of Liberty LILAK in The Private Investment Brief. Prior to founding Brennan Asset Management, Patrick managed portfolios and led research efforts at two value investing firms in California: Hutchinson Capital Management and RBO & Co. Previously, Patrick worked at Mark Boyar & Company, where he led the firm’s research team and helped manage $800 million of assets across individual portfolios, institutional accounts and a mutual fund. Patrick also worked for six years in investment banking and equity research with Deutsche Bank, CIBC World Markets and William Blair & Company. Patrick graduated summa cum laude from the University of Notre Dame with a degree in economics and was inducted into Phi Beta Kappa. Patrick received the Chartered Financial Analyst (CFA) designation in 2002 and is a member of the CFA Institute (formerly AIMR). Patrick is originally from Omaha, Nebraska.