A great start to the new year

The Fund gained +0.89% during March, taking the year to date performance to +11.32%. Following the shock of Q4 18, the past three months delivered some of the best returns for a long time.

Fund Commentary
18 Apr 2019

The Fund gained +0.89% during March, taking the year to date performance to +11.32%. Following the shock of Q4 18, the past three months delivered some of the best returns for a long time.

From a broader point of view, one of the stories that characterised 2018 was the total absence of positive returns in any major asset class. So far, 2019 has been the polar opposite, with healthy returns in commodities, stocks, credit markets and government bonds.

This phenomenon may appear counter intuitive in the context of continued uncertainties around Brexit, global trade agreements and a relentless slowdown in global manufacturing data driving down EPS expectations globally. According to the Investment Adviser, all of this was overshadowed by the change of tone from the major central banks.

As noted in the February newsletter, and already voiced by several market participants and observers, reduced volatility and the absence of discrimination may not last for the entire year. As a consequence, the Investment Adviser firmly believes that discipline around entry and exit prices is of paramount importance in a market environment that could become more volatile at any time.

Spie was the largest monthly performance contributor, followed by Albioma and Boozt. Jacquet Metal, Mauna Kea and Metall Zug were the three largest detractors.

Spie released FY 2018 numbers on the 12th March, significantly beating market expectations, particularly with regards to free cash flow generation. Even after returning +36% during the quarter, Spie still trades at an 11% free cash flow yield for 2019 with high visibility given that 85% of the year was already secured on 1st January, thanks to the installation backlog and the maintenance share of revenues.

Albioma has been discussed in detail in previous letters, especially during the last quarter of 2018. On the 8th March, the Company released 2018 numbers and unveiled a 2019 EBITDA guidance in line with expectations. In addition, the Company also released a €200M EBITDA target for 2020, significantly exceeding the €185M consensus expectations at that point in time, with the stock price rebounding accordingly.

There is nothing specific to mention regarding Boozt except for an initiation note by Nordea on the 14th March with a Buy rating and a SEK 84 target price. The stock closed on the 5th April at SEK 69.5.

In terms of detractors, Jacquet Metal was penalised as a result of low volumes in Q4; however, management appeared relatively confident about 2019 during the roadshow that followed the full year release and record profitability in 2018. With the bolstering of competence during the year (purchasing, financial, legal), the group is structured to integrate new acquisitions and is still looking for targets. The management’s track record of value creation in that field is one of the key pillars of the investment thesis. In addition, the strong rebound of nickel prices since the beginning of the year should gradually translate into the group’s earnings during the year.

Mauna Kea was penalised by the absence of concrete news flow regarding refinancing options during the 2018 conference call. The Investment Adviser believes this issue is likely to be addressed properly by the Company during the coming months.

Finally, Metall Zug published numbers that overshadowed the major announcement of the release: the Company’s decision to break up the business. Given that Metall Zug trades at 10x EV/EBIT 2019 and the Investment Adviser’s view that each individual part is worth more than such a multiple, the realisation of the break up should unveil significant value in the quarters to come.

The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 08/04/2019 and are based on internal research and modelling.