The Fund gained +1.90% during September, taking its year to date performance to +15.48%. During the month, central banks briefly succeeded in pleasing markets by taking the center stage and confirming their renewed dovish stance on both sides of the Atlantic. As anticipated, additional rate cuts and a revival of quantitative easing in Europe were announced, whilst the Federal Reserve at the same time reiterated that the US economy remains in a favorable place in spite of significant risks.
Despite weakness in the manufacturing sector, consumption remains healthy, backed by low unemployment, rising wages and high savings in the household sectors. This said, the Investment Adviser believes that profit growth is likely to remain modest as margins moderate and revenue growth remains subdued.
The surprisingly strong sector rotation in early September was short-lived. Investors appear to be spooked by various triggers such as disappointing macro data and political turmoil and therefore moved towards safe haven companies with past outperformance, more specifically quality, low-volatility and momentum shares. As a result, defensive sectors are trading near a record premium. According to the Investment Adviser, there is currently no bubble in the market as a whole, but certainly a bubble in some names, with the team continuing to avoid the latter as it considers the current prices to be very high, leading to extreme risks.
Spie was the largest monthly contributor, followed by Boozt and Ipsos. SAF Holland, Trigano and Mauna Kea were the three largest detractors. Spie enjoyed positive performance in September after a sell-side event that took place in London early in the month. Management sounded upbeat on current trading and subsequent broker’s comments were very positive.
Boozt benefited from its key competitor Zalando’s comments during conferences in Germany, which indicated a good run in Q3 19, benefitting from a poor trend in Q3 18.
Ipsos reacted positively to BNP Paribas Exane’s recommendation upgrade on the back of heightened confidence in the Company’s midterm targets set for 2021 after organic growth accelerated to 3% in H1 19.
Two weeks ago, SAF-HOLLAND shocked the market with a profit warning, guiding for a c15% cut to consensus-adjusted EBIT for 2019, whilst withdrawing its 2020 guidance. The Investment Adviser believes that the share price reaction (-29% since the announcement at the time of writing) is overstated and thinks that the market appears to be missing that c25% of the adjusted EBIT guidance cut is related to impairments following the Company’s (admittedly) unclear communication. The stock is now trading on a >10% FCF yield 2020, despite a significant share of earnings being exposed to recurring revenues from spare parts and maintenance. The share price correction was followed by insider buying, with CEO, CFO and COO buying shares on the day of the announcement.
The market also reacted negatively to Trigano’s Q4 sales report (fiscal year end on August 31st), with the Company missing its top line guidance. This was largely due to the impact from reduced production in two factories that are being re-organised in order to improve productivity. The second disruption came from suppliers failing to deliver the new EURO6D chassis in a timely manner, which led to days of production stoppages in several factories. The situation has been resolved in early September, while productivity issues in the above mentioned factories should be fully fixed by the end of November. As the Investment Adviser considers these to be one off events, the position size was increased sizably during the month, with the Company trading at 5.5x EV/EBIT and 7.5X PE on the basis of August 2020’s expectations.
Finally, Mauna Kea suffered from a global sell off in medtech/biotech names across the European markets in September.
The recent shifts in markets have created great opportunities to resize some of the Fund’s positions, which the team is hopeful will continue to produce solid returns through the last quarter of 2019 and into 2020.
The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 08/10/2019 and are based on internal research and modelling.