Not for the first time this year, writing the monthly newsletter feels like déjà vu. Weeks go by and look the same: once again, in May, all eyes were on monetary tightening, economic growth-related data, as well as the conflict in Ukraine and its consequences.
The Fed raised rates again, this time by 50 bps, and the BoE by 25 bps for the fourth time in a row. Policies by central bankers are aimed at reducing the rampant inflation as much as possible, despite the risk this poses to global economic growth – the latter being revised downwards regularly.
The conflict in Ukraine and China’s “zero COVID” policy have inflicted multiple consequences on price levels, supply chains and household confidence. The European Commission has lowered its FY22 and FY23 GDP growth forecasts for the Eurozone to 2.7% and 2.3% respectively.
At this stage, it is hard to see what could stop an unfolding bear market, although past cycles provide some answers: central banks injecting lots of excess liquidity into the system, a collapse in energy prices, a fall in the US Dollar, or assets becoming significantly undervalued. Unfortunately, none of those seem to be on the horizon.
On the contrary, the current environment has already triggered a wave of profit warnings from stock market heavyweights: Walmart, Target and Lowe’s due to inflation and supply chain; Estee Lauder and Nvidia due to the Russia / Ukraine crisis and China; Cisco and Applied Materials due to supply chain and China, to name but a few.
In May, the Strategic European Silver Stars Fund outperformed the MSCI Europe SMID Cap Index by 1.82%, taking the year-to-date outperformance versus the benchmark to 5.73%.
Our investment approach has helped again this year. Rigorous valuation methodologies protected the Fund from the severe sell off in growth stocks that were, in our view, heavily overvalued at the end of 2021.
Second, our fundamental approach to investing in listed markets has again yielded returns through our positions being taken private by private equity funds; Albioma, one of the Fund’s largest positions, was up 45% in 2022 as a result of the announced takeover by KKR.
Third, and perhaps most important, a permanently disciplined and prudent approach led us to significantly increase the cash held in the Fund this year.
The largest contributors to performance in May were Bekaert (+0.87%), TeamViewer (+0.63%) and Gränges (+0.19%). Just Eat Takeaway was the largest detractor during the month (-0.51%), followed by Byggmax (-0.49%) and RevolutionRace (-0.39%).
Bekaert was up 8.6% last month, including the dividend payment. The company had a very solid quarter despite subdued demand in China. Consolidated sales came in at €1.39bn, +23% YoY and 14% ahead of consensus, with all segments showing strong performance.
This is proof again of Bekaert’s pricing power and ability to shift its product portfolio towards a better price mix. The sales will probably more than compensate for any inflation and margins should remain robust as expected.
In a similar fashion, TeamViewer reacted positively to its Q1 release, where an adjusted EBITDA margin reached 51% in Q1 2022 – circa 5% ahead of consensus expectations and confirming its 2022 guidance.
Investors were encouraged by the KPIs of its Enterprise business; growing Billings >50% in the quarter, adding >160 new Enterprise customers and showing sustained graduation of mid-market customers becoming large customers, one of the key pillars of our thesis. In the meantime, the company continues to buy back shares, providing more support to the share price.
Like their automotive peers, Gränges benefitted from Volkswagen’s comments in the early days of May. Volkswagen expects the protracted shortage of semiconductors to ease during the second half of the year and contribute to a surge in output, offsetting months of curtailments. It also confirmed a projection that deliveries will rise by as much as 10% this year, even after production slumped by 12% during the first three months.
Just Eat Takeaway continued to suffer from the tech rout this month. On the company front, it announced its decision to close its platform in Romania. After Norway and Portugal, it is the third country the company has exited this year. In Europe, there remains only one country – France – where Just Eat Takeaway is present without a leadership position.
In France, it announced in April that it is reducing its rider fleet by 269 (out of 800-900), and will cut staff in support functions by 20 to 30, to keep approximately 40 of them, consistent with the objective to return to a positive adjusted EBITDA in 2023 at group level.
The entire delivery space is currently seeing a complete shake up with a clear path to free cash flow, which is essential given the absence of additional funding. As a perfect illustration, the boom in grocery delivery seems to have lost almost all momentum.
In May, Gorillas announced plans to lay off 300 people, cutting its administrative staff in half only seven months after the Berlin-based company raised up to $1bn. Gorillas is also exiting four of the nine markets in which it operates.
Turkish grocery delivery firm Getir told staff recently that it plans to reduce its global headcount by 14%, and Gopuff put 22 warehouses on the chopping block to cut costs. Rationalisation and proper capital allocation are precisely what the delivery industry has been lacking in recent years. This can only benefit established leaders like Just Eat Takeaway.
Despite strong Q1 releases during the month, both Byggmax and RevolutionRace suffered from the increased near-term uncertainty amid weak consumer sentiment.
As always, we invite investors and prospective investors, to contact us should they wish to understand our views on the current situation and the positions held in the portfolio. Download the latest factsheet.
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The views and statements contained herein, including those pertaining to contribution analysis, are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 03/06/2022 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.
Morningstar™ Ratings Disclaimer
The Strategic European Silver Stars Fund – A EUR share class has a Morningstar rating of 4 stars overall and 5 stars over 3 Years. Morningstar Rating™ as of 31/05/2022. Past performance may not be a reliable guide to future performance. Returns could be reduced, or losses incurred, due to currency fluctuations. The Strategic European Silver Stars Fund received a Morningstar 3 Globe Sustainability Award. Sustainability Rating as of 30/04/2022. Out of 789 Europe Equity Mid/Small Cap funds as of 30/04/2022. Based on 98.92% of AUM. Historical Sustainability Score as of 31/03/2022. Sustainalytics provides company-level analysis used in the calculation of Morningstar’s Historical Sustainability Score. Data is based on long positions only.