July rebound almost compensated for June decline despite Brexit and Italian NPLs


Fund Commentary
17 Aug 2016


Fears surrounding the consequences of the Brexit vote and the Italian banking situation disappeared as fast as they emerged. The EuroStoxx 600 Net Return ended the month with a positive performance: +3.73%, almost compensating for the June decline: -4.83%, and reducing the year to date decline to –5.41%.

In that context, the Fund managed to outperform with a +6.25% return in July, outperforming its benchmark by 2.52% for the month. Year to date, the Fund’s performance stands at +3.14%, translating into an 8.55% outperformance versus its benchmark index.

Barco was the most significant contributor, followed, this month, by Alten and Kardex. At the other end of the spectrum, GfK, Tarkett and Beneteau were the three main detractors. The portfolio remained unchanged during the period under review in terms of number of constituents. The investment in Beneteau was sold off during the month and a new position was initiated in a Swedish company, Gränges.

Gränges is a company that the Investment Adviser has been following for quite some time. It is the market leader in rolled aluminum products for the heat exchanger industry and a well-known tier two supplier with long relationships with all the major OEMs and tier one suppliers. Until recently, close to 90% of Gränges’ customers were in the automotive industry. The company has a global market share of 20%, with leading positions in Europe and Asia – the locations of its two manufacturing facilities.

Gränges was nominated as the stalking horse bidder in a US bankruptcy court-supervised auction process for US company, Noranda that filed for bankruptcy in February 2016. The divestment of its downstream aluminum rolling business is part of the restructuring. Gränges won the auction process that followed and paid marginally above the predefined floor price. The downstream part of Noranda that Gränges is set to acquire is solid and profitable (stable revenues and EBIT margins over the past six years). Noranda has capacity of 180 kT, which would add around 85% to Gränges’ current capacity of 210 kT.

Besides its size and being a very stable business with more diversified end-market exposure two aspects are attractive from an industrial standpoint: 1) Gränges will acquire the long-sought after US manufacturing capacity and 2) the deal gives access to the HVAC market, a structural growth market with low aluminum penetration today. Finally, the financials of the transaction are extremely attractive: EPS accretion post transaction should be above 30% and 2017 multiples for the combined businesses stand at 9x EBIT, 11x PE or 8.5% Free Cash Flow Yield.


The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 08/08/16 and are based on internal research and modelling.