The Strategic European Silver Stars Fund returned +2.17% in August, taking the year to date performance to +25.67% – an outperformance of 5.59% vs the benchmark. In general, European indices continued the steady rise that began at the start of the year, posting a seventh consecutive monthly increase.
On the whole, August has been relatively calm, the exception being comments from Chinese President Xi Jinping who stressed the need for “common prosperity” and that they are considering plans to regulate and redistribute excess wealth.
The market initially reacted negatively to the news, but this decline quickly reversed in the days that followed. Likewise, the tension observed mid-August on the volatility index (VIX) did not persist and the risk indicator ended the month at a low 16.48, close to the 2021 low of 15.
The corporate earnings released during August were generally very good. According to Bloomberg, STOXX 600 constituents’ sales and net income exceeded expectations by 3.33% and 26% respectively. We saw a similar trend across the board for the Fund’s positions.
The largest contributors to August’s performance were Albioma (+0.48%), Hunter Douglas (+0.46%) and Ipsos (+0.44%). Nordic Paper was the largest detractor during the month (-0.27%), followed by Akwel (-0.18%) and Granges (-0.12%).
Albioma’s performance was penalised in H1 due to the potential renegotiation of tariffs for solar installation from before 2011. Since then, and thanks to reassuring news on that specific topic, the stock price has reversed its course. In the end, few of the group’s installations will be affected and the financial impact should be negligible.
Overall, we still see the potential for greater than 50% upside for this company, which is reflected in the fact that it is currently in the top 5 largest positions held by the Fund.
In December 2020, Hunter Douglas’ majority shareholder announced their intention to purchase all of Hunter Douglas’ outstanding common shares at €64 per share. The offer was subsequently increased by nearly 30%, from €64 to €82 in May this year. We felt that both the initial and revised offer prices were totally inadequate and did not tender any of the Fund’s shares to the offer that lapsed in June.
The correct decision as it happens, as the tender ratio to the offer, turned out to be ridiculously low, and the stock price now trades at over €100 post-release of H1 numbers. Interestingly, it was the first release after the offer period, and surprisingly, the company’s outlook turned from “cautiously optimistic” to “positive”. The H1 earnings per share were €6.27 compared to €0.74 the previous year.
We still fail to understand how independent board members approved and recommended an offer from the majority shareholder at 10.2x H1 earnings (5.1x annualised), then increased it to 13.1x H1 earnings (6.5x annualised) when all competitors or industry transactions take place at above 25x annual earnings.
The upside potential remains staggering for this investment, and we would not be surprised to see another attempt from the majority shareholder to delist the company in the near future; at a price more consistent with the intrinsic value of the business.
The market was pleasantly surprised in late July, following Ipsos’ interim results and the announcement of its new CEO. There was no further news in August, other than a number of brokers digesting the news from July and translating it into earnings and recommendation upgrades.
There was no significant news regarding the detractors during the month. Nordic Paper published its results in late July. Demand remains strong for both kraft paper and natural greaseproof segments. Sales prices are moving up gradually to adjust to higher input costs, faster for kraft paper, and more slowly for natural greaseproof due to longer contracts.
We see value in the company, particularly once the slower-moving sales prices adjust to higher pulp costs towards the early part of next year. Akwel and Granges suffered for the same reason during the month: gloominess of the automotive sector, where short term visibility is still low as production remains temporarily but severely impacted by the highly publicised chip shortage.
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 02/09/2021 and are based on internal research and modelling. Performance data is based on the Strategic European Silver Stars Fund (A EUR Class). Please click on Disclaimer Page to view full disclaimers.
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