Rotation presents undervalued opportunities

European capital markets were quiet during the first three weeks of November but continued their upward trend. In our opinion, this can be explained by the conciliatory tone of the central banks, good employment figures, and the continuation of upward revisions of earnings per share.

Fund Commentary
7 Dec 2021

European capital markets were quiet during the first three weeks of November but continued their upward trend. In our opinion, this can be explained by the conciliatory tone of the central banks, good employment figures, and the continuation of upward revisions of earnings per share.

This said, momentum halted suddenly on concerns surrounding the rise in COVID cases in many countries, and the discovery of the Omicron variant, which led to the significant rise in case numbers in South Africa. Due to the increased lack of visibility, the benchmark fell by nearly 4% following the announcement of this new variant and ended the month at -2.53%. Meanwhile, risk indicators have logically risen sharply with the VIX crossing the 25% mark on November 26th and ending November at an elevated level of 24%.

The Strategic European Silver Stars Fund returned -0.70% in November compared to -2.53% for the benchmark. Year to date the Fund has returned +18.40%.

The largest contributors to the November performance were: RVRC (+0.65%), Byggmax (+0.62%) and Boozt (+0.48%). All three are Swedish companies mainly or partially involved in e-commerce activities. Bekaert was the largest detractor during the month (-0.58%), followed by Just Eat Takeaway (-0.44%) and Befesa (-0.40%).

As mentioned regularly, our fundamental approach to investing often leads us to invest with contrarian views of the market. During September and October 2020, the significant market rotations led us to sizeably reduce our exposure towards “COVID winners” or “Stay at Home players” and crystallise our gains from earlier in 2020.

During 2021 those same “Stay at Home” stocks have been largely penalised by the market as economies reopened and vaccination campaigns have led other investors to believe that these companies will not continue to perform as well as they did throughout the COVID lockdowns.

In 2021, we decided to re-enter the space and redeploy capital in businesses that, in our view, managed to post the equivalent of three years of development in three months during spring 2020, all without having to spend a euro on marketing – as unusually for this type of business, customers came spontaneously.

We do not believe that these online businesses will retain all their customers now that the world has reopened, but our view is that many of the customers / business wins should remain in the future, and the markets are significantly under-pricing the stocks of these companies.

RevolutionRace (RVRC) is a pure digital, Direct to Consumer lifestyle brand specialising in outdoor apparel. It focuses on developing and selling high-quality products, but at lower prices than its competitors by internalising many of the activities and only selling the products online directly to consumers, cutting out the middlemen. On the back of this strategy, RVRC should continue to outgrow significantly its underlying market.

On top of this strategy RVRC is entering new markets (they have entered the US and Switzerland this year) and the product range will continue to be enlarged (shoes and backpacks this year).

In November, RVRC reported very strong results. Sales grew 95% and their EBIT margin rose to an impressive 28.0% for Q1 2021/22 (calendar Q3). Management advised that Q2 was off to a strong start and downplayed supply disruptions. We see the great ongoing potential for a brand that still appears to be in the early stages of its roll-out.

Byggmax is a position we entered in March 2021 and described the investment case in March’s monthly newsletter. This company is the number one value retailer in the fragmented Nordic DIY and construction materials market, operating physical stores and digital platforms (direct sales and click & collect).

Since March, the business has been developing extremely well, posting growth of 13.7% for nine months with a 13.7% operating margin (11.5% at 9M 2020). In mid-September, the company announced its intention to buy back SEK 200m (approx. 4% of the capital).

The repurchased shares will be withdrawn through a reduction in share capital. As such, the 4% adds to the 3% dividend yield and will confer investors with a 7% capital return this year. At the end of November, approximately 50% of the buyback was already completed at attractive price levels.

Boozt reported another strong quarter in early November and confirmed an upgraded outlook for 2021. On 30th November, post-Black Friday weekend, the company announced that October and November delivered ahead of expectations, and net revenue growth for 2021 is now expected to be towards the upper end of the 27.5-32.5% range, with 125,000 new customers attracted during the Black Friday week alone.

Consensus expectations in early 2021 for revenues this year were SEK 5.02bn. They now stand 12.4% higher at SEK 5.64bn. Like many of the Fund’s positions, Boozt’s business has turned out to be much better than expected this year, and this has not yet been fully translated into its stock price development.

On the detractor’s side, we’ll focus mainly on Bekaert – the Fund’s largest position, as there is little significant news regarding Just Eat Takeaway and Befesa. In the 3rd quarter, Bekaert’s sales were much stronger than expected with a beat of 9% compared to consensus expectations.

Net debt increased as Bekaert took in more inventory than normal to be able to circumvent possible supply chain issues in Q4 21, resulting in higher working capital. In addition, Bekaert disclosed that the volume growth in Q3 21 was modest (0.6%). Those elements, plus the fact that Bekaert did not narrow down its 2021 EBIT guidance (>10%), probably resulted in a negative reaction.

The over conservative guidance was discussed extensively with the management team post the release. Based on those discussions, we remain convinced that things should correct rapidly, and by then, investors will be more inclined to reward the company for its success and strategy. This stock trades at approx. 3x EBITDA for 2022 and has the potential to double from here in our view.

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.

Please do not hesitate to contact us or visit the Strategic European Silver Stars Fund Page.

Adam TurbervilleAdam Turberville
+44 1481 742380

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 02/12/2021 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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