March was another turbulent month for global equity markets, during which, nothing really changed in terms of visibility. On the contrary, commodity prices have experienced extreme volatility, and now more than ever, inflation is at the centre stage of all debates. Economists and central banks have taken turns downgrading their economic growth expectations for 2022.
Although the impact on the actual economic data remains limited for now, the impact of the war in Ukraine has become visible in several surveys in Europe. Eurozone consumer confidence fell sharply in March, adding to the risk of a possible shock to consumption.
Given that European stocks have a higher exposure than their US counterparts to countries involved in the conflict and a big dependence on Russian commodities, investors exited the region in a large way in the early days of the month, triggering unprecedented outflows with the STOXX 600 Index losing a further 8.3% in the first week of March.
Since the war began, not only have Europe’s equities underperformed US stocks by approximately 8% but they have also significantly de-rated. The MSCI Europe Index now trades at a record 35% forward price-earnings discount to its US counterpart.
In light of the above, the Strategic European Silver Stars Fund returned performance for March was -0.53%. The year to date return stands at -6.87%, a 2.80% outperformance compared to the benchmark at -9.67%.
The largest contributors to the March performance were: Albioma (+0.74%), Befesa (+0.65%) and Ipsos (+0.42%). Bekaert was the largest detractor during the month (-0.66%), followed by Trigano (-0.53%) and Just Eat Takeaway (-0.35%).
For the second month in a row, Albioma was the largest contributor. Following an article in the first week of March from Betaville, then another by Bloomberg, Albioma confirmed on 9th March that it is conducting preliminary discussions with KKR that could lead to a full takeover of the company.
Albioma has the perfect profile for private equity or infrastructure firm as it has a fully regulated or contracted profile under which its operating cash flows allow for a self-financing model. In addition to this, KKR launched Stellar Renewable Power, a platform to develop large solar power plants at the end of 2021, and is looking for assets in the renewables sphere.
Given that there are not that many players with more than €200m EBITDA in that space within Europe, Albioma could also attract interest from other private equity and infrastructure investors, as well as from oil and gas producers, or utilities seeking to boost their exposure to renewables and green energy producers.
We find it interesting to note that, without exception, all three companies that contributed negatively to the performance in 2021 (Albioma, TeamViewer and Just Eat Takeaway) have either been approached officially or are rumoured to attract takeover interests, during the first three months of 2022.
Befesa has capitalised on the commodity price crisis. Earlier this year, the market focused on higher energy costs which it perceived as a drag, however, the higher costs should be more than offset by elevated zinc (c.1/3 unhedged) and aluminium (fully unhedged) prices.
The story remains more attractive than ever with multiple growth drivers materialising simultaneously: China expansion, full-year American Zinc Recycling (AZR) incorporation and structural tailwinds to both EAF steelmaking and steel dust recycling.
Finally, Ipsos continued its upward trend following stunning 2021 results that were published in late February, and the additional subsequent upgrades by sell-side research. As shown in 2009 and 2020, a fast-changing or uncertain environment is structurally favourable to the company, as Ipsos’ role is to help companies and organisations assess the potential impacts of changes occurring all over the world.
On top of this great news flow, the comparable valuations are also looking very favourable as a private equity consortium led by Elliott Management and Brookfield Asset Management has agreed to acquire television ratings group Nielsen for $16bn, in a deal valuing Nielsen at 15-16x EBIT, more than twice Ipsos’ multiples.
On the detractor side, Bekaert continued to give back the significant gains of January despite strong results, with >10% Free Cash Flow yield in 2021, a 4% dividend yield and the initiation of the announced share buyback for €120m representing 6% of the current capitalisation, pushing the shareholder return north of 10% in 2022. It appears to us that Bekaert was trapped in the cyclical/European outflows of March for no fundamental reason.
Similarly, despite its rock-solid balance sheet with a net cash position last August (representing 15% of Trigano’s market capitalisation) and H1 revenues released on 24th March at +8.4% organically, Trigano’s stock price was heavily penalised in March. The stock dropped 14% as the company mentioned that the chassis supply disruption that has already hampered Q2, will persist into Q3 at least. The company’s backlog now extends well into the next FY with dealers’ inventory at a historical low point.
Finally, the most recent trade fair, which took place at the end of February, went particularly well, with clients expecting their orders to be delivered in March 2023. The market seems to price demand destruction and margin squeeze. We believe this is highly unlikely, particularly in the current geopolitical context, which should continue to favour staycationing, and therefore motor vans.
There is nothing specific to mention about Just Eat Takeaway other than the acquisition rumour referenced above. According to a Betaville blog post, the food delivery company is at the centre of takeover speculation and maybe considering strategic options with an investment banking adviser.
They say the firm may have attracted interest from buyout firms during a strategic review, as well as Uber Technologies. We don’t believe there is anything surprising in this news given the ridiculously low level the shares have been trading at recently.
As already mentioned at the end of February, we have positioned the Fund to be prepared for whatever scenario materialises by maintaining a very prudent stance. At the end of March, cash exposure (uninvested cash and a position currently under offer) amounts to approximately 21% of the NAV. In addition, the Albioma investment (8.3% of NAV) might also convert into cash in the coming months.
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.
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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 05/04/2021 and are based on internal research and modelling. Please click on Disclaimer Page to view full disclaimers.