Undervalued stocks will have their day

September was marked with numerous sources of concern: the economy; central banks; COVID and politics, all generating a rise in risk indicators and a sharp fall in indices.

Fund Commentary
8 Nov 2021

September was marked with numerous sources of concern: the economy; central banks; COVID and politics, all generating a rise in risk indicators and a sharp fall in indices.

The month of October continued in the same vein with a relentless flow of news on rising energy prices and inflation in general. This however was supported by corporates’ good earnings releases. European stocks have begun the final quarter in the best way possible, with the EURO STOXX 600 Index posting its best month since March with a +4.67% return.

The Strategic European Silver Stars Fund returned +0.61% in October. Half of the difference can be explained by news from one company that significantly penalised the Fund’s return, and we will cover this in detail. Year to date, the Fund has returned +19.24%.

The largest contributors to the October performance were: Indra Sistemas (+0.53%), Bekaert (+0.49%) and RVRC (+0.39%). TeamViewer was the largest detractor (-1.75%) during the month, followed by Pierce (-0.27%) and Gränges (-0.15%).

Indra Sistemas was one of the few positive contributors to performance during the harsh market conditions of September, and it confirmed its positive trajectory in October, thanks to the release of an excellent Q3 report. Both revenues and EBIT were substantially ahead of the consensus numbers, and FY21 guidance was raised for revenues, EBIT and Free Cash Flow (FCF).

Despite a good first half, the previous FY21 guidance had raised concerns surrounding the group’s momentum for H2 and the stock did not re-rate much, leaving it the most heavily discounted name in the sector among midcaps. On top of the excellent numbers, the dividend is to be reinstated after 8 years with the company proposing to pay €0.15 per share in July 2022, indicating that management expects consistent profitability and FCF for the coming years.

There was no company-specific news on Bekaert other than a broker report mentioning the following: “The company, which has achieved a step-change in margins, is valued at a ridiculously low 2022 EV / EBITDA of 3.6x versus 5.8x for the peer group while generating high FCF yields, even with a material uptick in CapEx. As earnings and FCF remain strong, and Bekaert occasionally opts for a share buyback, that undervaluation should disappear.” We are expecting more news on a potential share buyback when the company reports its Q3 numbers in the second half of November.

RevolutionRace (RVRC) is a rapidly growing and highly profitable direct-to-consumer (D2C) brand, selling multifunctional outdoor wear online. The company currently generates strong growth in all 36 countries where it is present, with particularly strong momentum in the DACH region.

The company’s ambition is to launch in 2 to 4 new markets per year. This calendar year has so far seen launches in the US and Switzerland. The US launch was in June, with a small selection of SKUs using Amazon for its fulfilment. The company also plans to launch its new collections of shoes and backpacks sometime in November-December and is evaluating further expansion to new product areas. Results will be released on 8th November; we expect another very strong quarter with close to 100% revenue growth.

Moving to the main detractor this month, TeamViewer. A high growth and high margin business exposed to a large and fast-growing market in remote connectivity software. At the end of 2020, TeamViewer’s products had been installed on over 2.25bn devices and its active connected devices had crossed a whopping 340m devices. At that date, it had amassed 584k paid users across 180 countries.

TeamViewer’s target market is fragmented. There are a few free alternatives available from players such as Microsoft and Google, but these have limitations in terms of use. For example, the devices that can be connected; the type of operating system used etc. and they do not match up to TeamViewer’s ease-of-use and breadth-of-use cases.

In March 2021, TeamViewer announced sponsorship deals with the Manchester United football team as the lead jersey sponsor and the Mercedes F1 team. The Manchester United deal alone was reportedly worth approximately €275m (or €55m per year over 5 years) and the company cut its FY21 adj. EBITDA margin guidance to 49-51%, from 55-57% which was announced just 6 weeks before. Based on 200M shares, and assuming zero benefits from those deals, they would cost a maximum of €1.4 per share, but the stock price moved from €45 to €30 and this is when the Fund began to build a 2.5% position in TeamViewer.

The company benefitted from the working from home trend resulting from the COVID crisis, but then saw more normalised growth trends in 2021. In early July 2021, the company confirmed its full-year guidance, albeit at the low end of the range, putting itself under significant pressure to perform in H2, as even the low end implied a considerable acceleration compared to H1.

In the early days of October, a second profit warning prompted TeamViewer to cut its FY21 guidance (as expected by consensus), but unexpectedly, it also walked away from its 2023 targets that were set just six months ago. This led to substantial downgrades and changes in the recommendation from nearly every broker covering the stock. The stock price dropped by more than 50% following the announcement.

Clearly, 2021 is a year to forget for TeamViewer, and a new thesis is required based on the revised mid-term outlook. Some issues need to be fixed, not to mention management credibility, to justify an immediate recovery in the share price. The market needs to see evidence that 2021’s shortcomings were only a result of execution missteps and overly ambitious targets.

On 3rd November, the company released the final Q3 numbers and confirmed its 2021 guidance and the stock price rebounded by more than 10% on the day. We remain convinced about the company’s positioning, and this should be reinforced during a Capital Market Day on 10th November.

Our view was that despite questionable sponsorship deals, TeamViewer is way too cheap relative to its growth, margins and FCF generation profile. The same is still true today; high teens top-line growth with 50% EBITDA margin is at odds with  TeamViewer’s 9x FY23 EV/EBITA multiple.

Releases from Pierce and Gränges during the month triggered volatility on their stock prices, but this in no way changes our view about the companies and the long term investment thesis.

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 04/11/2021 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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