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O'Keefe Stevens on Alibaba $BABA US
Thesis: Alibaba's strong market share and growth in AI-related cloud services, coupled with significant undervaluation, offer compelling upside potential.
Extract from their Q2 letter, link here
Analysis: Alibaba is the largest e-commerce player in China, with 40% gross merchandise volume (GMV) market share through its Taobao and T-mall businesses. While the cloud computing business is relatively small, its 37% market share in China positions it well to capitalize on the increasing demand for AI-related products. In the most recent quarter, AI-related cloud revenue recorded triple-digit growth y/y, with the expectation that total cloud revenue will accelerate to double-digit growth in 2H 2025. It’s rare to find a dominant market share business with significant tailwinds trading for ~10x adj. EPS. After accounting for their ~$60B net cash balance sheet, the stock is trading at 6-7x, which, we believe, is far too cheap. We understand this business would not trade at this price if it were a U.S. business. However, the valuation gap at a high single-digit P/E is pricing in a combination of the following risks – 1. China invading Taiwan. 2. Cash can never leave mainland China (disproven). 3. Increasing competition from Pinduoduo and Shien resulting in market share loss 4. China’s geopolitical tensions worsen. 5. Economic slowdown stemming from the recent housing market downturn. 6. VIE structure creates doubt over the actual ownership of the business. All risks have merit, with cash distribution restrictions at the lower end due to the recently announced dividend and special dividend. Cash returned to shareholders totaled $16.5B in FY24, up from $13.4B in FY23. All investments carry risks; some can be diversified away, and others cannot. While incremental investments and spending will likely lead to margin compression, this is a necessary step to stabilize and potentially regain market share. The risk of continued market share loss from Pinduoduo (Temu), JD.com, Shein, and Douyin is shown below. Alibaba’s Chinese market share has declined from 78% in 2015 to 44% in 2022 and 40% in 2023. The under-reinvestment in the business opened the door for others to come in. Joe Tsai, Chairman, stated Alibaba had shot itself in the foot over the last decade, not prioritizing the end-user experience. Eddie Wu, who took over as CEO in late 2023, has prioritized improvements in the user interface. This reinvestment should help mitigate future market share losses. We expect capital returns through dividends and buybacks to continue for the foreseeable future. The business generates substantial free cash flow, cumulatively over the next 5-6 years, could total today’s enterprise value.
Forager on APi Group $APG US
Thesis: APi Group's recurring regulatory-driven revenue and diversified customer base make it a resilient and attractive long-term investment.
Extract from their Q2 letter, link here
Analysis: We still see APi Group as an attractively valued, high-quality compounder with healthy cash flow generation. It should continue to do well across various macroeconomic environments given its largely recurring revenue focused on inspection, maintenance and monitoring. Note that most of this work is typically regulatory or statutorily driven and largely uncorrelated to the economic cycle. Furthermore, it has a very diversified customer base with average contract sizes of less than $10k amongst its core segments. Due to this, it remains one of our larger holdings.
Platinium AM on Bilibili $BILI US
Thesis: Bilibili’s strong user engagement and monetization potential, coupled with recent game success, highlight its bright and rewarding future.
Extract from their Q2 letter, link here
Analysis: Despite the housing hangover we continue to find opportunities in the Chinese market. For example, we established a new position in the online video and games company Bilibili. The firm started out as a website catering to comic, anime and gaming enthusiasts but has now cemented its position as a general-interest YouTube like asset. This is a platform which boasts over 340m active users each month and enjoys high user engagement, with users typically logging in one out of every three days and spending 105 minutes on the platform each day they log in. The founder’s maniacal focus on user experience is behind this healthy growth in usage and growing engagement means the firm can now monetise its popularity and strengthen its financial position. We had a little bit of luck as well, with one of Bilibili’s newly-launched games gaining strong traction shortly after we bought into the company. Bilibili was once a market darling but has fallen out of favour since its loftily-priced IPO in 2021. However, we think the company has a bright – and potentially very rewarding – future.
Munro Partners on Cameco $CCJ US
Thesis: Cameco's strategic position in the nuclear supply chain and supportive market dynamics highlight its potential for significant growth.
Extract from their Q2 letter, link here
Analysis: Cameco was founded in 1988 in Canada and is the largest uranium company in the Western world, producing over 20mn lbs of uranium in 2023. They also provide fuel services such as uranium conversion and refining, and own a 49% stake in Westinghouse, a leading nuclear reactor Original Equipment Manufacturer (OEM) and aftermarket product and services provider with content in ~50% of the global nuclear reactor fleet. Cameco is the only Western, publicly traded, large-cap company with 100% exposure across the nuclear energy supply chain. We believe nuclear energy is a key pillar of the energy transition as a scalable, carbon-free baseload power source. The nuclear power industry is experiencing a shift with discussions moving from early plant retirements to new 40-year life extensions and the possibility of new builds, including in the US. From our research, we believe the consequential earnings opportunity for Westinghouse is underappreciated by the market, with 16 reactors in the US already approved for life extensions and 6 new reactor units scheduled for construction in Eastern Europe over the next 4 years. A new AP1000 reactor costs US$6-8bn, 25-40% of which is addressable by Westinghouse. Assuming the midpoints, each AP1000 reactor could generate more than US$2bn in revenue opportunity for Westinghouse, compared to its current revenue of just over $3bn today. This resurgence of the nuclear industry is clearly supportive of uranium prices, where Cameco could benefit given their Tier 1 uranium assets in Canada. These market forces are influenced by the existing uranium supply chain structure, with 70% of global production in the ‘East’ (Eg. Russia, Kazakhstan, Niger). Given the recent geopolitical instability, Western utilities are being pressured to diversify their supply chains away from these regions. However, capacity is scarce. In May 2024, a bipartisan bill was signed that banned the import of enriched uranium from Russia, with waivers issued until 2028 to address supply concerns. There could be upside risks to uranium prices if there were a Russian retaliation tantamount similar to what we saw with European natural gas.
Oakmark on Corebridge Financial $CRBG US
Thesis: Corebridge Financial, a top retirement solutions provider, offers a stable and diversified earnings profile, now available at a discount due to market misvaluation.
Extract from their Q2 letter, link here
Analysis: Corebridge Financial is one of the largest providers of retirement solutions and insurance products in the United States. Corebridge's extensive distribution network and long-standing relationships with large financial institutions have helped it maintain a high market share position for decades. In our view, the market values Corebridge as a variable annuity company despite its more diversified and less risky earnings profile relative to peers. In addition, we believe the recent reduction in AIG’s significant ownership stake removes an overhang on the stock price. The combination of these factors provided the opportunity to invest in Corebridge at a discount to other non-variable annuity peers and our estimate of intrinsic value.
Munro Partners on GE Vernova $GEV US
Thesis: GE Vernova's strategic focus on decarbonisation and electrification positions it for significant growth in a net zero world.
Extract from their Q2 letter, link here
Analysis: GE Vernova (GEV) is the power business that in March 2024 spun out from the broader industrial company, General Electric (GE). After years of management challenges, American business executive Larry Culp, was appointed as the GE CEO in 2018 to restructure and simplify its businesses. Part of Culp’s strategy has been to spin out GE’s Healthcare and Power businesses into separately listed companies. With GEV, we have a high level of conviction that the company’s dedicated board and executive team can continue to improve its recent execution and profitability trajectory. While some project obstacles remain within the portfolio, we are satisfied that the company has adequately provisioned for them and note that the company is in a strong net cash position. As these obstacles are worked through, we believe that the simplified product focus puts GEV in a strong position to benefit from the decarbonisation megatrend that its products and services enable. GEV is a power conglomerate organized under 3 main divisions: power generation (gas, nuclear, hydro, steam), wind (onshore and offshore turbine equipment and services) and electrification (power transmission, storage, software) with a sales mix of approximately 50%, 30% and 20%, respectively. The bull case for each division varies but each revolves around decarbonisation. Within power, the company benefits not only from coal-to-gas switching but also the ability to switch the fleet of existing gas turbines to hydrogen powered turbines. The power business is also set to benefit from the improved outlook for nuclear in a net zero world. While wind has always been an area of excitement, profitability has been poor primarily due to execution missteps in offshore wind, with projects in the past bid at low margins and with too much technology and project risk–specifically, very large turbines installed many kilometres offshore. We’re anticipating GEV to withdraw this business if industry dynamics don’t change once it addresses its legacy backlog. However, we believe that the most interesting growth business within the GEV portfolio is the Electrification business, which provides electrical grid equipment and software. Electrification is driven by all the positive electrical demand drivers we talked about earlier in this report and we model the grid business to grow its sales in the mid-teens to the end of the decade.
Miller Value on Gray Television $GTN US
Thesis: Gray Television's strategic positioning in high-margin political advertising and digital market share, coupled with strong cash flow potential, makes it a compelling investment for patient investors.
Extract from their Q2 letter, link here
Analysis: Gray Television remained under pressure during Q2, with ongoing marketplace concerns on the company debt leverage. Gray has limited maturities over the next 2 years and recently announced an opportunistic debt repurchase program. After a slow start to political advertising due to weaker than expected primaries, we expect to see a nice ramp in political advertising in the back half of the year. Gray’s strong local TV stations, #1 and/or #2 in 89% of their markets, has the company well positioned to achieve $500-700M in high margin political advertising in 2024. In addition, Gray has been outpacing peers in growing their core business over the past couple of years and still appear to be in the early innings of an improvement cycle. Management has recently retrained their salesforce with a greater focus on expanding their high margin digital market share over the next couple of years. In addition, ATSC 3.0 (industry new IP standard), provides opportunity for Gray to stream more content and capture new high margin digital revenue streams over time. We see the potential for $2.5B of free cash flow generation over the next 5 years that could allow the company to rapidly de-lever their balance sheet and accrue value to the equity holder. With a greater than 80% earnings and free cash flow yield, and an attractive 6.2% dividend yield, we believe patient investors have potential to be rewarded over the coming years.
Appalaches Capital on Lithia Motors $LAD US
Thesis: Lithia Motors' strategic acquisitions and focus on high-margin parts and services position it for continued value creation and growth.
Extract from their Q2 letter, link here
Analysis: During the quarter, we purchased shares in Lithia Motors (LAD), the largest automotive dealership group in the United States. The dealership industry is not very popular amongst mainline investors. The businesses are perceived to be subject to discretionary volumes, levered to the health of the consumer, and exposed to the credit cycle. Additionally, under a GAAP (Generally Accepted Accounting Principles) basis, the businesses look over leveraged and unable to generate free cash flow. Investors also worry about the threat of disintermediation under the assumption that the model only exists due to regulatory frameworks. The cumulative result of all of these factors leads to the industry routinely having a high short interest that has persisted for decades despite strong returns from the group. From the perspective of a contrarian, this is not a truly accurate picture of the industry. The first thought that most have of dealerships is the act of being a dealer: selling cars and other vehicles. However, dealers make the majority of their gross profit from ongoing maintenance, parts, warranty, insurance and financing services. These sources of income are far less discretionary. The operational profile of dealerships has changed dramatically since the last significant recession in 2008, when 70% of gross profit could be attributed to vehicle sales versus just 35% in 2019. GAAP standards are additionally not kind to dealers from a balance sheet and cash flows perspective. When a dealer sources new inventory, they typically do so by using floor plan financing. Under GAAP, floor plan financing is treated as debt, however, it truly functions as any other short-term payable. Floor plan financing is typically non-recourse, secured by the inventory, and carries a negligible net interest cost after OEM benefits and subsidies. In fact, in some years, dealers are paid under their floor plan arrangements. Call it debt if you will, but it is likely one of the best lending arrangements to exist. So, why Lithia? Largely due to stringent franchise laws and local barriers to entry, each dealership group can earn excess returns on their invested capital. Some, however, seem much more apt to do so than others. Lithia’s strategy for creating value is to acquire independent lots at an attractive price and improve their operations significantly. Over the last few years, Lithia has roughly doubled their footprint, meaning that 1) earnings will be higher due to a larger store base, and that 2) the level of earnings per store is currently depressed relative to a normalized basis stemming from the dilutive impact of the under-earning acquisitions. Lithia is an acquirer of choice, benefitting from strong relationships with OEMs and a reputation for being an effective operator. I believe that Lithia’s engine for value creation will continue to work for years to come. During the pandemic, the supply of new and used cars coming on to the market did not adequately meet consumer demand. As a result, used car prices inflated dramatically which increased gross dollars (but not gross margins as the trade-in values also escalated) and new cars were subject to a bidding war pushing retail prices well beyond MSRPs. Gross margins on new cars doubled despite volumes being lower. Investors and analysts are now pricing in a scenario in which operating profitability reverts to 2019 levels. I do not see this as being likely. The opportunity lies in margin retention in parts and service and improving selling costs. In the post pandemic world, the omnichannel dealership offering is gaining in popularity which sees lower sales costs due to a no-negotiating and no-contact model. Parts and service margins have increased over the course of the last four years, which is consistent with the historical trend as well. Additionally, total parts and service gross dollars have contributed a limited amount to the total gross profit mix which de-emphasizes their impact on gross profitability. Going forward, their proportion of the mix should be higher, which provides a fundamentally higher margin profile. Gross margins in parts and service have tended to be very sticky historically. It is my belief that the earnings power of Lithia has expanded dramatically, and I do not see significant downside beyond current estimates.
Parnassus on MSCI $MSCI US
Thesis: MSCI's strong market position and temporary weak earnings present an attractive investment opportunity for long-term gains.
Extract from their Q2 letter, link here
Analysis: MSCI is a leading provider of data and analytics for the investment industry. The company is best known for the indices that bear its name, which are used to construct and benchmark portfolios of international equity funds. It also provides analytical tools and data that help investors understand the performance, risk and ESG characteristics of their portfolios. MSCI’s indices are used by active equity managers such as Aoris, who pay an annual subscription fee to benchmark themselves against them, and by managers of exchange-traded index funds (ETFs), such as Vanguard and BlackRock, who use MSCI’s data to construct their funds. Currently, $14 trillion of actively managed assets are benchmarked to MSCI’s indices and over $1.6 trillion of ETFs are linked to its indices. Its customers couldn’t operate their investment products without its data, which is reflected in a retention rate for its index customers of above 95%. The index business is highly profitable because once MSCI creates a new product, it can sell this intellectual property to many customers for little additional cost. MSCI has consistently invested in new indices that meet evolving investment needs, such as those that track a particular sector, market theme, or particular criteria for a customer. It also earns revenue and grows in relevance with the increasing volume of futures and options contracts that are traded based on its indices. MSCI also has a suite of analytical software to help asset managers construct and manage their portfolios. Two of its industry-leading solutions are MSCI Barra, which is used to report and analyse a fund’s performance, and MSCI RiskMetrics, which is used to analyse portfolio risk. We believe MSCI’s relevance to financial market participants will continue to grow, and its earnings will rise at an attractive rate for many years to come.
Aoris on MSCI $MSCI US
Thesis: MSCI's dominant position in the index business and high customer retention rate make it a strong investment for long-term growth.
Extract from their Q2 letter, link here
Analysis: MSCI is a leading provider of data and analytics for the investment industry. The company is best known for the indices that bear its name, which are used to construct and benchmark portfolios of international equity funds. It also provides analytical tools and data that help investors understand the performance, risk and ESG characteristics of their portfolios. MSCI’s indices are used by active equity managers such as Aoris, who pay an annual subscription fee to benchmark themselves against them, and by managers of exchange-traded index funds (ETFs), such as Vanguard and BlackRock, who use MSCI’s data to construct their funds. Currently, $14 trillion of actively managed assets are benchmarked to MSCI’s indices and over $1.6 trillion of ETFs are linked to its indices. Its customers couldn’t operate their investment products without its data, which is reflected in a retention rate for its index customers of above 95%. The index business is highly profitable because once MSCI creates a new product, it can sell this intellectual property to many customers for little additional cost. MSCI has consistently invested in new indices that meet evolving investment needs, such as those that track a particular sector, market theme, or particular criteria for a customer. It also earns revenue and grows in relevance with the increasing volume of futures and options contracts that are traded based on its indices. MSCI also has a suite of analytical software to help asset managers construct and manage their portfolios. Two of its industry-leading solutions are MSCI Barra, which is used to report and analyse a fund’s performance, and MSCI RiskMetrics, which is used to analyse portfolio risk. We believe MSCI’s relevance to financial market participants will continue to grow, and its earnings will rise at an attractive rate for many years to come.
Miller Value on Nabors $NBR US
Thesis: Nabors Industries' strategic partnerships and international expansion make it a highly attractive long-term investment with significant upside potential.
Extract from their Q2 letter, link here
Analysis: With the recent pullback in commodity prices and increased industry consolidation there has been growing fear that Nabors will experience greater operational pressure on their North America rig business. However, Nabors’ significant global presence has developed long standing relationships with leading energy companies and national Oil companies. While the recent industry consolidation may lead to some near-term choppiness in industry capital expenditures, Nabors is likely to be a long-term beneficiary with the potential for incremental market share overtime. We believe the North America rig market should bottom over the coming quarter and there is potential for incremental rig deployments over the coming 6 to 12 months. Meanwhile, international rig demand remains very robust. Nabors has signed contracts for a 25% increase in their international working rig fleet over the coming 2 years. In addition, their joint venture (“JV”) with Saudi Aramco should continue to scale over the next couple of years with 4-5 new rigs added each year. The JV free cash flow should also have a meaningful improvement as it transitions from cash use to positive free cash flow generation. Finally, Nabors Drilling Solutions division has a growing global expansion opportunity. The segment has very low capital intensity, further growth should also support company future free cash flow generation. With the recent share price weakness, Nabors looks extremely attractive, at less than 1x forward cash flow (only lower post Covid 2020 outbreak), >50% normalized free cash flow yield and forward EV/EBITDA approaching 3x. We believe long-term upside potential for Nabors is multiples of the current share price.
Oakmark on Nasdaq $NDAQ US
Thesis: Nasdaq's strategic transformation and focus on high-growth software and data businesses present a compelling investment at an average price.
Extract from their Q2 letter, link here
Analysis: Nasdaq is a global technology company that provides platforms and services for capital markets and other industries. Over the past decade, under the leadership of CEO Adena Friedman, Nasdaq has transformed from a traditional equity exchange into a collection of fast-growing, high-quality software and data businesses with the majority of revenue coming from non-exchange segments. Nasdaq’s recent acquisition of Adenza led some investors to question management’s capital allocation discipline. However, we believe the subsequent share price reaction more than compensates for the risk that Nasdaq overpaid for Adenza. More importantly, the experience seems to have catalyzed a renewed focus on organic growth, debt paydown, and capital return. Despite Nasdaq’s potential for faster than average growth, high mix of recurring revenue, and impressive operating margins, the stock trades at a P/E multiple in line with the broader market. We were pleased to purchase shares in this excellent business for an average price.
Laughing Water Capital on Nextnav $NN US
Thesis: Nextnav's strategic petition for 5G spectrum and potential for monetization make it a high-upside investment despite current uncertainties.
Extract from their Q2 letter, link here
Analysis: Nextnav Inc. (NN) – Nextnav is our owner of wireless spectrum that is building a next-gen GPS system which is presently not economically viable. In April, Nextnav filed a petition with the FCC asking to swap their existing owned spectrum for similar but contiguous spectrum, and then to repurpose this spectrum for use with 5G. This 5G spectrum could then be monetized by some sort of partnership or lease agreement. It is impossible to handicap how this process will play out, but examining the pieces on the chess board suggests that it is highly likely that Nextnav’s petition will be granted in one way or another in the not-too-distant future. In brief, the present GPS system has serious shortcomings. This has been known for years, but has become a higher priority issue as the conflicts in Ukraine and Israel/Gaza have demonstrated that the existing, satellite-based GPS system can be easily hacked, spoofed, or otherwise tricked. Additionally, it is no secret that Russia and China have been developing “satellite killing” missiles that could destroy the global GPS system – or that part of it covering the U.S. - in a conflict. The GPS system is not only responsible for powering Waze and other apps that make daily driving easier. It also powers the clocks that tie together the power grid and the financial system, allows for precision agriculture and weather forecasting, and is the backbone of emergency response systems. Essentially, every agency that relies on GPS is anxious to see the development of a backup system, but – unsurprisingly – none of these agencies want to pay for this system. As such, it is my belief that all of these government agencies are leaning on the FCC to engage in a horse-trade with Nextnav whereby the FCC will grant Nextnav 5G spectrum which can be monetized in exchange for Nextnav continuing to develop their next-gen GPS system. This appears to be a win-win-win as the assorted Government agencies get an alternative to GPS, the FCC would be able to take a step towards its goal of freeing up 5G spectrum, and Nextnav would have the cash flow and/or balance sheet to continue developing its next-gen GPS. Between the unknowable time line of the FCC process and the unknowable form of a future Nextnav monetization / partnership plan, there is a lot of uncertainty here. However, two things do appear certain: 1. the laws of physics say that nobody is inventing more spectrum 2. as long as the world consumes more data, the value of spectrum will go up over time. According to Ericsson’s (ERIC) Mobility Report, in 2023 the average North American smartphone used 26 GB of data per month versus 17.4 GB in 2022, and mobile data traffic will triple between 2023 and 2029. Spectrum is typically valued on a MHz-pop basis, where the value of the spectrum is determined by multiplying the size of the spectrum by the covered population. Assuming Nextnav’s FCC petition is granted and the company is able to monetize 95% of the spectrum, at present the Company trades at approximately $0.25 MHz-pop. Past transactions have taken place at many multiples of this number, and at $1.00 Mhz-pop NN stock would be worth ~$30, suggesting that being patient here will be worth it. Of note, insider and veteran of many spectrum battles Joe Samberg bought shares during the quarter.
Vulcan Value Partners on NICE $NICE US
Thesis: NICE's strategic positioning in AI and cloud adoption underscores its strong growth potential and competitive advantage in the software industry.
Extract from their Q2 letter, link here
Analysis: NICE is a global enterprise software company that provides mission-critical contact center software. NICE was a material contributor last quarter. As we said last quarter, the company continues to perform well, and fundamentals are strong. Cloud revenue has grown in line with our expectations. We believe that generative AI will continue to drive cloud adoption and that AI is an opportunity rather than a threat to NICE’s business. As the leading platform in the space, the company has many competitive advantages that position them well to win. Cloud penetration is in the low 20% range today and AI will likely accelerate cloud adoption, which should benefit NICE. We believe that this growth will more than offset any seat count attrition due to automation. Furthermore, data and customer examples show AI is driving higher levels of revenue per customer and that AI specific product adoption is increasing rapidly. We followed our discipline and added to our position during the quarter.
Lindsell Train on Nike $NKE US
Thesis: Nike's strong market position and innovative pipeline, coupled with attractive valuations, make it poised for a resurgence in investment returns.
Extract from their Q2 letter, link here
Analysis: Yet there’s cause for optimism. Fashion can be fickle, but at the technical/performance end of the spectrum, Nike still dominates (the above Times article notes that of the last six major marathons, fully half the competitors crossed the finish line in a shiny pair of high-tech Nikes). Yes, Nike needs to regain momentum (innovations are coming, with the upcoming Paris Olympics an obvious showcase), but despite the share loss in running, Nike holds strong number one positions in almost all geographic footwear sub-markets. The wider economic environment will have prompted some consumers to trade down (be that in the US or China), which is unhelpful in the near term but not of structural competitive concern. Notably its iconic basketball shoes are still enjoying double digit growth. All in all, despite some guided contraction next year, operating margins will likely remain a healthy 11-12%, and as discussed above, with investor enthusiasm low, valuations are now far from demanding. At a c.19x GAAP P/E (a 5% FCF yield), much of the derating threat has gone, leaving room for resurgent underlying compounding to once again drive investment returns.
O'Keefe Stevens on Perrigo $PRGO US
Thesis: Perrigo's turnaround strategy, new product launches, and potential for significant earnings growth make it a compelling investment.
Extract from their Q2 letter, link here
Analysis: Perrigo offers over-the-counter (OTC) self-care and wellness solutions in the U.S. and internationally. In the U.S., the company primarily focuses on store brand products, whereas Perrigo markets its own brand internationally. The Consumer Self-Care Americas (U.S. business) represents ~2/3 of sales, with most revenue generated through store-branded products at retailers including Target, Walmart, and CVS. Products include pain relief, sleep aids, upper respiratory relief, and digestive health. Consumer Self-Care International (International business) represents ~1/3 of revenue concentrated in Europe. 90% of sales stem from Perrigo’s branded products, pain and sleep aids Solpadeine and Nytol, upper respiratory - Aflubin, and Physiomer. Over the past several years, Perrigo experienced significant management missteps and regulatory changes. Investors have seen nothing but a downward trending business and stock price over the past nine years. Fatigue has set in. However, significant business developments, management changes, and new market opportunities, combined with an undemanding multiple and growth acceleration, have us encouraged that the future is unlike the recent past. In August 2023, the FDA issued warning letters to Perrigo and two other infant formula manufacturers, ByHeart and Reckitt, for violations of the Federal Food, Drug, and Cosmetic Act and the FDA’s infant formula regulations. These letters are part of the FDA’s ongoing efforts to ensure the safety and quality of infant formula products and prevent contamination. As part of these efforts, the FDA updated its infant formula compliance program to enhance inspections, sampling, laboratory analysis, and compliance activities. This includes annual environmental sampling for Cronobacter and Salmonella. Perrigo, the only private-label infant formula manufacturer in the U.S., was required to shut down manufacturing facilities to modernize and update production lines to achieve compliance. The resulting downtime, along with several starts and stops, led to approximately $130 million in lost operating income. Guidance calls for infant formula stabilization in 2H 2024, with 2025 seeking to fully recover the lost $130m. We like this easy comparison and accelerating growth formula. Management Change – Patrick Lockwood-Taylor joined Perrigo in June 2023. Before this, he held leadership roles, including President of Bayer’s North America Consumer Health Division. In the first quarter of 2024, he announced Project Energize, a three-year investment and efficiency program aiming to achieve $100 million to $110 million in pretax savings by 2026. Management has several ongoing initiatives, including SKU rationalization, an infant formula relaunch, the introduction of Opill (discussed below), and Project Energize. These efforts are designed to increase free cash flow generation, directed toward debt reduction. Currently, leverage stands above 4x, with expectations to reduce it to approximately 3x by the end of 2025. In a rising rate environment, it is unsurprising that the market is concerned about leverage levels. However, we anticipate these concerns will diminish as leverage decreases, leading to higher valuation multiples, lower interest costs, and incremental EPS growth. Around 65% of women aged 15-49 use birth control, according to a survey conducted from 2017 to 2019 by the Centers for Disease Control and Prevention (CDC). In the first quarter of 2024, Perrigo introduced Opill, the first over-the-counter (OTC) birth control tablet. This total addressable market (TAM) is substantial, offering significant potential earnings if the launch succeeds. Considering all current initiatives, we estimate that Perrigo (PRGO) can generate over $3.50 in EPS by 2025. A valuation of 14x earnings (a conservative estimate for a staples/healthcare business) translates to a $49 stock price. We anticipate mid-single-digit EPS growth beyond 2025, coupled with reduced leverage, which could result in a “Davis double play” of earnings growth plus multiple expansion.
Vulcan Value Partners on Planet Fitness $PLNT US
Thesis: Planet Fitness's scalable, high-value model and dominant market position drive robust growth and impressive financial returns.
Extract from their Q2 letter, link here
Analysis: Planet Fitness pioneered the “high value, low price” (HVLP) gym model and operates over 2,500 gyms globally with 18.7 million members. Their straightforward, no-frills approach offers excellent value, appealing to a diverse and casual fitness demographic. Members enjoy a clean environment, regularly updated equipment, and accessible pricing starting at $10 per month, with their premium “Black Card” membership providing extensive benefits and access to all locations. Planet Fitness captured roughly 90% of U.S. gym membership growth from 2011-2019. The company’s dominant scale coupled with high advertising spend drives powerful growth, and the company plans to double its number of U.S. locations. Planet Fitness demonstrates robust same-store sales growth, high EBIT margins, strong returns on capital, and excellent free cash flow conversion.
Cove Street Capital on Red Violet $RDVT US
Thesis: Red Violet, leveraging its strong management team and cloud-first architecture, is poised for high growth in personal identity data solutions.
Extract from their Q2 letter, link here
Analysis: Lastly, we added a position in another data company in Red Violet (ticker: RDVT) in the quarter. Unlike Clarivate, which provides a suite of niche, high-value services to a few particular industries, Red Violet is focused on being an “arms dealer” of personal identity data that powers other data service company solutions. They do this for a variety of end-markets: financial/corporate (AML, KYC), real estate, collections, investigative, retail, etc. The Red Violet management team built two of the other three players in the industry and have “gotten the gang back together,” only this time they have built a cloud-first architecture and have high inside ownership. We have followed the small (~$300m market cap), thinly traded company for a long time and had an opportunity to take a meaningful stake via secondary by a charitable foundation shareholder at a cost just under $19. Growing 20% as of 1Q24, Red Violet seeks to maintain its high growth rate via efforts to move up-market towards enterprise customers as well as reaping gains from recently entered verticals such as government, legal, and marketing.
Ausacap AM on ResMed $RMD US
Thesis: ResMed's strong market position and growth potential in the CPAP sector make it an attractive buy despite concerns over GLP-1 drugs.
Extract from their Q2 letter, link here
Analysis: Investors would be aware that ResMed became a significant position for the Auscap funds in the second half of 2023. It is a founder-led business that sells CPAP (continual positive airway pressure) devices to sufferers of obstructive sleep apnea (OSA). Following a recall by its major competitor, Phillips, ResMed is the dominant player within its sector, having grown earnings per share by 15% per annum for the last decade with a consistent return on equity above 20%. ResMed sold off in the last year due to the perceived potential impact of a class of drugs referred to as Glucagon-Like Peptide 1 agonists, or GLP-1s, which assist patients in losing significant amounts of weight. There is a strong correlation between OSA and weight. GLP-1 drugs could potentially reduce the number of patients that suffer from OSA thereby reducing the size of its market. However, the evidence is far from conclusive. ResMed noted that a current study of 660,000 patients with GLP-1 initiation and an OSA diagnosis saw a 10.5% increase in the likelihood that the patients would initiate positive airway pressure (PAP) therapy if they are prescribed a GLP-1 drug. Patients on GLP-1s also had higher PAP resupply rates 1 and 2 years post setup. A recent high-profile study called SURMOUNT-OSA has driven another sell off in recent weeks. Having spoken to many industry participants, the concerns currently appear overblown. There remain many outstanding issues with concluding that GLP-1s should be the primary treatment for OSA. The benefits of GLP-1s take time, with the weight loss and health benefits of the SURMOUNT-OSA study measured over 52 weeks. CPAP by contrast delivers benefits immediately, and untreated OSA can increase all-cause mortality. Patient adherence, noticeable side effects from GLP-1s and whether patients can maintain the weight loss post treatment are all ongoing issues. Ultimately it may be the case that a combination of treatments is most effective for OSA. The cost of GLP-1 drugs is currently extremely high and it is not clear to what extent reimbursement will be available. Feedback suggests that ResMed remains the strongly preferred CPAP standard of care, with physicians tending to view GLP-1s as an adjunctive OSA therapy to CPAP. Significantly, demand trends for the CPAP sector remain extremely strong. It also appears that the sudden focus on weight and health that has arisen from the GLP-1 fervour has substantially increased awareness of OSA, an under-diagnosed condition, which is increasing the number of patients looking for a solution. ResMed management estimates the current global OSA market to be roughly 1 billion people, and in FY23 ResMed had just 23.5 million connected devices in market. Awareness is likely to increase further with Samsung’s new Galaxy Watch which detects signs of sleep apnea. ResMed is currently trading on a forward price to earnings multiple that is a discount to where it has traded historically, and even more so relative to the broader market, which we think is a great opportunity to buy in at an attractive price for long term investors. We see a significant runway for earnings growth for ResMed over the coming years.
Lindsell Train on Sysmex $SSMXY US
Thesis: Sysmex's dominant market position, innovative growth strategies, and strong fundamentals make it a resilient and attractive investment.
Extract from their Q2 letter, link here
Analysis: In amongst it all, we have started to build a position in Sysmex, which is an Invitro Diagnostic (IVD) manufacturer with the global #1 position in haematology and haemostasis testing. The company was founded in Kobe back in 1968 by Taro Nakatani, whose family retain a holding in the business to this day. The largest part of Sysmex’s business (60% of sales) is haematology diagnostics (measuring and analysing the size, number and type of blood cells to test for diseases like anaemia, leukaemia and others). Then comes the haemostasis business (testing for the blood clotting function to diagnose conditions such as haemophilia and deep-vein thrombosis) at 16% of sales. Sysmex is the dominant player in both of these parts of the IVD market and has been for some time, with an estimated market share of 55% and 35% in haematology and haemostasis respectively. The company operates an attractive platform business model by selling testing instruments at low margins, followed by reagents and customer support contracts at high margins. The reagents are effectively the razorblades in the closed razor/razorblade model. From a competitive standpoint, in haematology, Sysmex’s main rivals are two of the global majors, Danaher and Siemens, as well as the Chinese company Mindray. In haemostasis, Abbott, Stago and Werfen comprise the competitive set. In both domains, Sysmex has partnered with a couple of the four global majors who dominate the wider IVD market. In haematology, it has an alliance with Roche which it uses as a distributor in certain markets; as for haemostasis, there is a partnership in place with Siemens which is responsible for reagent production in a number of key western markets. The alliance with Siemens has been in place for decades, but if circumstances allow, Sysmex would like to attain greater control over this part of the business. Beyond these two areas, Sysmex is again #1 in urinalysis (testing for the presence of sugar, blood or protein in urine amongst other things), but it’s a relatively small business at 9% of sales. Finally, the company also has small positions in the immunochemistry and life sciences fields, with the key focus here being on Alzheimer’s testing and liquid biopsy molecular testing. The company is also engaged in a joint venture with Kawasaki Heavy Industry, which sells surgical robots. The overall business has a global footprint with a sales split of: 28% EMEA, 26% Americas, 24% China, 13% Japan and 9% APAC. There’s a lot to like about Sysmex’s business, not least the company’s dominant global position in a few corners of the IVD market. This installed base tends to be sticky and comes with an attractive closed-loop business model that combines the sale of instruments and reagents. Instruments are sold to customers either outright or are leased; these are typically replaced every 5-7 years. For the reagents, there is little to no third party competition as using first party reagents is critical in ensuring the accuracy and quality of testing data, and is often enforced by regulatory authorities. Over 70% of sales and an even higher portion of profits are generated by reliable repeat business in the form of reagents and customer service/support contracts. End market demand for testing, whether in a clinical or research setting, provides a highly dependable source of growth; estimates suggest that ~70% of all clinical decisions across the screening, assessment and monitoring of patients are determined by testing, whilst only accounting for 1-2% of healthcare spending.
We have been following the business for a number of years and believe that now is an attractive point at which to begin a holding. Since overtaking Danaher as the #1 player in the haematology field around 20 years ago, Sysmex has continued to invest and innovate to sustain this position. Competition from the global majors has not been overly intense as the big four have put more focus on other parts of the IVD market. However, the Chinese company Mindray has emerged as a tough competitor in emerging markets and particularly within China where it has been aided by the ‘Buy China’ policy that favours local manufacturers versus overseas ones. These headwinds have weighed on sentiment around Sysmex and the shares have been stagnant as a result. Management has responded by steadily increasing production in China to counteract these measures. The overall outlook for the company is broadly positive though. For the haematology business, as well as investing to bolster its position in some of its established markets, Sysmex has also been investing heavily in markets like India and Brazil, which are well poised for future growth. In the haemostasis field, the company also anticipates strong growth (previously it was limited to selling instruments in a number of European markets and the Americas, but going forward it will also be able to sell reagents which carry higher profits). Looking to the longer term, peripheral initiatives in life sciences and immunochemistry, albeit nascent, could provide future pillars of earnings growth. Taken as a whole, the company boasts strong fundamentals: the balance sheet is in a net cash position, operating margins are steady at ~17%, ROIC has averaged ~13% and there are initiatives underway that seek to improve the return profile of the company without jeopardising the pursuit of sustainable growth. These strong fundamentals have helped deliver 12% annualised dividend growth over the last decade – if the company can continue to execute successfully, we are optimistic similar rewards are on offer for patient investors.
LVS Advisory on Talen Energy $TLN US
Thesis: Talen's unique position with high-quality nuclear assets and a lucrative AWS deal presents significant growth opportunities.
Extract from their Q2 letter, link here
Analysis: Talen is an exception for several reasons. First, there is a wide moat around the business simply because a new nuclear power plant of Susquehanna’s scale cannot be replicated at a cost anywhere near the current enterprise value of Talen. Furthermore, nuclear power plants operate with high margins and limited operational complexity. These are the attributes of a very high-quality asset. Second, we view the management team as high quality. Since we have invested, Talen has under-promised and over-delivered on every key aspect of the story. The company has reduced leverage, monetized virtually all of its non-core assets, repurchased a substantial portion of the stock, and successfully uplisted to the Nasdaq exchange. Operational results have also been excellent. It is rare to find an asset as well-run as Talen appears to be. Third, we have identified a tangible growth catalyst playing out over the next 10 years. Talen agreed to sell a data center co-located with the nuclear plant to Amazon Web Services for $650 million in March 2024. Over the next 10 years, AWS has contracted to purchase as much as 1 gigawatt of power per year for a price nearly double the rate of the wholesale power price. This contract alone has the potential to generate an incremental $255 million in EBITDA for Talen per year by 2034 vs. Talen’s current $700 million EBITDA run rate. Amazon is willing to pay a premium to source reliable carbon-free energy for a large data center and it will also benefit from certain tax credits associated with the project. Finally, we see additional opportunities for per share value growth above and beyond the AWS deal. I am bullish on the supply/demand story for electricity playing out in the coming years. In addition, Talen believes there are additional opportunities to co-locate data centers next to its other power plants. Talen’s capital allocation strategy of creatively monetizing existing assets while returning capital to shareholders should continue to work.
Platinium AM on Torm $TRMD US
Thesis: TORM Plc's strategic positioning and market dynamics provide a compelling opportunity as shipping capacity tightens and environmental regulations reshape the industry.
Extract from their Q2 letter, link here
Analysis: Shipping firms buoyed by capacity constraints TORM Plc is one of world’s largest owners and operators of tankers that transport refined oil products and chemicals. It has been a standout performer over the last year, returning around 100% (including dividends). TORM’s story reflects a broader Platinum approach – taking advantage of a supply/demand imbalance driven by industry change. Shipping is a notoriously cyclical industry and timing an earnings upswing can be very tricky given the fragmentation of the industry and the debt vessel owners typically carry. Over the past few years, the capacity to transport refined products and chemicals has tightened. Firstly, war in Ukraine saw a wave of sanctions from Western governments that had profound effects on the tanker market – trade patterns had to change almost instantaneously. Those changed trade patterns boosted revenue for the tanker industry. The EU, for example, typically imported refined products from Russia. A vessel would take around 10 days round trip to supply the EU via the Baltic Sea. Now the EU needs the same volume of diesel but it comes from the Middle East or US – a round trip of over 25 days. This gradually tightens the capacity of the tanker industry – they have more vessels, at sea for longer, to carry the same volume. Long-run changes in the petrochemical refinery network have also been positive for the tanker industry. As it became costlier to build and operate refineries in the US and Europe companies shifted operations to the Middle East and China. This also avoided harsher permitting and environment regulations. When Covid-19 hit and governments chose to shut down the oil and gas industry and furlough workers, refineries representing nearly 1.5m barrels of refined product capacity ceased operation. This sudden, significant drop in refining capacity meant European and US buyers needed to ship even more petrochemicals by sea.
Intrinsic Investing on Veeva Systems Inc. $VEEV US
Thesis: Veeva Systems' expanding dominance in the life sciences software market positions it for strong long-term growth.
Extract from their Q2 letter, link here
Analysis: Ensemble has recently taken a position in Veeva Systems, which we believe is expanding its lead in the life sciences software market. As pharma, biotech, medtech and contract research organization (CRO) companies buy more of Veeva’s applications that tie together on its cloud-based Vault platform, the more efficient and stickier those customers become. We expect this to fuel above-average growth in revenue and profits for Veeva over the next decade.
Aoris on Visa $V US
Thesis: Visa's extensive network, high operating margins, and continuous growth make it a compelling long-term investment.
Extract from their Q2 letter, link here
Analysis: Visa operates the world’s largest payments network, which facilitates the movement of money between merchants, financial institutions, consumers, businesses, and governments. The company is best known for enabling consumers to make debit and credit card payments. In the year to September 2023, 4.3 billion Visa cardholders made 213 billion transactions on its network, to a total value of US$12.1 trillion. Compared to cash and cheques, which are still widely used around the world, Visa’s network is a more convenient, secure, and ubiquitous way for consumers to pay. Visa has invested to reduce friction and fraud in the payments experience, to the benefit of both merchants and consumers. Consider as a consumer the ease of making a payment by tapping your smartphone on a terminal, compared to swiping your card, signing a receipt, or paying in cash. Card payments also save merchants the costs and administrative burden of counting and handling cash. Visa’s network has become more valuable as the number of places and ways in which it can be used has risen. Over the last 10 years, the number of merchants accepting Visa’s network has grown from 25 million to 130 million. Some examples of ways that Visa’s network can be used today that weren’t the case 10 years ago are: • Payments can be made to or from a bank account • Mobile devices can be used as terminals to accept Visa payments, as well as making payments themselves • Visa’s network is being used to disburse wages, government benefits, and insurance payouts. Visa charges a small fee relative to all the benefits its network provides, of around 0.25% of each transaction (that’s 25c per $100 spent). Remarkably this fee has been stable over time, even though the payments experience has substantially improved. Visa primarily grows by capturing a greater share of global payment volume. The company has grown its revenue at a double-digit rate for many years, and it earns a high and steadily rising operating profit margin of over 60%. We believe Visa can continue to grow profitably and at a healthy rate for the foreseeable future.
Parnassus on Workday $WDAY US
Thesis: Workday's strategic partnerships and market leadership make it a compelling long-term investment despite short-term uncertainties.
Extract from their Q2 letter, link here
Analysis: Workday is a category leader serving a large, growing enterprise software market. Despite near-term macro uncertainty across software, we believe Workday is well positioned long term, and key initiatives such as its partnership with other service providers can drive incremental growth over the next few years.
Laughing Water Capital on Xponential Fitness $XPOF US
Thesis: Xponential Fitness's strategic leadership changes and growth potential position it for significant upside as market confidence improves.
Extract from their Q2 letter, link here
Analysis: Xponential Fitness (XPOF) – Xponential Fitness is a franchisor of boutique fitness concepts including Club Pilates, Pure Barre, Stretch Lab and others. The stock was previously a stock market darling, having nearly tripled from the 2021 IPO through 2023 highs, but then became the subject of a well-regarded short seller at this time last year, causing shares to plummet. The short report focused on 1) questioning the integrity of XPOF’s CEO, and 2) cherry picking commentary from unhappy franchisees in select verticals to imply that the entire business was at risk. In May, XPOF’s CEO was removed, causing shares to plummet, and I purchased our position on this weakness. Generally speaking, being a franchisor is a very good business, which explains why franchisors often trade at 20x EBITDA or more. At the time of the decline, if one assumed that every single franchisee had financed 75% of their franchise with debt, and then sued XPOF to recover this liability and won, I estimated that XPOF would have been trading at 12.5x their guidance for 2024 adjusted EBITDA. The idea that every single franchise would sue was extremely farfetched because first, many franchisees own more than one franchise, and it is unlikely this would be true if they were unhappy with their first franchise. Second, information on franchisee/franchisor litigation is widely available, and through 2023 XPOF averaged less than 2 conflicts per 1,000 units. Importantly, Club Pilates – XPOF’s crown jewel – had zero lawsuits. Further, I believed that Club Pilates by itself could be worth more in a private sale than the price that public markets ascribed to the entire portfolio of concepts. Since the time of our purchase the company has named an impressive new CEO, made it clear that they are open to divesting underperforming concepts, and indicated that share repurchases are likely in the not-too-distant future. Additionally, future growth is all but guaranteed as the number of global licenses sold far exceeds the number of global studios that are currently open. Importantly, this dynamic should cushion the business during any economic downturns as license holders who have not yet opened studios would be incentivized to take advantage of favorable lease terms during economic downturns. I would note that XPOF grew and gained market share through COVID, while the industry suffered. Shares have rallied considerably since our purchase, but there is still a fair amount of uncertainty surrounding the business related to an SEC investigation instigated by the short report. I expect this investigation will be resolved with time, and shares will re-rate higher. If XPOF continues to execute and gets a franchisee peer multiple, the stock could rally more than 200% from here. This leaves plenty of room for success if the market is suspicious about the durability of fitness concepts and XPOF trades at a discounted multiple.
Asheville Capital Management on Auto Partner $APN PW
Thesis: Auto Partner's strong market position and significant growth potential in the European auto parts market make it a high-return investment.
Extract from their Q2 letter, link here
Analysis: Auto Partner is a Polish distributor of aftermarket auto parts. It is one of the largest distributors of auto parts in Europe with more than 15 million individual spare part items inventoried within 160,000 m² of warehouse capacity. These parts are stored and delivered to garages and retailers across Europe on a just-in-time basis with delivery to domestic customers occurring 3-5x per day. Auto Partner offers its customers the industry’s widest assortment of auto parts, available for delivery within hours of purchase, at competitive prices, with best-in-class customer service. This value proposition is superior to that of Auto Partner’s primary competition (local parts distributors) which are unable to provide the same level of availability, speed, or service. There is reason to believe that Auto Partner has a very long runway ahead of itself for the continued consolidation of market share and capital efficient growth of revenue, as Auto Partner continues to replicate, in its own unique way, a business model that has proven to be very successful in the United States over the last 50 years. Auto Partner has an estimated 10% market share in its home country of Poland but only around 0.5% market share in the rest of Europe, a region that it is growing quickly within. Auto Partner is owned and operated by its founder, Aleksander Górecki, who continues to serve as President of the company, while retaining 44% of the shares outstanding. Aleksander takes a low salary (~$100,000 USD) with no variable remuneration. His two Vice Presidents, Andrzej Manowski and Piotr Janta, are long-time employees who have been with the company for 30 and 15 years, respectively. These VPs receive 92% of their annual compensation based upon fundamental performance and the growth of shareholder value. * All bonuses are paid out in cash as Auto Partner has not issued a single share in the last five years. Lastly, Auto Partner trades between 10-12x FY24 earnings and 15-20x FY24 free cash flow. Auto Partner has grown EPS by >10x in the last eight years, at a 34% annual growth rate, and maintains a long reinvestment runway for the redeployment of capital into existing operations at similar, if not higher, returns on incremental capital. I believe it is reasonable to project EPS growth between 18-25% over the next five years, and for mid-teens growth thereafter. If this were to occur, then our shareholders would appreciate at a similar rate of return even in the absence of multiple expansion. A fundamental downside scenario of a slowdown in revenue or earnings is possible but unlikely, given that Auto Partner operates in a highly durable industry with a model that is allowing them to continue to take market share.
AVI on Reckitt Benckiser $RKT LN
Thesis: Reckitt Benckiser's undervaluation due to litigation concerns and strong portfolio of trusted brands make it a compelling value investment.
Extract from their Q2 letter, link here
Analysis: In recent months we have built a new position in Reckitt Benckiser, the UK-listed consumer goods conglomerate which trades at an 39% discount to our estimated NAV. It is currently a 3.9% weight. Already trading at a discounted valuation, in March 2024 the company was hit by a litigation shock. The company’s US infant nutrition business, Mead Johnson, was ordered to pay $60m compensation to the mother of a baby who died of Necrotising Enterocolitis (NEC) – a bowel disease that mainly affects premature babies - who had been fed Enfamil pre-term baby formula. This led to a -15% one-day decline in Reckitt’s share price as investors struggled to price the potential liability and capitulated. We do not intend to get into the minutiae of the case here but at a high level the facts are as follows. NEC occurs in c.10% of all premature (pre-37 week) babies and in every 1 c.2000 full-term births. It typically occurs within 2-3 weeks after birth & results in death in 15-40% of cases. Mead Johnson hold a >40% market share in the oligopolistic US infant nutrition business, accounting for c.6% of Reckitt’s sales. Within this, the pre-term formula - to which the case relates - is a small portion and immaterial at the group level. Whilst mothers’ milk and then donor milk are the first and second choices for premature babies, cows’ milk formulas and fortifiers are necessary options where parents of premature babies are unable or unwilling to breast feed and donor supply is limited. This is standard medical practice and the decision to use such products is made by a medical professional in a neonatal setting. From as early as 1990 medical research has showed that incidence of NEC increases when cows’ milk-based infant formula is used. That is – however – not causality. It is widely recognised that human milk offers the best premature nutrition. NEC, although the risk can never be fully eliminated can occur in conjunction with any kind of feeding. The Illinois Court ruled that a) there is a link between cows’ milk-based formula usage and NEC, and b) that Mead Johnson were negligent in their labelling did not adequately warn of the risk. The NEC Society have spoken out against the ruling, saying that such labels would scare parents who rely on the product. We are humble enough to realise that we do not possess any competitive advantage in analysing the legal merits of the case. However, 1) with close to $10bn of market cap eroded, the market appears to be discounting an excessively pessimistic scenario versus reasonable estimates; 2) the company maintain that legally the liability is non-recourse to Reckitt PLC thereby putting an at least theoretical cap on it; 3) our mandate and organisational structural does give us a competitive advantage in owning out of favour or even stigmatised companies compared to more institutional peers. Turning to the underlying business, we believe there is a lot to be excited about. Reckitt owns a collection of trusted brands which exhibit meaningful barriers to entry, high margins, and attractive growth prospects. This is split across Health (42% sales), Hygiene (42%) and Nutrition (16%). Over 70% of revenues are derived from brands that hold #1 or #2 positions in their respective category and – with more than 30 million products sold daily – will be well known to readers such as Nurofen, Durex, Strepsils, Dettol, Finish and Vanish. Across the group, underlying category growth should grow at an average of 3-4% and management target mid-single-digit organic growth. The business generates industry leading gross margins (60%), healthy operating margins (23%) and strong cash generation (2023 free cash flow £2.2bn / ~15% of sales). That said, there is certainly room for improvement. Having had two CEOs from 1999 to 2019 the business is now on their third CEO in five years. Former employees talk of confusion around the prioritisation of gross margins or growth, and the 2017 Mead Johnson acquisition led to a loss of focus and neglect of the Consumer Health division. Certainly, it is an open question whether more focused management would be beneficial, with the company having explored splitting the business up in 2018. Moreover, we believe there is potential for further improvement in operating margins – something with which management seems to agree given their target to boost margins by +200bps. Following the sell-off, on this year’s numbers the shares trade at an EV/EBIT multiple of 11x, a PE ratio of 13x and a 7.4% free cash flow yield. These are the lowest levels in over a decade and represent the steepest ever discount to peers. For investors with a longer-time horizon, we believe the shares offer highly attractive value, and one that is unlikely persist indefinitely without attracting the interest of strategic buyers and other activist shareholders. A resolution of the legal liability is the key catalyst for the shares, and the 2025 Federal litigation is likely central to this. With the commencement of the buyback there is a path to £4 of earnings per share in 2026. As the dust settles the market will likely capitalise this at a fairer multiple than that implied by the share price.
Epoch on Segro $SGRO LN
Thesis: SEGRO's strategic expansion in e-commerce and supply chain optimization positions it for steady growth and attractive dividends.
Extract from their Q2 letter, link here
Analysis: New positions were initiated in SEGRO and Salesforce. UK-based SEGRO is a Real Estate Investment Trust focused on owning and leasing industrial and warehouse properties in the UK and Western Europe. The company is well-positioned to benefit from long-term structural trends in the global economy driven by the growth of e-commerce as well as supply chain optimization. SEGRO has for several years exhibited steady growth driven by expansion of its property portfolio through acquisitions and new development. We expect SEGRO to continue to experience growth in funds from operations through ongoing portfolio expansion as well as from the roll-up of maturing leases to market rent levels, supporting an attractive and growing dividend. SEGRO pays a consistently growing semi-annual dividend with a stated policy to distribute 85% to 95% of full-year adjusted earnings.
Laughing Water Capital on Vistry Group $VTY LN
Thesis: Vistry Group's strategic shift to an asset-light model and significant undervaluation position it for substantial upside potential.
Extract from their Q2 letter, link here
Analysis: Vistry, is our U.K. based homebuilder that is in the process of exiting its capital intensive traditional homebuilding business in order to focus all of its attention on its asset light Partnerships business. Shares have rallied ~30% YTD, but in my view remain drastically undervalued as the Company is executing on their plan by announcing notable new business wins, as well as repurchasing its own stock nearly every day. Management appears to remain confident as CEO and Chairman Greg Fitzgerald recently purchased shares on the open market. Additionally, Vistry shares have been added to the FTSE 100, which should raise the profile of the business, and lead to more investors taking the time to understand what is happening underneath the hood here. Additionally, a newly elected Labour government should benefit Vistry. If the Company is able to execute on their intermediate term goal of £800M in EBIT, shares will be trading at ~4x EBIT versus past transactions that have taken place at 12-13x EBIT, suggesting that upside of 300-400% is possible in the not-too-distant future.
Kathmandu Capital on Kaspi $KSPI KZ
Thesis: Kaspi's strong payment momentum and international expansion potential position it for significant growth in the AI era.
Extract from their Q2 letter, link here
Analysis: Payment momentum and income growth continue to drive the business and generate 20%+ top and bottom-line growth. As the world enters the AI era, we believe Kaspi is well-positioned to ride this wave with the help of its extensive database and top engineering talent in Central Asia, a huge opportunity yet to be fully addressed by the market. We continue to view KSPI as the best flywheel business in the world, a regional monopoly that has morphed into a government-like entity, effectively taxing the entire Kazakhstan population. All eyes are now on the company’s international expansion plan, which we believe will become more concrete once the Ukraine war ends. We believe KSPI is well-positioned to capture international expansion opportunities, aided by the management team’s strong track record of making big, calculated bets when the right opportunity arises. With Kazakhstan poised to remain an important trade corridor between the East and the West post-Ukraine conflict, and its increasing importance on the international stage due to its uranium and oil & gas resources, we continue to believe this high-quality compounder should warrant at least a 20x P/E multiple.
Platinium AM on Fast Retailing $9983 JP
Thesis: Fast Retailing’s global growth and efficient supply chain make UNIQLO a standout in the apparel industry, poised for continued expansion and market dominance.
Extract from their Q2 letter, link here
Analysis: Fast Retailing is the owner of UNIQLO, a clothing brand with well-designed, high-quality basics with built-in fabric functionality (e.g., Airism, Heattech). In many ways UNIQLO is the Toyota of the apparel industry. We think their mid/value price points appeal to a broad range of consumers globally and they have a highly efficient supply chain. UNIQLO has quietly become a genuinely global brand in a highly fragmented industry and its rising market share implies further growth. Their market presence is higher in Japan, China and Asia, but Fast is now concentrating on building out their North America and Europe businesses.
Bell AM on Obic $4684 JP
Thesis: OBIC's leading market share, high customer retention, and consistent margin improvement make it an attractive investment at current valuation lows.
Extract from their Q2 letter, link here
Analysis: One of the new names purchased was OBIC, a leading enterprise resource planning (ERP) software provider in Japan. OBIC boasts the number 1 market share within Japan’s small-to-medium enterprise (SME) market with approximately 30% market share. The company’s ERP platform is also ranked number 1 in customer satisfaction in Japan and the company has enjoyed a 99% customer retention rate over the past decade. OBIC has delivered consistent operating margin improvement over the past couple of decades (FY24: 63.5%), helped by moving their customer base to the cloud. Going forward, the company has an opportunity to expand their presence in larger corporates who either operate an ‘in-house’ ERP system or one provided by competitors such as Oracle Japan, Fujitsu or SAP. We believe OBIC will continue to grow its earnings above 10% p.a. for the medium term, with additional shareholder returns from effective deployment of the company’s strong cash flow and net cash balance sheet. Valuation is trading at 5-year lows, creating an attractive investment entry point.
Platinium AM on Unicharm $8113 JP
Thesis: Unicharm's strong brand, pricing power, and shift to higher-margin categories position it for impressive growth and profitability.
Extract from their Q2 letter, link here
Analysis: We reinitiated a position in Unicharm given the strength of its brand and signs that channel inventory in the important China feminine care category has improved. Recent earnings have been stronger than expected, underscoring the value of their brand. Pricing power and growth across several markets continue to impress. We expect structural growth for disposable hygiene to continue with strong margins due to innovation, premiumisation and the company’s shift from low margin baby diapers to the higher margin ‘femcare’, adult incontinence and petcare categories.
Kathmandu Capital on NagaCorp $3918 HK
Thesis: NagaCorp's recovery in tourism and strategic international ties position it for significant upside potential.
Extract from their Q2 letter, link here
Analysis: We conducted further due diligence on the company over the past quarter. We spoke with tourists, local tour guides, regulars at the casino, and people working at the Naga Citywalk duty-free, and confirmed that overall traffic at Naga 1 and 2 is trending towards pre-COVID levels. This trend aligns with the official tourism data posted in May, which showed Chinese tourism visitations up 50% YoY to roughly 30% of 2019 levels and Phnom Penh airport arrivals up 10% YoY to 78% of 2019 levels. We expect the recovery to accelerate with the new international airport adding more direct flights, especially from China, next year. In the backdrop, the new prime minister Hun Manet, a childhood friend of Nagacorp's current CEO Chen Yiy Fon, continues to deepen international ties with neighboring countries. Beijing has appointed its highly regarded “wolf warrior” diplomat Wang Wenbin as Cambodia's ambassador, demonstrating a commitment to strengthening ties and investments in Cambodia. Meanwhile, the United States has sent its defense secretary to discuss military exchanges, and Japanese companies like MinebeaMitsumi and Tsuho have committed to investing $400 million into the country. We believe Cambodia will continue to attract record foreign direct investments and strengthen international ties, which bodes well for the country’s economic development and political stability, ultimately benefiting Nagacorp over the long run. That said, the market still has low expectations for Nagacorp, as it trades at a discount to its historical average and Macau peers. We believe the regional monopoly is on track for a rerating once it pays down its July 2024 debt overhang. Additionally, as tourism recovers and Nagacorp evolves into a more organic business in the post-junket world, we foresee a 100%+ share price upside by 2029 for investors patient enough to wait.
East72 on Bolloré $BOL FP
Thesis: Bolloré's significant discount to NAV and strategic potential position it as an exceptional low-risk investment with substantial upside.
Extract from their Q2 letter, link here
Analysis: As at 30 June 2024 €million Comments Cash (net) 6,248 Deconsolidation as per December 2023 report Universal Music Group (18%) 9,056 326m shares at €27.78 Vivendi (~30%) 2,928 300m shares at €9.76 TOTAL 18,232 €15.77 per share Hence at end June 2024, we view Bolloré as trading at a 65% discount to NAV, well above the prevailing discounts of ~40% of other European family-controlled conglomerates; more pointedly, the discount has blown out nine percentage points in a year despite the removal of transaction closure uncertainties and a 36% lift in the price of its largest investment. If that is perplexing, the situation with Compagnie de L’Odet is even more the case, especially as at the June 2023 AGM, Chair Vincent Bolloré was noting the very low price of Odet; at 30 June 2024, it had fallen 14% from then. A year ago (page 27 of QR#2), we calculated based on Bolloré’s then market price, that Odet was trading at around a 5% discount to market value NAV (€1554 against mid-point NAV of €1634). The same calculations at 30 June 2024 show that Odet has slithered away to close on a 20% discount to NAV at Bolloré’s market value: €million Eliminate SCL † Don’t eliminate Comments Bolloré shares (€13.15) 9,368 10,900 1,709m shares on elimination; 1,989m shares with SCL Vivendi shares (€9.76) 54 54 5.5million UMG shares (€27.78) 172 172 6.2million Debt (430) (430) Via deconsolidation TOTAL NAV 9,164 10,696 Issued ODET shares 5.649m 6.586m NAV/share €1622 €1624 ODET price €1304 = 19.6% discount at Bolloré share price † self control loop So we have a holding company trading at a 20% discount to an intermediate holding company with effectively three investments, which itself trades at a 65% discount to real NAV. We value Odet at over €4,700/share on the current asset base – 260% above the prevailing market price. Given the massive optionality with Bolloré’s cash hoard and the clear desire of the group to commence the process of simplification and value extraction, there are few other low-moderate risk investments with such upside, anywhere on the planet.
Kathmandu Capital on VusionGroup $VU FP
Thesis: VusionGroup's growth targets and strategic positioning in the U.S. market make it a promising quality compounder.
Extract from their Q2 letter, link here
Analysis: VusionGroup reaffirmed its 2024 target of achieving €1 billion in sales and improving its adjusted EBITDA margin by 50-100 basis points. Additionally, the company implied room for an upward revision to the 2025 guidance as Walmart accelerates its ESL implementation. We continue to see strong revenue upside and margin expansion opportunities, as the company hinted at onboarding another large U.S. client by year-end and broadened its VAS offering. Although competitors like Hanshow are aggressively building their U.S. operations, we believe VU still has an edge in U.S. penetration due to its early mover advantage and the ongoing geopolitical tensions between China and the U.S., which may intensify if Trump takes office. Despite initially categorizing VusionGroup as a special situation investment, we now view it more as a quality compounder that can outgrow the economic cycle and benefit from inflation as retailers look to hedge inflationary pressures. We will continue to monitor the development as we head to Taiwan to conduct further due diligence on the company’s upstream suppliers.
East72 Dynasty Trust on Catapult International $CAT AU
Thesis: Catapult's strategic SaaS transition and robust revenue growth potential make it a compelling investment opportunity.
Extract from their Q2 letter, link here
Analysis: With significant investment in capex and R&D (capitalized intangibles) over the past three fiscal years amounting to over US$72 million, we believe Catapult has reinforced its product suite, started the introduction of AI and remote athlete monitoring and significantly inculcated its products into the key motorsports competitions. We expect the company will have to continue to maintain this overall level of spend in the $15-$25 million area as it has publicly flagged. Catapult now appears to have reached the “SaaS crossover point” where incremental revenue gains – which we clearly view as highly likely – fall to the bottom line in material fashion at over 40% margin. The key test will be to see Catapult meet their 5,000 “mid-term” elite team target by mid-way through FY 2027 (March). Each incremental team represents an opportunity for gradual upselling and cross-selling as their “experts” are convinced of the necessity and usability of the technology. Hence, in valuing the company, it’s reasonable to expect per team revenue and margin to increase on a known fixed cost base with forecastable variable costs. Our approach has been to use a ‘lifetime value of client’ approach, common in SaaS companies, whilst cross-checking our valuation against a DCF valuation at 12.5% discount rate and also – with great trepidation – other medium sized (by US standards) SaaS companies relative to revenue. As a starting point, amazingly, if we reverse engineer the rating of SRAD and GENI in the sports data area and apply EV/Revenue multiples to Catapult (the company has no net debt) we arrive at the exact closing share price on 30 June 2024 of A$1.89 Our assessment of five mid cap US SaaS companies (US$2 – 5bn market cap) across a range of consumer services, work management, software repository, content storage and search optimisation, none of which have debt, yields an average EV/Revenue multiple of 3.8x for the 2025 year on a comparison group whose shares trade at an average 28% below their 52week high. Simplistically applying this to Catapult would yield an equity value of A$2.76 per share (at fx A$1=US$0.66) under the assumption of 20% revenue growth in the period to 31 March 2025 to US$120 million. Our DCF valuation using 10% per annum client growth, for the next five years, incremental gains in gross margin from the 81% current level, applying constant variable cost to revenue ratios, and 3.5% cost inflation to the fixed cost base, yields an after-tax valuation of $2.65 per share at the same exchange rate. In our opinion, the risks with our valuation and thesis reside with management execution, since there are a myriad of opportunities at this stage of development. We do not rule out a friendly corporate play for Catapult, most obviously from private equity investors, who had a serious look at the company in March-April 2019 with the shares around $1.00. Somewhat surprisingly, no-one made a pitch in late 2022 and early 2023 at even lower prices. With board and management, including the two founders directly owning or having influence over ~23% of the company, their thinking will be a determining factor. With the gargantuan tailwinds of sporting monetisation, we wouldn’t be in a big rush.
Tidefall Capital on Fairfax India $FIH/U CN
Thesis: Fairfax India's strategic investment in Bangalore Airport positions it to capitalize on India's booming air travel market and potential significant value realization.
Extract from their Q2 letter, link here
Analysis: Having just finished Fairfax’s investor week in Toronto, I thought it would be helpful to recap the events and how we view the positions today. First off, there was the Fairfax India AGM at the Ritz Carlton. As always my focus was on the 64% ownership of Bangalore International Airport (BIAL), which is by far and away the largest and most important asset in the holding company. Bangalore is the Silicon Valley of India and where tech companies are increasingly moving manufacturing to as relations with China deteriorate. With the fastest growing G-20 economy and just 2-3% of its citizens having ever been on a plane, passenger volumes are expected to dramatically increase in India; from 208mn in 2019 to 510mn in 2030. BIAL had a big win this month when it announced that it would become Air India’s second hub which bodes well for more lucrative international travellers. The 2023 Fairfax India letter had disclosed that with the new opening of Terminal 2, BIAL was likely trading for just 9.5x normalized free cash flow. Airports are notoriously difficult to value due to control periods and by claiming a normalized figure, Prem is essentially saying that not only is BIAL one of the best positioned and fastest growing airports in the world, it is also on their books as one of the cheapest (the top 10 airports in the world have a median PE ratio of 27x). BIAL is currently on Fairfax’s books at an implied valuation of $2.5bn, a 33% increase from its value in 2022, while its closest Indian peer has more than doubled. The CFO disclosed in the Q&A section that they use discount rates in their valuation that are as high as 16% to be conservative. We believe that Fairfax is actually doing shareholders a favor with what they call ‘a prudent valuation’, as any write up in the asset value would increase their own fees as managers. An eventual IPO, which they recommitted to at the AGM, will see the true value flow through to shareholders and I’m very confident that BIAL is worth substantially more than the current recorded value. During the pandemic, the slower growing Sydney airport which had 38 million passengers in 2023, nearly the same as BIAL’s 37 million passengers, sold for $17bn (49x 2019 pre-covid earnings), seven times BIAL’s private valuation. BIAL has far better prospects given its passenger capacity should reach 90 million in less than 10 years. Fairfax India remains a fantastic value proposition for capturing the rise of India which is expected to become the world’s third largest economy by 2027. With a market capitalization of $2bn for Fairfax India and a valuation of $1.5bn for all of their non-airport net assets, investors are paying approximately half a billion for their 64% ownership in BIAL, an investment that we believe is likely worth multiples of that amount.
Here are some additional Q2 letters :
https://www.mairsandpower.com/images/resources/Small_Cap_Fund_Commentary.pdf
https://www.mairsandpower.com/images/resources/Balanced_Fund_Commentary.pdf
https://www.mairsandpower.com/images/resources/Growth_Fund_Commentary.pdf
Everything you read here is for information purposes only and is not an investment recommendation.
Thanks for the compilation, appreciate it. FYI That is Tidefall's Q1 letter. I think they release their letters 1 quarter late.