Passport Capital's Top 10 Holdings & Saudi Equity Theses: Q1 Letter ~ market folly

Tuesday, May 1, 2012

Passport Capital's Top 10 Holdings & Saudi Equity Theses: Q1 Letter

Today we're highlighting commentary from Passport Capital's Q1 letter to investors.  We've already highlighted how Passport is net short and so now we want to shift focus to John Burbank's top longs.

Passport's Top 10 Holdings (at end of Q1)

1. Vivus (VVUS US): 5% of NAV
2. Cytec Industries (CYT US): 4%
3. Marathon Petroleum (MPC US): 4%
4. Yanbu National Petroleum (YANSAB AB): 4%
5. Etihad Etisalat (EEC AB): 4%
6. Google (GOOG US): 3%
7. Liberty Interactive (LINTA US): 3%
8. Apple (AAPL US): 3%
9. Saudi Basic Industries (SABIC AB): 2%
10. Wynn Resorts (WYNN US): 2%

Comparing the above longs to their list at the end of 2011, there are a few noticeable changes.  Their stake in Vivus has climbed from 7th largest holding to their top position.  We had previously detailed how Passport was bullish on Saudi equities and you see that reflected now in their latest portfolio. 

US tech giants Apple (AAPL) and Google (GOOG) weren't included in their 2011 year-end top 10 but both make the list now.  As of March 31st, their top 10 equity holdings accounted for 34% of the fund's net asset value.

Passport's Investment Theses on Saudi Equity Plays

Given that many of their top holdings are now plays in Saudi equities, we thought it prudent to highlight some of their rationale for owning them.

Yanbu National Petrochemical:  John Burbank writes, "Our rationale for investing in YANSAB is predicated on the company’s strong cash-generating capability.  The company has a highly advantaged feedstock position in Saudi Arabia, allowing it to generate  EBITDA  margins  in  excess  of  45%  and  FCF  yield  of  over  10%.    YANSAB  is  a  single  petrochemical  plant commissioned in 2010 with no plans for further expansion and we believe is likely to pay out all its  cash once its debt covenants are fulfilled.  Over FY2011, the company decreased its long-term debt by  over 30% with Net Debt/EBITDA now at 2.7x.  We think YANSAB’s 51% shareholder SABIC could  start paying out dividends in the 2H of 2012, which should significantly re-rate the stock."

Etihad Etisalat: Passport's founder notes that, "Etihad Etisalat operates under the brand name Mobily, is the second largest mobile operator in Saudi,  and is a key beneficiary of the deregulation of the Saudi telecom sector.  Earnings have grown at around  48.7% CAGR in the last five years.  Mobily is capturing the growing data market (currently 22% of  revenue) due to what we believe are superior data services infrastructure compared to the competition.   In addition, Mobily is currently the leader in mobile broadband.  This segment is growing at an  exponential rate due to increased use of mobile tablets and 3G-enabled phones by the affluent Saudi  population (~60% of whom are below the age of 30).  Due to very high mobile penetration rates in the  Kingdom, Mobily is transforming from a high-growth company to a dividend opportunity given its SAR  4.25 FCF/share."

Saudi Basic Industries Corp:  The hedge fund's thesis on this name is that, "SABIC is the largest petrochemical company in the world by market cap and among the top five in terms  of production capacity.  SABIC has the key structural advantage of  very low-cost feedstock for its  petrochemical complexes in Saudi Arabia that helps the company maintain a healthy EBITDA margin of  approximately 32%.  The company increased its revenues by 25% and net income by 36% YoY. SABIC  represents approximately 11% of the market cap  of the Tadawul index, and while the stock has  underperformed the general market, we believe it will be a key beneficiary of foreign flows once the Saudi  market opens up to foreign investors."

Don't miss our other post from the hedge fund's Q1 letter on why Passport is net short.

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