Sohn London Conference Notes 2013: Hohn, Armitage, Tangen, Gaonkar & More ~ market folly

Friday, November 1, 2013

Sohn London Conference Notes 2013: Hohn, Armitage, Tangen, Gaonkar & More

The 2013 Sohn London Conference just took place and MarketFolly has notes below.  The event featured hedge fund managers presenting their latest investment ideas benefiting paediatric cancer and childhood disease research.

Sohn London Conference Notes 2013

Chris Hohn – The Children’s Investment Fund  

Following on from last week’s disclosure that TCI had bought a large part of the UK’s privatised post office, Royal Mail, in the secondary market, Hohn pitched two more privatisation ideas. He said that governments are the worst manager and that there are huge efficiency savings to be made in the aftermath of a privatisation.

Idea 1: Aurizon (Australia)  - Aurizon, formerly QR National, is a publically listed rail company in Australia. According to Hohn, Aurizon’s CEO, Lance Hockridge is a winner. Recent returns have been about 10% per year with 6% volume growth per year. The cost cutting potential is huge. Large scale redundancies are already underway. Aurizon was privatised with no debt, which Hohn said was ridiculous. Hohn implied that he has been pressing the company to re-lever and that he had had some success. Aurizon can have a double digit dividend within a couple of years. The company is a play on the Austrailian commodities market and the Chinese and Indian economic growth.

Idea 2: Long EADS  - Hohn noted that the company has had a bad record with investors – no one has made money for 30 years. Sometimes it pays to study the history of a company. He believes that the EADS will double and then triple profits in the coming years. Airbus is now competing well with Boeing. There is no chance of new competitors breaking into the market as safety concerns keep new entrants out. Pricing is increasing. Costs are falling as suppliers are squeezed for the first time. EADS is committed to 3.75bn euro of stock buybacks over the next 18 months. EADS 10x multiple can close the gap on Boeing’s 15 x multiple.

John Armitage - Egerton Capital  

Idea 1: Long Nordea (Sweden)  - Armitage said that Nordea is a simple, low risk stockpick which he referred to as a ‘teddy bear stock’ because it allowed him to sleep well at night. Nordea is the leading Scandinavian bank – being #1 or #2 in most Nordic countries. Nordea performed well in the financial crisis. The bank does not look for dynamic growth in earnings and that is its strength. Boring is good in the banking sector. Nordea will grow moderately in the future. Its market has oligopolistic qualities. Loan loss rates will drop for a prolonged period of time. Nordic banks are much better capitalised than their European or US counterparts. The dividend is likely rise over time.

Idea 2: Long Ocwen (OCN)  - Armitage said that whilst his first pick had been simple and straightforward, Ocwen was a far more complex and complicated situation. Ocwen is a mortgage servicing business which sits at the core of the difficulties that the US housing sector has faced since the financial crisis. In the US, mortgages are packaged and turned into bonds. Many of the loans made over the last decade or so are delinquent and have needed to be modified or foreclosed. Big banks have been overwhelmed and are often too unfocused to carry out the mortgage servicing task that Ocwen specialises in. Ocwen has a good technology platform which he referred to as a dialogue engine. It profiles a borrower’s ability to pay back mortgages. Making the appropriate loan modifications is a key driver of success or failure. Ocwen’s founders own 22% of the business. There will be growth in income from the existing portfolio of loans. They are producing $1.1bn of FCF. Some of that money will be used for stock buybacks which have recently been agreed. Ocwen are well placed to make acquisitions. Armitage believes that Ocwen will be able to deploy their existing expertise and technology to diversify into new markets such as car loans and subprime.  Note that Steve Eisman also pitched OCN at the Invest For Kids Chicago conference this week as well.

Nicolai Tangen – AKO Capital  

Idea: Long Experian  - Experian is the largest credit bureau in the world. It has a strong balance sheet and strong organic growth at 7%. They have lifted margin growth by 700 basis points in the last 6 years. Tangen believes margins will continue to increase in the future. Experian is selling credit data in more and more countries and the great thing about credit data is that you can often sell the same data several times. Demand for credit data has risen since the financial crisis as regulators have forced banks and other financial institutions to become more discerning about who they lend to. The rise of the internet and E-commerce is also creating demand for credit data. Experian has a significant moat as there are no other global players, just regional competitors. There are three players in the US but only 2 players in other countries. Experian is a safe play in as much as it has counter-cyclical qualities. Its gearing is falling rapidly as the cash keeps coming in.

Mala Gaonkar, Lone Pine Capital  

Mala Gaonkar is a co-portfolio manager at Lone Pine, a role she has held since 1998.

Idea: Long Qualcomm (NAS: QCOM)  - 3G & 4G wireless data and voice standards create two thirds of the business. The other one-third is from chips. Expect more unit growth in the smart phone market than most people assume. It will double in the next three years. Generally speaking, we will replace our smartphones more quickly than many analysts assume. The active broadband market is not yet mature. Royalty rates are resilient. QCOM has far more patents than their competitors. They will be able to diversify into new mobile devices in the future.  

Julian Sinclair – Talisman Global Asset Management

Idea 1: Long Tata Motors -  Sinclair valued Jaguar and Land Rover at around $17bn, the same as Tata’s market cap. Jaguar and Land Rover make up about 80% of Tata’s net worth so you get the other 20% for free. Jaguar and Land Rover are quintessential British brands. They are now competing well with the big German luxury brands in terms of quality and reliability. Tata is producing more reliable cars than it used to and that has been backed up by recent JD Power surveys. Tata is trading at 6x earnings. Sales are expected to expand by 20% during the next five years. There is potential for the share price to double Tata can even attain the double digit margins that Porsche has achieved. Tata is growing top line and bottom line simultaneously. Tata is also has potential as an emerging market recovery play.

Idea 2: Shared Appreciation Mortgages (SAMs)  SAMs are a form of mortgage backed security created in the late 1990s by banks like Barclays and Royal Bank of Scotland in the UK. Sinclair sees SAMs as the last great post-crisis credit trade. If house prices go up by 2-3% they will pay out 11% and if prices go up by more they will pay out even more. SAMs have a defensive quality too. If house prices were to fall by 5% SAMs would still pay out a similar return to Gilts (UK government bonds).

Eashwar Krishnan – Tybourne Capital Management  

Eashwar Krisnan spent 12 years as a Managing Director and Senior Analyst at Lone Pine. In 2007, he moved to Hong Kong to set up and manage Lone Pine’s operation in Asia. He set up his own fund  Tybourne Capital in 2012. Tybourne focuses mostly on equities in the consumer, financial and TMT   sectors in Asia.

Advertising in India is 20x cheaper than in the US. Over time the gap will narrow. TV dominates advertising spending in Asia. There is a favourable environment for investing in commercial TV businesses in Asia at the moment. Indonesians watch an average of 5 hours Television per day. He likes companies run by owner operators with skin in the game. Advertising growth rates can grow at double digits for many years.

Idea 1. Long Media Nusantara Citra MNC (Indonesia). Nusantara has 42% of audience share; it’s the industry price leader.

Idea 2. Long Surya Citra Media (Indonesia). Surya has 22% of primetime TV. It develops and owns content, which produces high returns on capital.

Idea 3. Long Zee Entertainment Enterprises (India)  - Zee is the #2 provider after Star owned by Fox (Tybourne hold Fox stock too). Zee will be a beneficiary of digitalisation. Two-thirds of TV viewers in India receive an analogue signal at present.

Idea 4. Sun Investments (India). Sun is the #1 player in Southern India.

Ross Turner – Pelham Capital  

Ross Turner was an equity partner with Lansdowne Partners and set up Pelham Capital in 2007.

Idea: Long DCC Plc  - DCC was listed in Ireland but has transferred its main listing in the UK. It is a distributions services company with a large energy division – oil and LPG. This part of the business is straightforward involving the pickup of the product from terminals and distribution to the customer. In oil distribution in the UK, they are the only distributor with a national network giving them a dominant market position. DCC have developed their market position through bolt on acquisitions. The LPG market is more consolidated but they have greater pricing power there. Europe only makes up 15% of DCC’s income, but they are beginning to make in-roads via the same strategy of bolt on acquisitions. DCC is a stable business with a strong competitive position. Turner believes the valuation is still attractive as no one takes into account the continued impact of the acquisitions. He   sees 15% earnings growth per year going forward.

Mas Siddiqui – Naya Management  

Before founding Naya in July 2012, Mas Siddiqui was a partner at TCI Fund where he was responsible for global investments in credit and equities. Previously he was Managing Director at Canyon Partners.

Idea 1: Long Salvatore Ferragamo (Italy)  - Salvatore Ferragamo creates, develops and produces clothes and shoes for men and women and fragrances and eyewear. Despite being based in Italy, only 25% of its sales are in Europe. Sales in emerging markets are larger and this should continue as the EM consumer becomes better off. They are growing top line growth and they have scope to increase their prices. Salvatore is an ‘undermanaged company’ with plenty of room for improvement. Labour costs are 50% higher than its peers and they could reduce them. He did not say whether he had been pressuring the company for change but it seems quite possible given his background at TCI and his take on the company. The company has a clean balance sheet and is considering a large return of cash via a special dividend, which Siddiqui indicated is being sought by family owners who hold a 60% of the stock.

Idea 2. Short Essilor International   - Essilor is an ophthalmic optics company based in France. It is a world leader in the manufacturing of lenses for glasses. Using FCF and organic growth, Siddiqui believes the company is wildly overvalued. Naya’s research shows that brands do not have much impact in the lenses market. New digital production techniques will cut costs and lead to deflation in the sector. Competition from Zeiss and Hoya will intensify.

Bruno Rocha – Dynamo Capital  

Rocha started by using data from Dimson, Marsh and Staunton’s data set (see the Credit Swiss   Yearbooks) to argue that there is no relationship between GDP and equity returns. In fact he said that the data suggested that slow growing countries produce better equity returns that fast growing counties. Rocha said that what goes for countries is true too for business sectors where growth in earnings is different from growth in earnings per share. Slow growing countries and companies can create better returns for investors than fast growing countries and companies.

Idea: Long Anheuser Busch Inbev (BUD) -  In the beer business, Rocha showed that contrary to popular wisdom, Inbev was more profitable in wine drinking France than in beer drinking Germany. Rocha noted that there are only four big beer companies left in the western world. Inbev has economies of scale allowing it to benefit from the mature, consolidated markets.

Andrew Weiss – Weiss Asset Management  

Intriguingly, when Andrew Weiss was introduced it was suggested that his presentation at Sohn London was the first time he had ever spoken to a large investment audience as he normally prefers to address academic gatherings. Weiss then pitched one of his own funds as his investment idea.

Idea: Long Weiss Korea (LON: WKOF) - Weiss Korea invests in the listed preferred shares of companies incorporated in South Korea.  Andrew Weiss said that there are four things going for the investor in South Korea. Firstly stocks are cheap. Secondly, there is potential for future economic growth as the demographics are good; the workforce is well educated; the road, rail and internet infrastructure is sound; there is low debt to GDP and good natural resources. Thirdly there are catalysts to change including changes to the regulatory environment in favour of shareholders. Fourthly, there are exceptional access products like preferred shares. In Korea preferred shares are similar to ordinary shares but without the voting rights. Preferred stock tends to trade at a large discount to ordinary shares in Korea. 

For more hedge fund conference coverage, check out notes from other recent events:

- Invest For Kids Chicago notes: Lasry, Eisman, Cooperman & more

- Great Investors Best Ideas notes: Price, Akre, Pickens & more

- Excellence in Investing San Francisco notes: Burbank, Billick, McGuire & more

- Value Investing Congress notes: Ubben, Smith, Yacktman, Roepers & more

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