Monday, December 7, 2015

Sohn London Conference Notes 2015 - Burbank, Singh, Block & More

We're posting up notes from the Sohn London 2015 Investment Conference that recently took place.  It featured prominent investment managers sharing their latest ideas to benefit cancer research.  Click the links below to go to the presentations.

Notes From 2015 Sohn London Conference

- John Burbank (Passport Capital): Long CF Industries

- Michael Karsch (Hunter Peak Investments): Long Houghton Harcourt 

- Carson Block (Muddy Waters): Short Proofpoint

- Selvan Masil (Westray Capital): Long Rolls Royce, Short Ericsson

- Bran Cornelisse (Farringdon Capital): Pair trade

- Dinakar Singh (TPG-Axon Capital): Long Yutong Bus Company

- Vikram Kumar (TT International): Long TomTom

- Robert Harteveldt (Trishield Capital): Long New Media Investment Group

- Franck Falezan (Primestone Capital): Long Dorma Kaba

- Guillaume Rambourg (Verrazzano Capital): Long Unipol Group

- Per Johansson (Bodenholm Capital): Long eBay, Short ACS 

- Bo Bortemark (Carve Capital): 3 long ideas

- Beltram Lastra (Bestinver): Long Indra

- Elif Aktug (Pictet Asset Mgmt): Long Mead Johnson Nutrition

- Mike Wilkins (Kingsford Capital): On short selling

John Burbank's Sohn London Presentation: Long CF Industries

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Passport Capital's John Burbank who pitched a long of CF Industries (CF).

John Burbank's Sohn London Presentation 2015

Long CF Industries (CF) 

Burbank said that he is generally very bearish on commodities but he likes CF industries for the following reasons.

- They know CF well and have been researching them for at least two year’s.

- CF is the leader in nitrogen fertilizers. The nitrogen fertilizer business is better than the potash business because farmers have to apply it to the soil.

- CF made two good deals in 2015. CF is buying OCI which is listed in the Netherlands. It will give CF a 50% share of the US nitrogen fertilizer business.  Owning a large share of the market will allow CF to charge higher prices. Buying Netherlands based OCI enables a tax inversion which will reduce CF’s tax rate from 35% to between 20-25%. The CF OCI deal should close in mid-2016. The other good deal that CF has done in 2015 is to allow its largest customer, CHS Co-Op, to buy 9% of it shares at $107/ share or $2.8bn. That’s more than double the current stock price. Burbank thinks that CF will use the money to buy back stock. He also believes that analysts have been slow to recognise that the deals will lead to 25% extra product capacity.

- CF is a shareholder friendly company with a long history of share buybacks. Capital returns in dividends and buybacks have been running at 10% per year since 2011. They have reduced the shares by 35% since 2012. Executives are net buyers rather than net sellers of the stock.  Burbank said that CF stock may not do anything for the next four to five months. Then the deals will close, the big buyback will happen and the stock price will go up.

What can go wrong? Burbank thinks that China will devalue. “If China devalues everything in the World will go down in value.” CF’s earnings will get hit too by about 7%. Passport has bought CF against a basket of commodity shorts. They are hedging the downside risk in non-miner, CF, by being short potash miners like Potash Corp (POT), Mosaic (MOS) and Agrium (AGU).

Be sure to check out the rest of the Sohn London Conference presentations.

Carson Block Short Proofpoint: Sohn London Presentation

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Carson Block of Muddy Waters who pitched a short of Proofpoint (PFPT).

Carson Block's Sohn London Presentation 2015

Short Proofpoint (NAS: PFPT) 

Proofpoint is priced for perfection. They went public in 2012. Block said that the more Proofpoint sells the more it loses. There is something wrong with the business model as they have had plenty of time to turn sales into profit.

Management mischaracterise their company as a cyber security company but it only focuses on email. Email security is a tiny market compared to cyber. Email security is a mature market. The number of business emails might actually be shrinking according to one analyst.

Management fudges the organic growth numbers. The real figure is much less than the market thinks.

Proofpoint is facing increasing competitive pressures. Microsoft, Google and Cisco are putting more effort into email security and are catching up. Proofpoint are losing some of their big accounts. Billing and revenue rates are flat lining. The growth rate is at risk. Proofpoint will not be able to maintain its premium pricing and there are already signs they are selling software at greater discounts. Many companies do not see email security as vitally important and are happy to use a free product that is good enough.

Be sure to check out the rest of the Sohn London Conference presentations.

Michael Karsch's Sohn London Presentation: Long Houghton Harcourt

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Michael Karsch of Hunter Peak Investments.  He pitched a long of Houghton Harcourt.

Michael Karsch's Sohn London Presentation 2015

Long Houghton Harcourt (NAS: HMHC) 

Houghton Harcourt is primarily a school text book publisher. It dominates in books for reading, maths and science. Houghton is the largest developer of text book content from Kindergarten to 12th grade in the US. It has 40% market share of the overall spend in the US. The school publishing market is an oligopoly. HMHC is a well-established company that has been trading for over 100 years. HMHC stock currently trades with a beta < 1.

HMHC went through bankruptcy in 2007 after an LBO and a second private equity owner encouraged it to take on too much leverage.  Houghton re-emerged from bankruptcy about a year ago and has been significantly de-levered.

Text books are a good business as revenues are fairly stable. There is a never ending stream of children entering the education system that need to be educated. It costs about $10,000 to educate a student in the US - approximately $100 per year comes from text books.

Houghton is not vulnerable to digital disruption – 40% of their orders are already for digital products. The text book market should not be compared with newspapers in this respect. Houghton has not lost margins from the move to digital. News Corp tried to break into the school digital market by giving away tablets but failed and had to write off the costs. There may actually be benefits from the digital revolution.  For example, print cost savings.

Houghton has complex accounting partly because revenues from textbooks are spread over 7 years even though the fee for the books is received up front. It’s a lumpy business that is hard to predict quarter by quarter. In the last two quarters Houghton has missed earnings expectations. Only 4 analysts following the stock. The earnings disappointments’ have provided a good entry point. Expect the company to buyback 20% of the shares in the next 12 months.

Be sure to check out the rest of the Sohn London Conference presentations.

Selvan Masil's Sohn London Presentation: Long Rolls Royce, Short Ericsson

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Selvan Masil of Westray Capital who pitched a long of Rolls Royce (RR.L) and a short of Ericsson (STO:ERIC-A, ERIC-B).

Selvan Masil's Sohn London Presentation 2015

Selvan Masil founded long/ short equity fund Westray Capital Management in April 2014. Before that he worked at Theorema Advisors, Pelham Capital, and Lansdowne Partners.

Long Rolls Royce (LON: RR) Rolls Royce primarily makes and services jet engines for aircraft. Aero engines are a good business:

- Air passengers double every 15 years

- The order backlog for wide bodied planes is at historic highs

- Fuel is the largest cost for airlines – around 60%. New engines that provide fuel savings are crucial to the future of airlines.

- The barriers to entry are high due to safety concerns and because engine development for wide bodied planes takes time to pay off. New engines lose money for the first 10-15 years before breaking even.

- There are few competitors : GE, Safran, Pratt and Whitney.  Masil sees no sign of a new entrant for the next 10 to 15 years.

- Rolls Royce has issued 5 profit warnings in a row in the last two years. The previous management did not communicate well with investors. Masil thinks that Rolls Royce is at an inflection point.

- Rolls Royce is at the start of capturing new market share. The order book suggests that it will double its market share in wide bodied engines in the next 15 years.

- Profitability will trough in 2016 and then pick up. Masil thinks that margins will pick up sharply by 2019. Consensus estimates for 2019 only show margins making a small improvement from today. 

- RR’s profit margins are not as good as Safran or GE’s which are around the 20% mark. RR can potentially close this gap over time.

- The new CEO, Warren East, is addressing some of the problems with a package of self-help measures – cost cutting, management redundancies and better communication with investors.

Short Ericsson (STO: ERIC-A; ERIC-B) Ericsson is a network equipment company. The industry dynamics are poor. There is pricing pressure in an increasingly commoditised industry due to competition from Asian manufacturers. The recent merger of Alcatel and Lucent has also created a stronger competitor. EBIT margin will be under pressure for a number of years. Ericsson has not done well in taking market share of the 4G market.  Ericsson’s P+L statement overstates profitability – the restructuring charges are not one off/ exceptional but rather ongoing.

Be sure to check out the rest of the Sohn London Conference presentations.

Bran Cornelisse's Sohn London Presentation: Long First Group, Short Student Transportation

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Bran Cornelisse of Farringdon Capital who pitched a pair trade involving two bus companies.

Bran Cornelisse's Sohn London Presentation 2015

Short Student Transportation Inc (TSE: STB): Student Transport is a Canadian school bus company. It owns about 12,000 buses. STB appears to have good growth and pays a very large 10.7% dividend.

The company is not strong financially:

- Net income has been negative since 2007. The company has burnt nearly $200m of cash since 2007.

- The company is increasingly relying on operating leases.

- Cornelisse said that STB cannot afford to pay the dividend. It is being funded by shareholders via the issue of new equity. The company is being poorly run and management have the wrong priorities.

Long First Group (LON: FGP): First Group is a UK based company that runs buses in the UK and operates the famous Greyhound service in the US. It is 4x larger than STB. The two companies do compete in the school bus market.

First Group has consistently generated much higher margins and it is consistently profitable. Unlike Student Transport, First Group does not pay a dividend and does not grow. First Group cut the dividend in 2013 and did a large rights issue. The share price was cut in half and has not recovered since.

First Group has outstanding debt. Interest charges from loans are higher than net income but the first bond will mature in 2018. First Group are paying 6-7% on financing. By 2024 all the bonds will have matured and any new financing should be able to be done at better rates. Once the debt has been paid off expect a profit increase of £60m/ year. Even though First group has expensive debt the balance sheet is strong.

                 Student Transport       First Group  
PE                      62.7                         8.5
EV/CE               2x                            1.8x

Be sure to check out the rest of the Sohn London Conference presentations.

Vikram Kumar's Sohn London Presentation: Long TomTom

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Vikram Kumar of TT International who pitched a long of TomTom (AMS:TOM2).

Vikram Kumar's Sohn London Presentation 2015

Long TomTom (AMS: TOM2) 

TT International  have owned TomTom stock for two and half years.

The Satellite Navigation industry has been shrinking by 25% per annum since 2007. TomTom is misunderstood. It is primarily a mapping software company not a seller of devices/ hardware. Its main business is intellectual property. There are only three global mapping databases: Nokia, TomTom and Google. The barriers to entry are extremely high as it would take at least 10 years to build up a global mapping database.

Google’s map data is not good enough according to interviews that TT International has done with car companies. Accurate maps will be crucial to self-driving cars. It is the key underpinning for the next stage in the development of the automobile. Mapping is going to become more important. Kumar sees Nokia and TomTom as a duopoly. They will have great pricing power in the future.

All Apple mapping data is underpinned by TomTom data. TomTom have recently signed an agreement with Uber to provide all their mapping data. Kumar believes that location based advertising through mobile devices is going to be very important for businesses like Facebook. Push and pull advertising will be targeted by map based technology depending on your location.

In the spring of 2015 Nokia announced that it had been approached by multiple parties and eventually was bought by a consortium led by VW, Audi, Daimler and BMW. Kumar said that this deal proves that mapping is growing in importance to car makers. TomTom is the last remaining independent owner of mapping software in the world. It will be the target of other car companies.

Given that Nokia sold for $3.1bn Kumar thinks that TomTom is worth between $3-5bn.

Be sure to check out the rest of the Sohn London Conference presentations.

Robert Harteveldt Long New Media Investment Group (Sohn London Conference)

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Robert Harteveldt of Trishield Capital Management who pitched a long of New Media Investment Group (NEWM).

Robert Harteveldt's Sohn London Presentation 2015

Long New Media Investment Group (NYSE: NEWM) 

New Media is a newspaper publisher that utilizes a roll-up strategy buying small and medium sized local newspaper businesses.

NEWM owns 575 publications in total, 125 daily publication and 490 related websites EV multiple 2015 6.3x; FCF 17.9%; Dividend 7.3%. NEWM will pay no income tax for the foreseeable future. Revenue and FCF has been growing over the last 3 years. New Media is managed by the private equity arm of Fortress Investment Group.

No one wants to touch newspaper businesses because of the challenge from digital media. Total newspaper circulation in the US has fallen from 51m in 2007 to 44m in 2010. However, Harteveldt argued that if you know where to look you can find thriving newspaper businesses. Newspaper circulation sales trends have stabilised. Small, local papers are here to stay and are sustainable. People need local news and local papers are the main way to get it – school news, obituaries, police blogs etc. There are few alternatives.

Trishield specialises in looking for businesses that are going through a hard time but are misunderstood by the market. New Media’s digital revenues are growing. They receive strong revenues from local advertising.

NEWM have made ten acquisitions since 2013. They will need to acquire $200m more small and medium sized newspapers in the future to hit their targets. This can be achieved via internally generated funds without the need for a rights issue. They make cost savings at newly acquired businesses by centralising administration and raise revenue by raising prices strategically.

Be sure to check out the rest of the Sohn London Conference presentations.

Franck Falézan's Sohn London Presentation: Long Dorma Kaba

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Franck Falézan of Primestone Capital who pitched a long of Dorma Kaba (SWZ:DOKA).

Franck Falézan's Sohn London Presentation 2015

Long Dorma Kaba Holdings (SWZ: DOKA) 

Primestone is a constructivist Activist that brings private equity experience to bear. It focuses on good businesses that can be improved.

Dorma Kaba Holding is a Switzerland-based company engaged in the provision of security systems  - locks, cylinders, hotel security, door closers. It is the No. 2 provider of security solutions after Assa Abloy.

Reasons to like DOKA:

- The security industry is an attractive sector with high margins that are often above 20%. It’s recession resilient. It is characterized by growing markets driven by urbanisation and the need to produce ever more effective security systems. There has been a shift from mechanical to electronic locks – lots of mechanical locks still need to be replaced. Local players have an advantage as government safety standards vary from country to country requiring different products.

- DOKA has a strong position within the industry. Good brands. Architects and security advisers tend to be brand conscious.

- There are multiple ways management can create value. The pieces are beginning to fall into place and he price is still appealing.  DOKA is a good business but it could be improved in several areas.

- Operations: margins should be increased from 16% to come in line with their main competitors that achieve 21%

-Strategy: more growth through acquisitions is required

- Balance sheet efficiency: there is cash on the balance sheet and no debt. DOKA needs to re-lever.

- Management need incentivising: they do not own enough equity and should be paid a larger percentage in shares.

- There is room for consolidation in the market. The market leader Assa Abloy only has 17% of the global market.

Be sure to check out the rest of the Sohn London Conference presentations.

Guillaume Rambourg's Sohn London Presentation: Long Unipol Group

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Guillaume Rambourg of Verrazzano Capital who pitched long Unipol Group.

Guillaume Rambourg's Sohn London Conference Presentation 2015

Long Unipol Group (BIT: UNI) 

Unipol has been a top five position for Verrazzano Capital for the past year and has performed well for the fund.

Unipol is an Italian insurance company. In 2011 it was in chapter 11.It was created by the merger of three insurance businesses that had been poorly managed. They were merged into one entity and a Euro 2bn rights issue was done to take care of the debt. Whilst the rights issue was dilutive, it gave the company a great platform on which to build. They were lucky in 2012 as the money that they raised was invested in Italian high yield bonds with yields of 5-7%. Now that the bonds appear less risky they provide the company with a strong buffer.

Unipol has transformed itself into the No. 1 in telematics. They fit devices to cars of the drivers that they insure that track speed and geography – a kind of in-car spy. With knowledge that they are being watched, drivers drive more carefully and have fewer accidents. Auto insurance is their key market at the moment.

Rambourg said that he likes self-help stories as there is less likelihood of being taken hostage by macro narratives such as the Euro or Chinese GDP.  At Unipol there is a strong CEO that is turning a previously struggling company around. It is taking its destiny into its own hands.

Unipol has a three year plan. Disposals are likely to follow. It pays a 6.4% dividend – the highest in Italy. There is M&A potential.

Be sure to check out the rest of the Sohn London Conference presentations.

Per Johansson's Sohn London Presentation: Long eBay, Short ACS

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Per Johansson of Bodenholm Capital who pitched a long of EBAY and a short of ACS.

Per Johansson's Sohn London Conference Presentation 2015

Long Ebay (NAS: EBAY): Per Johansson is particularly interested in the investment opportunities created by spinoffs. The spinoff of Paypal from Ebay is creating an opportunity to invest in a smaller Ebay. The Paypal spinoff is the first step to unlocking Ebay’s value.

Ebay has a strong balance sheet. It is a high margin business but growth has temporarily slowed for three main reasons.  - May 2014, Google changed the search algorithm - A security breach led to customers having to change their passwords - The strength of the Dollar has been a headwind.

Johansson believes growth is picking up again. Auctions are only 15% of the business. Ebay owns some good brands that some market participants are not aware of. For example, it owns which he referred to as the” Autotrader of Germany.” In time the market will recognise the importance of Ebay’s brands.

Short ACS Actividades de Construccion y Servicios (BME: ACS): ACS is a Spain based global construction company. Johansson said that ACS has accounting irregularities and overstates its earnings. The company has not created any cash flow in the last five years. There are hidden liabilities on the balance sheet. ACS’s end markets are deteriorating. There are cost over-runs on big projects in California.

Be sure to check out the rest of the Sohn London Conference presentations.

Bo Bortemark's Sohn London Presentation: Short Lafargeholcim, Long Sprouts & Yahoo

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Bo Börtemark of Carve Capital who pitched a short of Larfargeholcim and two long ideas: Sprouts Farmers Market and Yahoo.

Bo Börtemark's Sohn London Presentation 2015

Carve Capital is a long/ short equity and credit hedge fund manager that approaches equity from a bottom-up perspective.

Short Lafargeholcim.  China used more cement in the last three years than the US did in the whole Twentieth Century.  Now there is over capacity in China and the rest of the world. China is trying to export its excess capacity. China will increasingly seek to export cement to the countries where the price of cement is highest. These are the same markets that Lafargeholcim is in.

Long Sprout Farmers Market (NAS: SFM). The natural and organic food market is expected to grow in the US.

Long Yahoo (NAS: YHOO).  The core operation is valued at zero by the market. Investors have stopped believing and have given up.

Be sure to check out the rest of the Sohn London Conference presentations.

Beltram Lastra's Sohn London Presentation: Long Indra

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Beltram Lastra of Bestinver who pitched a long of Indra (BME:IDR).

Beltram Lastra's Sohn London Conference Presentation 2015

Long Indra (BME: IDR) 

Indra is a Spanish IT company. One of its main areas of business is the provision of air traffic management systems. The company has been through a difficult patch. It has recently taken write-downs of Euro 900m. It has cut labour costs and made redundancies. The share price has suffered and has been cut in half since 2007.

Central to Beltram Lastra’s investment case is the new CEO who was appointed in Jan 2015. Lastra believes the new CEO will turn the company around in the medium-term. In the short-term there are potential risks from further write downs in the Brazilian part of the business and possible balance sheet issues due to the company’s high level of debt.

Be sure to check out the rest of the Sohn London Conference presentations.

Elif Aktug Long Mead Johnson Nutrition: Sohn London Presentation 2015

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Elif Aktug of Pictet Asset Management who pitched a long of Mead Johnson Nutrition (MJN).

Elif Aktug's Sohn London Conference Presentation 2015

Long Mead Johnson (NYSE: MJN) 

Mead Johnson is the global leader in baby milk formula. Baby food is a high growth product driven by population growth especially in emerging markets and the US.

Mead is beefing up its e-commerce presence in China. It is also going to launch a super-premium product in China next year. The termination of China’s one child policy will generate more business.

The industry is consolidating and Mead Johnson could be a takeover target. A cost cutting programme has been recently implemented and the company is buying back 10% of the shares.

Be sure to check out the rest of the Sohn London Conference presentations.

Dinakar Singh: Long Yutong Bus Company at Sohn London Conference

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is TPG-Axon Capital's Dinakar Singh.  He pitched a long of Yutong Bus Company (SHA:600066).

Dinakar Singh's Sohn London 2015 Presentation

Long Yutong Bus Company (SHA: 600066)

Yutong Bus Company’s main products are school coaches, enterprise shuttle buses, caravans, motor homes. Margins are improving. Expect revenues to grow 10-15% in coming years.

Dinakar Singh said that he would much rather invest in Chinese capital goods companies than in their European counterparts that have very high valuations.

Be sure to check out the rest of the Sohn London Conference presentations.

Mike Wilkins on Short Selling at Sohn London Conference 2015

We're posting up notes from the Sohn London Investment Conference 2015.  Next up is Mike Wilkins of Kingsford Capital who talked about short selling.

Mike Wilkins' Sohn London Presentation

Kingsford Capital is a short only hedge fund.

Mike Wilkins did not pitch a specific name but talked generally about how his firm finds short ideas by searching for business people who get involved in fraud and law breaking. They look for senior managers that behave badly as they tend to keep going.

Once they have identified a rule breaker, Kingsford Capital follow their progress and build-up histories of their companies. They also track the business networks of people that infringe the law. Fraudsters often interact with one another. For example, they sometimes share the same auditors.

Be sure to check out the rest of the Sohn London Conference presentations.