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.

ValueAct Capital Doubles Rolls Royce Stake

Jeff Ubben's activist firm ValueAct Capital now owns 10% of Rolls Royce (RR.L / RYCEY), according to a regulatory filing with the company.  The investment firm crossed the required threshold on November 18th.

We highlighted when ValueAct initially took a Rolls Royce stake earlier this year.  Back then, they owned 5.44% of the company and since that disclosure shares have fallen around 21% and they've utilized the dip to increase their stake.

The company's new CEO Warren East recently issued another profit warning and is laying out his plans to turnaround the airplane engine maker.

Rolls has been hit in the near-term with its exposure to the oil and gas industry via some of its other business lines.  Additionally, the company has seen some dips in their aerospace segment (especially with its Trent 700 engine) as customers wait for newer, more efficient engines and airplanes to be delivered.

It seems as though ValueAct likes the company's duopoly position in the widebody aircraft engine industry.  However, they're probably looking for the company to improve margins and rationalize their production lines. They've also been pushing for a seat on the board at Rolls, but thus far haven't been granted access.

ValueAct, as a long term investor, probably sees this as an ideal turnaround story and are willing to take the near-term pain as East begins to dig in at the company.  Rolls sells its engines at a loss or break-even but then earns money on service contracts over the lifetime of the engine. 

As RR delivers more and more of their newest engines (on planes such as the Airbus A350) their installed base of service contracts is set to expand dramatically.  The company just has to get through the rough patch until then.

You can view additional portfolio activity from ValueAct here.

Per Google Finance, Rolls Royce is "a United Kingdom-based company that designs, develops, manufactures and services power systems for use in the air, on land and at sea. The Company operates through two divisions: Aerospace and Land & Sea. The Aerospace Division produces aero engines for large civil aircraft and corporate jets and provides defense aero engines and services. The Land & Sea Division comprises power systems, marine and nuclear businesses. The power systems business is involved in the development, manufacture, marketing and sales of diesel engines and power systems. The marine business is engaged in the development, manufacture, marketing and sales of marine power propulsion systems and aftermarket services. The nuclear business is involved in the development, manufacture, marketing and sales of nuclear systems for civil power generation and naval propulsion systems."

Lone Pine Capital Increases Short Position in Rolls Royce

Steve Mandel's hedge fund firm Lone Pine Capital has recently made some disclosures regarding their short position in shares of Rolls Royce (RR.L) in the UK.

We previously highlighted Lone Pine's initial short in RR shares earlier this summer and now they've increased their short position further.  Per filings made with the UK's FCA, Mandel's firm increased the short to 0.66% of shares on September 22nd, up to 0.76% of shares on September 23rd, and then finally up to 0.85% of shares a day later.  This is the most recent disclosure.

As we've also detailed, this is now somewhat of a battleground stock between two well respected investment managers as Jeff Ubben's ValueAct Capital is long RR.  They obviously saw an opportunity for activism here and are long-term investors.  Lone Pine, on the other hand, is looking to take advantage of the near-term troubles at the company.

We've posted a bunch of short position updates this week.  You can scroll through them all by clicking here: hedge fund short positions.

The UK regulatory rules for short position disclosures state that hedge funds must file when their net short position eclipses 0.2% of the issued share capital of a company.  Notification is also required again at each 0.1% increment after that.  This applies to both increases and decreases in the position.  Public disclosure is required when net short positions reach 0.5% of issued share capital.  Additionally, disclosure is required when the position subsequently falls below 0.5%.

You can read more recent portfolio activity from Lone Pine here.

ValueAct Capital Discloses Rolls Royce Stake; GreenWood's Thesis on Rolls

Jeff Ubben's activist firm ValueAct Capital has filed a regulatory disclosure in the UK regarding shares of Rolls Royce (RR.L)


ValueAct Starts Rolls Royce Stake

The filing indicates that ValueAct now owns 5.44% of Rolls Royce's (RR.L) voting rights.  The filing was made due to activity on July 29th and their are now the largest shareholder.

Per the FT, Rolls Royce in a statement said that, "ValueAct has been an investor before and we constructively engaged with them before.  We welcome any investor who recognises the long-term value of our business.  We look forward to engaging with ValueAct, just as we do with all investors."

Just last week, we highlighted how Steve Mandel's Lone Pine Capital is short Rolls Royce.  So now we have a bit of a battleground stock with prominent investors involved on both sides.  However, given the investment timeframes of longs versus shorts, both sides could still potentially end up winning.

Lone Pine is plausibly betting on the near-term pain at Rolls as some of their business units suffer from oil and gas exposure amidst the decline in oil prices and their Trent 700 engine sees a dip as purchasers wait for a newer, more efficient engine and airplane (Airbus A330neo).

ValueAct, as a long investor, is probably looking to capitalize on a turnaround in Rolls' business under new CEO Warren East.  They're typically long-term holders anyways and would seemingly be fine with riding out any turbulence in the near-term. 

Ruane Cunniff's Sequoia Fund is also a long-term holder of Rolls shares.  In their 2014 annual letter, they lamented that, "Management and the board seem stubborn and entrenched, and it may take a tough-minded activist to force strategic change."  Well, now they have both: a new CEO and an activist in ValueAct.  Sequoia feels that "Rolls' wounds are self-inflicted and reversible."  They also really like the company's "world class business making engines for wide body jets" due to the high barriers to entry.

ValueAct seems to be bullish on the aerospace industry in general and engines in particular.  During the first quarter of this year, they also initiated a new $119 million stake in Precision Castparts (PCP). 

Numerous other prominent investors were buying PCP shares such as Berkshire Hathaway, Lou Simpson's SQ Advisors (he previously worked at Berkshire as well), Soroban Capital, Vulcan Value, Farallon, Third Point, and Eminence Capital, among others.  Sequoia also owns PCP and bought more in Q1 as well.

PCP makes castings, forgings, fasteners and more, and many of their parts go into aircraft engines.


GreenWood's Thesis on Rolls Royce

Steven Wood of GreenWood Investors also recently took a stake in Rolls Royce and posted his investment thesis on the name.

You can quickly get up to speed on the name and see his suggestions that the company should perhaps vertically integrate more to follow in the footsteps of their competitor, GE Aviation, to play catch up in margins.

Embedded below is Greenwood's investment thesis on Rolls:

   Rolls Royce Mind the Gap

You can download a .pdf copy here.


For more from ValueAct, you can view some of their other recent portfolio activity here.

Lone Pine Capital Short Rolls Royce

Steve Mandel's hedge fund firm Lone Pine Capital has filed a regulatory disclosure in the UK regarding shares of Rolls Royce (RR.L), indicating they have a net short position. 


Lone Pine Short Rolls Royce

Lone Pine has disclosed they have a net short position to the tune of 0.59% of Rolls Royce shares.  This is a newly disclosed short position and the disclosure was triggered on July 10th, 2015.  Previously, they were short 0.35% of shares due to a filing on July 8th.

This comes only a few days after new CEO Warren East issued a profit warning, cut guidance, and noted that next year's results would also be weaker than expected.  Prior to joining Rolls, East was the CEO at ARM Holdings.  This is the fourth time Rolls has issued a warning since last early year.  The company also canceled its existing share buyback.

The company's marine division has been impacted by lower oil prices.  Additionally, Rolls Royce said its main segment, civil aerospace, would be impacted next year due to lower orders for its Trent 700 engines.

While it's harder to discern if this is an alpha short or a hedge to one of their longs, it still seems Lone Pine is looking for near-term pain to continue for the company.

On the other side of the trade, Ruane Cunniff (Sequoia Fund) has been long shares and in its year-end 2014 letter they bemoaned the company's move into marine engine and power generation.  They believe that "Rolls' wounds are self-inflicted and reversible" and love the company's "world class business making engines for wide body jets" as it enjoys a duopoly with General Electric with high barriers to entry. 


Short Selling Disclosure Rules in the UK

In 2012, the UK's Financial Services Authority (FSA) began requiring institutional investors to
to privately notify the FSA when their net short position eclipses 0.2% of the issued share capital of a company.  Notification is also required again at each 0.1% increment after that.  This applies to both increases and decreases in the position.  The Financial Conduct Authority (FCA) now monitors short sales.

Public disclosure of the short (as is the case above), is required when net short positions reach 0.5% of issued share capital.  Additionally, disclosure is required when the position subsequently falls below 0.5%.


Stay tuned this week and next as we'll be updating other short positions from prominent hedge funds.  Today we also posted about how Viking Global is short Peugeot.

For more from this hedge fund, we posted that Lone Pine almost doubled its stake in Charter Communications recently.

Julian Robertson on What Stocks He Likes Now: Interview

Tiger Management founder Julian Robertson made his rare television appearance for the year on CNBC yesterday and talked about how now is a time to put money to work in the market.

He thinks the economy and overseas worries are having a big effect on investors.  So many investors are frightened about Asia and Europe that they've almost "lost their way" without realizing that many great companies are trading at great prices.

He feels that this market is good for hedge funds because their namesake allows them to hedge against uncertainty and these potential risks.  However, he worries that some managers have hedged too much and they won't benefit unless there's a big fallout in the world economy.


What Stocks Robertson Likes

Robertson cited Apple (AAPL) as great company trading at a great value, something he says rarely happens.  He said, "Apple is now probably somewhere around 14-15 times next year's earnings, it's very, very reasonable for the kind of growth you can get."

Facebook (FB) was another stock Robertson mentioned as he likes the social media exposure and admires Mark Zuckerberg.  However, he does not "really know enough about the stock" to own a position.  He cited "younger people" that he's in partnership with as having owned Facebook early on back when it was private.  We'd assume he's referring to Chase Coleman's Tiger Global.

Robertson says he's looking for great companies and he's invested in a European airway company: Ryanair (RYAAY) as they're the low-cost provider.  He also likes Rolls Royce (LON:RR or RYCEY on the pink sheets) because many people see it as a luxury automobile when in reality it is a great supplier to the aerospace and other industries.  Steve Mandel's Lone Pine Capital has been an owner of Rolls Royce.

In terms of financials, Robertson cited Capital One (COF) and Ocwen Financial (OCN).  The latter, he says,  is a mortgage servicing company that he thinks has a lot going for them.

Robertson argues that steel companies AK Steel (AKS), US Steel (X), etc are overvalued and we'd need to see the economy really takeoff to warrant those multiples.


Embedded below is the video of Julian Robertson's interview:



For more on this legendary investor, head to Julian Robertson's thoughts on the hedge fund industry past & present as well as his past extensive interview with Columbia Business School.