Notes From Next Wave Sohn San Francisco 2016: Rende, Kaufman, Drescher, Melsom

Today we're posting up notes from the Next Wave Sohn San Francisco 2016 investment conference that just took place.  This features emerging fund managers presenting investment ideas to benefit charities.  We've also posted notes from the main Sohn San Francisco 2016 conference as well.


Notes From Next Wave Sohn San Francisco 2016

John Rende, Copernicus Capital Management

• Focused on life sciences and services
• Manages $85mm AUM
• Positive performance 15 out of 16 years

• Idea: Biomarin Pharmaceuticals (BMRN)
• Enzyme replacement therapies for rare diseases 
• $16bn market cap
• 5 commercialized drugs = $1.1bn in product sales in 2016
• Thearpeutics category
• Leader in orphan drugs (affecting less than 200k people in the US)
• Why we like orphan drugs?
• Expedited regulatory path
• Limited competition
• Small sales force needs
• Motivated patient population
• Business model advantage
• 7 year marketing exclusivity 
• Tax credits
• FDA motivated to approve these drugs
• 2014-2020 CAGR of ~17%
• Biomarin makes 5 orphan drugs; Strength in Vimizim and Kuvan - raised revenue guidance recently
• Sustainability of revenues for rare diseases
• Vimizim - treats Morquio A disease - impacts population of 3,000 in the developed world with 20 births/year in the US
• Annual price/patient = ~$350k
• Kuvan - Phenylketonuria - inherited disorder which caused the buildup of the amino acid
• Works in conjunction with a low phe diet
• Annual price/patient =~$150k 
• Three near term pipeline products expected to add $400mm in product revenue by 2020
• Corporate pricing strategy has always been conservative; they've been kept out of the crosshairs because they don't represent a large portion of a given insurance company's costs given low number of patients impacted; also FDA understands that orphan drug companies need a financial incentive to continue to develop orphan drugs
• Over $4bn invested in R&D over past decade
• Base case = $130 price target; Upside case = $170 price target; Downside case = $80 price target

Neal Kaufman, Hillair Capital Management

• From a non-traditional background - formerly operated businesses - CEO of publicly traded small cap company - a supplier to the railroad industry
• Invests in publicly traded small companies

•  Idea: Sysorex (SYRX)
• Value added reseller transitioning into a product company 
• Moving to Saas/recurring revenue business model
• Hillair has $5mm invested in fixed price convertible debenture with preferred share equity kicker 
• Convertible at price significantly above current market
• Technologies
• Airpatrol: Detects cellular, Wifi, RFID, and Bluetooth deices, applications
• Lightminer: World's fastest analytics platform
• VAR business comprises the lionshare of revenue
• Announcement on contract with Top US mall operator and Airpatrol installations
• Valuation
• VAR business worth $14bn based on comps
• Security business is worth $26mm based on comps
• Value per share of $0.89 versus current price of $0.31

Joel Drescher, Drescher Capital

• Focused on TMT and consumer
• BA from Stanford and MBA from Cal Berkeley

• Idea: Signet Jewelers (SIG) 
• 15% ROE, 7 year of double
• Owns Kay, Jared and Pagoda and Zales store brands
• Three divisions
• Market for wedding and engagement rings is very stable
• 15% market share in the mass jewelry category; no competitor has more than 1%
• Zales had 3% operating margin before it was purchased versus Kay and Jared at 17%
• Stock beaten down due to a diamond swap scandal that was published on Buzzfeed, concerns around rising charge-offs
• Credit is an asset not a liability; can be sold off
• 62% of sales done on credit at an average FICO score of 660
• Mid-teens yield on credit portfolio
• Signet could get $1.1bn for the sale of their credit portfolio; could sell it with a minimal impact to EPS, proceeds can be used to buy back stock
• Third party would have more stringent credit standards but would result in minimal loss of sales
• Company announced that it is exploring the sale of its receivables
• $139 per share fair value; 85% increase from current market price based on $7.40 EPS x 10% growth, +1.13 EPS from credit sale portfolio x 15 P/E multiple

John Melsom, Omni Event Fund

• Risk/merger arbitrage fund; 20-25 names in portfolio
• $350mm AUM; launched three years ago
• Investment criteria: hard catalyst, low correlation to equity markets, liquid
• Focused on N. America, Western Europe and Asia
• Beta to the S&P of 0

• Idea: Syngenta (SYT) ~ $40bn market cap 
• One of the big six agro chemical firms
• Focused on crop protection and seeds
• Agricultural input sector facing headwinds; costs are increasing in R&D and crop prices are in decline
• A lot of consolidation in the sector
• ChemChina has a deal to acquire Syngenta
• ChemChina is China's largest chemical company - state owned 
• Terms of the deal: $465 USD + CHF 5/share special dividend
• Expect broad shareholder support for the deal, need Chinese regulatory approvals - but it is a very strategic deal for China given China's desire to increase agriculture output significantly 
• Swiss government has blessed the deal; CFIUS - US body has approved the deal
• Potential 20% return before CFIUS deal; Post CFIUS approval, there is a 7% spread - annualizes to 28% based on closing date
• Spread driven by concerns of antitrust and Chinese buyer.  Market share issues can be easily solved
• Highly confident that the deal will close

Be sure to also check out the presentations from the main Sohn San Francisco 2016 conference as well.

Corvex Management Boosts Signet Jewelers Stake, Files 13D

Keith Meister's activist hedge fund Corvex Management has filed an amended 13D with the SEC on shares of Signet Jewelers (SIG).  Per the filing, Corvex now owns 8.3% of Signet with over 6.52 million shares.

The filing notes that Corvex "commend the Issuer for the announcement in its quarterly earnings call on May 26, 2016 of its commitment to conduct, along with its advisor Goldman Sachs, a strategic evaluation of its credit portfolio.  The Reporting Persons strongly support the Issuer’s review of credit portfolio alternatives, and believes that it is essential that the Issuer complete this review as quickly as reasonably practicable, and thereafter promptly both announce to the shareholders and implement the actions which were determined to create the greatest enhancement to financial and shareholder value."

Corvex also indicates they purchased shares of SIG in April and May with the bulk of the activity coming on May 26th at $98.25 per share.

The firm previously owned 5.93 million Signet shares at the end of the first quarter.

Per Google Finance, Signet Jewelers is "a retailer of jewelry, watches and associated services in the United States, Canada and the United Kingdom. The Company's segments are the Sterling Jewelers division, the UK Jewelry division, the Zale division, which consists of Zale Jewelry and Piercing Pagoda, and the Other segment. The Other segment includes subsidiaries involved in purchasing and conversion of rough diamonds to polished stones. The Company operates retail jewelry stores in various real estate formats, including mall-based, free-standing, strip center and outlet store locations. It operates approximately 3,620 stores and kiosks across approximately five million square feet of retail space. The Sterling Jewelers division operates approximately 1,540 stores. Its stores operate nationally in malls and off-mall locations as Kay Jewelers, and regionally under various mall-based brands. Zale Jewelry consists of brands, including Zales Jewelers and Zales Outlet."

Corvex Management Adds To Signet Jewelers Stake

Keith Meister's activist hedge fund Corvex Management has filed an amended 13D with the SEC regarding its position in Signet Jewelers (SIG).  Per the filing, Corvex now owns 7.2% of SIG with over 5.74 million shares.

They've increased their position size by 235,000 shares.  They were buying sporadically in January, February and early March at prices between $117.40 and $121.68.

Corvex's filing says they commend Signet "for its new capital allocation policy and look forward to continuing to engage in constructive and collaborative conversations."

You can view additional portfolio activity from Corvex here.

Per Google Finance, Signet Jewelers is "a Bermuda-based specialty retail jeweler by sales in the United States and United Kingdom. The Company also has stores in the Republic of Ireland and Channel Islands. It is engaged in the retailing of jewelry, watches and associated services. The business is managed as two geographical operating divisions: the US division and the UK division."

Corvex Management Starts Activist Signet Jewelers Position

Keith Meister's activist firm Corvex Management has filed a 13D with the SEC regarding Signet Jewlers (SIG).  Per the filing, Corvex now owns 7.8% of the company with over 6.2 million shares. 

This is a newly revealed stake and the filing was required due to activity on January 14th.  As has been customary with Corvex's other recent positions, they've bought both common stock and call options, as well as sold puts. 

It looks like they were buying November 2014 $53 calls and February 2015 $51 calls as well as selling November 2014 $53 puts and February 2015 $51 puts.


Activist Talks

The filing indicates Corvex has already talked with management and found talks to be "constructive." 

Corvex has approached Signet about "options for enhancing shareholder value through various strategic alternatives including, but not limited to, leveraging the Issuer's credit receivables, optimizing capital structure, accelerating M&A and/or return of capital to shareholders, utilizing the Issuer's offshore corporate structure, and general corporate matters."


About Signet Jewelers

Per Google Finance, Signet Jewelers is "a specialty retail jeweler by sales in the United States and United Kingdom, and also has stores in the Republic of Ireland and Channel Islands. The Company is engaged in the retailing of jewelry, watches and associated services. The business is managed as two geographical operating divisions: the US division and the UK division. Its stores trade nationally in malls and off-mall locations as Kay Jewelers (Kay), and regionally under a number of mall-based brands. Destination superstores trade nationwide as Jared The Galleria Of Jewelry (Jared)."

You can view more of Corvex's recent portfolio activity here.

John Armitage: Long Signet Jewelers & AZ Electronic Materials (Sohn London Conference)

Continuing our series of notes from the Sohn London Investment Conference, next up is John Armitage of Egerton Capital.

John Armitage is one of the survivors of the hedge fund industry. He co-founded Egerton Capital  in 1994. At Egerton, he is the Chief Investment Officer for all portfolio management activities  including long/ short and long only funds. Egerton Capital has 14% compounded return since 1996.  He presented two long ideas: Signet Jewelers (SIG) and AZ Electronic Materials (LON: AZEM).


Long Signet Jewelers

-  Signet is a leading US mid-market jeweler
- 50% of sale are bridal/wedding related

-  Good IT systems
-  Exclusive brands account for 26% of sales. Exclusive brands reduce direct price competition  from retail outlets and online retailers
-  Signet’s competitive advantages:  1. Sourcing – as one of the biggest buyers of diamonds it has purchasing power , 2. Good advertising - Signet spends twice as much on advertising as their competitors, 3. Highly trained staff - customers need advice when buying jewelery and well trained sales staff are a major asset of the business

Armitage argued that Signet is a retail survivor in an internet age (Even the diamond industry sees competition via the internet, mainly from Blue Nile (NILE)).


Long AZ Electronic Materials

Armitage only had a minute or two left to talk about AZ.  It is a producer and supplier of specialty  chemical materials that are used in smartphones, tablets and connected devices.  The Company’s products are used in the manufacture of integrated circuits and flat panel displays  used in electronic devices and applications, including computers and tablet devices, flat screen  televisions, mobile communication devices, industrial and automotive applications and the  developing light and energy markets.

AZ revenue is driven by the semiconductor market. In Armitage’s view the company is cheap  trading on 13x earnings and a gem.


Armitage also mentioned that his favorite longs were News Corp (NWSA), Volkswagen (VW), Richemont, and Samsung.  At the event, Chris Cooper-Hohn made a presentation on NWSA, one of Armitage's favorites.


For the rest of the hedge fund presentations from this event, head to notes from Sohn London Investment Conference.