Below are links to notes from the recent Sohn London Investment Conference 2019 which featured investment managers sharing ideas to benefit charity.
Sohn London Conference Notes 2019
- Brian Baldwin (Trian Fund Management): Long Ferguson
- James Hanbury (Odey Asset Management): Long Plus500
- Catherine Berjal (CIAM): Long Accor
- Jason Ader (SpringOwl Asset Management): Long Playtec
- Per Johansson (Bodenholm Capital): Long LivaNova, Short Koenig and Bauer
- Tamas Eisenberger (Sikra Capital): Long Star Bulk Carriers & Scorpio Tankers
- Måns Larsson (Makuria): Short ICA Gruppen
- Arnaud Langlois (1798 TerreNeuve Fund): Short Air Products & Chemicals
- Lucy Macdonald (Allianz): Long Bloomsbury Publishing
- Fadi Arbid (Amwal Capital): Short Kuwait Finance House, long Ahli United Bank
- Pieter Taselaar (Lucerne Capital): Long Altice Europe (apologies, no notes from this one)
Monday, December 9, 2019
Notes From Sohn London Investment Conference 2019
Brian Baldwin (Trian) Long Ferguson: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Brian Baldwin of Trian Fund Management who presented a long of Ferguson (LON: FERG).
Brian Baldwin's Sohn London Conference Presentation
Trian disclosed a 5.2% stake in Ferguson in June 2019. It’s an activist investment and Trian has been in discussions with the board and management. Trian is the largest shareholder.
Ferguson’s main business is selling parts for plumbing and heating (80% of profits). They also sell waterworks and fire protection products (20% of profits). They have 1700 branches and 11 distribution centres in the US.
Plumbing products distribution is an attractive business in the US. Trian likes businesses that provide products at a fair price to their customers. Ferguson’s products cost much less than the labour costs to install them. Eighty percent of sales are done through their branches. Ferguson has the scale to get good prices from suppliers. Its scale also allows it to provide a wide range of products (100,000SKUs) to meet plumbers’ need.
Ferguson has used this scale to take 3-4 percentage points of market share per year over the last nine years. Revenue has been growing at over 9% CAGR for the last five years. EBIT at 11% CAGR over the same period. It is the market leader with 20% market share. There is still room for growth.
Ferguson announced that the remaining part of the UK business, Wolseley, would be divested just weeks after Trian disclosed their stake. At the same time, the CEO was replaced by the head of the US business, Kevin Murphy.
While the US business is a leader in a fragmented market the UK business operates in a less attractive consolidated market with several large players. Once Wolseley has been sold off, Ferguson will be a completely US business.
Ferguson’s main listing is on the London Stock Exchange. The company is not well known by US investors and is under-owned by US institutions. Trian are pressing for a listing on the NASDAQ. European analysts misunderstand Ferguson because they focus too much on the UK operations.
Ferguson should be compared to other specialty distributors in the US. If Ferguson was listed in the US and traded in line with other specialty distributors its shares that sell for £68 today could be worth £105.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
James Hanbury (Odey) Long Plus500: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is James Hanbury of Odey Asset Management who presented a long of Plus500 (LONG:PLUS).
James Hanbury's Sohn London Conference Presentation
Long Plus500 (LON: PLUS)
Plus500 is a CFD trading business. Its main competitors are IG Group, Saxo bank, CMC. It’s a fintech business and very much a technology company. In the last 3 years: revenue 38% CAGR, EPS 58% CAGR, EBIT margin 59%. It is best in class with a very high return on equity. Cash conversion has been excellent. At the IPO in 2013 they raised £22m in primary net proceeds. Since then, they have returned nearly £850m to shareholders, mainly in dividends. Over and above this, there is £200m excess cash on the balance sheet.
Can Plus500 keep generating this level of cash and what are the barriers to entry? Plus500 offer negative balance protection to all customers. As a customer with Plus500 you can use lots of leverage but not lose more than your deposit. The competition does not offer balance protection because it’s difficult and expensive requiring good risk control. Plus500 also offer spreads that are 10% to 15% inside other CFD brokers.
Hanbury said that you can tell a good disruptive business by its revenue / employee. Plus500 £1.5m/ employee compared to the two strongest competitors: IG Group £300,000/ employee and CMC£200,000/ employee.
Plus500 has good marketing. It has invested in machine learning and artificial intelligence to produce algorithms that place adverts on Google, Twitter and other web sites. It spends more on marketing in absolute terms than competitors and more as a percentage of sales. Even though they spend more on marketing their fixed costs are lower: Plus500 12%, IG Group 50%, CMC 60%. Plus500 has been taking market share every year. It is the market leader in the UK, Germany, Spain, Australia.
What are the risks? Plus500 has been hit by ESMA regulatory changes over the last year that have reduced customers’ ability to take on high levels of leverage. The European area represents 70% of its revenues. There are also similar regulatory changes taking place in Japan and Australia. Hanbury believes that in a tough regulatory environment the tough will get stronger and the weak will get weaker. Expect the number of operators to decline. Having less leverage will be better for customers. Since the ESMA changes, Plus500 have reported falling customer acquisition costs, churn has hit record lows and the win/lose ratio for customers has been improving.
Part of the bear case for Plus500 is that customers are often inappropriate, low value and don’t last long. However, the percentage of customers who have been with Plus500 for more than 1 year is high at 73%. Expect that number to improve further in the new regulatory environment.
It’s important to remember that one of the most important drivers of revenues for a CFD trading business is market volatility. Plus500 do well in difficult markets.
Another aspect of the bear case is that the business is high risk. Plus500 now has a full listing on the main market and has the best transparency in the industry. The market has not fully appreciated that it doesn’t hedge its positions. Instead they limit customers’ position sizes. They are very happy to have whale traders, but they don’t like single whale trades. Their profile of winning/ losing days is extremely impressive: 85% of days are winning days. They do have big losing days. The biggest one came on a day in the Crypto craze in Oct 2017 where they lost £3.5m. Hanbury’s view is that is easily coverable by the £200m cash on the balance sheet. When there are high levels of downside volatility, Plus500 tends to make back money that it has lost quickly because volatility stimulates activity elsewhere.
Plus500 has started to buy back stock. In the current market there is potential for them to make a good acquisition. They could move into new markets like stockbroking, ISAs and new geographies. It is the best business in the industry yet it has the cheapest valuation 2.3x EV/EBIT 2020. PE 5.3x 2020.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Jason Ader Long Playtec: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Jason Ader of SpringOwl Asset Management who presented a long of Playtec (LON: PTEC).
Jason Ader's Sohn London Conference Presentation
Long Playtec (LON: PTEC)
Spring Owl’s active approach could be referred to as private equity in public markets. It acts as a sponsor and focuses on turnarounds. Jason Ader has been involved in turnarounds in the gaming industry for several years, including Lss Vegas Sands, Bwin Party and The Stars Group.
SpringOwl disclosed their stake in Playtec in August 2018. Early in 2019 they were successful in getting two independent directors added to the board. They view Playtec as a technology company:a provider of gambling software. It would be hard to for another software company to duplicate what they have. With the US moving forward with the legalisation of sports betting – 10 States so far– there is a huge opportunity. Playtec has the potential to double its EBITDA in the US alone. Ader has encouraged the company to focus on the more regulated markets in the US and to operate through New Jersey.
SpringOwl has made recommendations to the company on how to improve the existing core business and pushed it to divest its stake in the UK Fintech, Plus 500. They have pushed for and achieved the introduction of share buybacks. They have tied management compensation to an incentive-based scheme. There is value in the Asian business even though analysts don’t see it. Ader wants an Asian investor to come in and take a minority stake in 2020. That would demonstrate the value of the business to the rest of the market.There is less risk in Playtec since SpringOwl got involved. The share price is a bit lower than their entry price. The end game is to sell to private equity.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Catherine Berjal Long Accor: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Catherine Berjal of CIAM who presented a long of Accor (EPA: AC).
Catherine Berjal's Sohn London Conference Presentation
Long Accor (EPA: AC)
CIAM is an activist but Accor is not currently an activist position.
Accor is the perfect target for Private equity. PE like the travel and Tourism sectors because of the high returns on capital. In particular, they like the hotels businesses as they are: asset-light, scalable, it’s easy to bring in new management, there are often opportunities to sell off assets.
Accor is a European leader in hotel management. It’s the sixth largest hospitality conglomerate worldwide with 5000 hotels and is the market leader in Europe and the Middle East.
It has above average cash generation. EBITDA will grow at 14% CAGR over the next 5 years.
There are multiple opportunities for a PE firm to unlock value: sell non-core assets, sell luxury brands. A PE takeover would bring 50% upside from the current share price. CIAM will support a PE takeover at the right price.
Write-downs in recent years have scared investors off. Accor is undervalued and out of favour. A sum of the parts valuation suggests 30% upside.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Per Johansson Short Koenig and Bauer, Long LivaNova: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Per Johansson of Bodenholm Capital who presented a short of Koenig and Bauer (GER:SKBX) and a long of LivaNova (NAS:LIVN).
Per Johansson's Sohn London Conference Presentation
Short: Koenig and Bauer (GER: SKBX)
Koenig and Bauer is a German based printing press manufacturer. It has less conservative accounting. Cashflow and earnings expectations are set for a big reset.
Demand for the presses has structural challenges. Bank notes in circulation are not shrinking yet but may do in the future. Bank note printing makes up 20% of revenue, 40% of profits. They used to have a monopoly in the bank note printing area but now buyers are tendering contracts. Japanese competitors have started to win contracts recently. The other part of the business, sheetfed offset printing, is also facing headwinds. Volume is slowing and margins are contracting.
They have taken a lot of ones offs and restructuring charges making the accounts look better than they are. This may have been incentivised by management bonus targets.
Long: LivaNova (NAS: LIVN)
LivaNova is a medical device company. Bodenholm like spinoffs and they like companies that are de-conglomerizing. They have been invested in the company for 4 years and its one of their largest positions.The neuromodulation business is high quality. It’s almost a monopoly, there are high barriers to entry. They can grow revenue at 5-8% per year.
The other part of the business is better than analysts think and has market leading positions in most businesses. It can grow revenue at 5-6% and profit at 10% per annum.
They are also running clinical trials to see if the neuromodulation technology can be used to treat depression. If it can, it will be a game changer for the company because the market is huge.
LivaNova is a prime acquisition target.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Måns Larsson Short ICA Gruppen: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Måns Larsson of Makuria who presented a short of ICA Gruppen (STO: ICA).
Måns Larsson's Sohn London Conference Presentation
Short: ICA Gruppen (STO: ICA)
ICA is a Swedish based supermarket/ grocery business. It’s the largest Swedish supermarket. ICA isrun on a franchisee model.
ICA is significantly overvalued at 25x accounting earnings. It has made good returns for shareholders over the last decade, but Larsson thinks that is about to change. Given the headwinds, 14x earnings would be a fairer valuation.
Challenging fundamentals: sales volumes are declining, the store footprint is contracting, the competition in Sweden is heating up especially with Lidl quietly gaining share.The Swedish grocery market is moving online quite quickly (expect 15% of total by 2022). Online is growing at about 30% per year. ICA doesn’t make money from online sales. ICA’s offline grocery sales are declining at about 1% per annum. Lidl is growing at about 10% CAGR over the last 5 years. ICA has stores in the Baltic region, but Aldi and Lidl will be opening stores there next year.
Larsson’s research that looks at the accounts of individual franchisees suggests that profitability is heavily skewed towards the large out of town stores (maxis). In the large cities like Stockholm and Gothenburg where online adoption is higher profitability is lower or non-existent. Because many of the franchisees are not making money, ICA as the franchisor may have to lower fees.
Quality of earnings and cash conversion is poorer than it looks: EBIT looks okay, but they have taken a lot one offs. ICA’s cash conversion is poor. Cash flow to equity holders is less than 20% - it doesn’t cover the dividend. Since 2016 about 30% of cash generation has come from non-operating items like networking capital. Reverse factoring is a big component. Management’s capital allocation has not always been good. They have invested too much in online.
ICA is a low-quality supermarket that is going ex-growth yet it is one of the most highly valued food retailers in the developed market.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Tamas Eisenberger Long Star Bulk Carriers & Scorpio Tankers: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Tamas Eisenberger of Sikra Capital who presented longs of Star Bulk Carriers (NAS: SBLK) and Scorpio Tankers (NYSE: STNG).
Tamas Eisenberger's Sohn London Conference Presentation
Long: Star Bulk Carriers (NAS: SBLK) & Scorpio Tankers (NYSE: STNG)
Large ships usually burn low quality, highly polluting fuel. One cruise liner can put out the same amount of sulphur dioxide over a year as 20m cars. A Finnish study found that if shipping emissions continue at their present level, they will cause 600,000 premature deaths over the next 5 years.
A new International Maritime Organisation regulation will come into force in Jan 2020 that will drastically reduce the amount of sulphur ships can emit. Shipping companies have been slow to gear up for new emission standards. Ship operators have two choices. Either they pay 50% more for better quality fuel or they install scrubbers that allow the ships to run on the old low-quality fuel but with less emissions. Well capitalised forward-thinking owners are installing scrubbers. Installing scrubbers will save $8-10,000 per ship/day compared to running on the high-quality fuel.
The shipping industry is highly cyclical. The last eleven years has been a bear market in which many players have gone out of business or were taken over. It has been destructive including many shipyard closures. Supply is now quite tight. It will stay tight for quite a few years because of the long lead times in shipbuilding.
The introduction of the new regulation in 2020 will cause chaos for at least the first six months. High quality fuel prices are likely rise because most ships have not been fitted with scrubbers. Those without scrubbers that will be burning the high-quality fuel may have to start slow steaming in order to use fuel more efficiently. If they travel 10% more slowly, cargo will take 10% longer to get to its destination. Ships fitted with scrubbers will have a significant advantage. Less fuel-efficient old ships will be uneconomic and scrapped.
Shipping can be unprofitable for long periods but this can be made up for in a two or three year period of super profits. In good times, a ship can earn 20-30% of its equity value in a single month. The new emissions regulations are the catalyst that can usher in a period of super profits.
Star Bulk Carriers has one of the largest and most diversified fleets. They are the low-cost operator and their fleet is 100% fitted with scrubbers. Scorpio Tankers will be 100% fitted with scrubbers by the end of next year. They have a young fleet and the management team are good.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Arnaud Langlois Short Air Products & Chemicals: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Arnaud Langlois of 1798 TerreNeuve Fund, Lombard Odier who presented a short of Air Products and Chemicals (NAS:APD).
Arnaud Langlois's Sohn London Conference Presentation
Short: Air Products and Chemicals (NAS: APD)
The stock is up 59% this year. APD is trying to grow at 10% per annum. To achieve this, in 2018 the company set out a plan to invest $17bn between 2018-2022 mostly into coal gasification – making gas from coal. There are risks with this process:
- Country risk, projects take place in countries that are trying to exploit coal assets like China, Indonesian and Indian
- Concentration risk, APD is investing too much into coal gasification
- Joint venture risks, their partners are in the mining industry which can be unstable
- Environmental risks. Coal gasification is a water intensive process. Plants have been stopped in China due to water shortages. It is also CO2 intensive emitting x2 coal fired power stations
Langlois’s research suggests that APD’s CO2 footprint could be 100m tons by 2025. That would give it one of the largest footprints in the S&P 500. Any new legislation that limits or taxes greenhouse gas emissions would hurt the company. Carbon pricing is established in Europe and seems likely to spread. No investor with a long-time horizon should support the APD’s business model.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Lucy Macdonald Long Bloomsbury Publishing: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Lucy Macdonald of Allianz Global Investors who presented a long of Bloomsbury Publishing (LON:BMY).
Lucy Macdonald's Sohn London Conference Presentation
Long: Bloomsbury Publishing (LON: BMY)
The UK market and publishing sector are loathed at the moment. Publishing is quite a way through the digitalization process and much further than most other industries. It will soon be entering the post-digital phase. Half of books sales go through Amazon. The publishing industry has survived. Quality is king. Publishers have had to redefine their part in the eco-system.
Bloomsbury has a strong content back catalogue. The books they have are still popular and high quality e.g., they have all the rights to the Harry Potter books.
They have strong growth drivers, especially the rise of audio books. Initially audio books sold to preschool children and to the visually impaired but now Millennials are listening to them on their phones. Bloomsbury have been supplying audio books since 2005. Children’s books have been Bloomsbury’s mainstay, but they have been developing a new market in academic and professional publishing that have a higher margin.
Bloomsbury also has international growth in areas like India, again with Harry Potter leading the way. They have invested in digitization in the academic area by building online archives on: Winston Churchill, The National Theatre and Shakespeare.
Revenue growth is steady in single digits. Margins have been improving due to the contributions academic and international sales. The founder is still CEO and in his early 60s.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Fadi Arbid Long Ahli United Bank, Short Kuwait Finance House: Sohn London Conference
We're posting up notes from the Sohn London investment conference. Next up is Fadi Arbid of Amwal Capital who presented an arbitrage trade: short of Kuwait Finance House and a long of Ahli United Bank.
Fadi Arbid's Sohn London Conference Presentation
The Saudi market is inefficient. Approx. 60% of daily volume is conducted by retail investors. It has a low level of analyst coverage. Shorting has only been allowed recently.
Idea: merger arbitrage. Short Kuwait Finance House, Long Ahli United Bank (AUB).
Both are Islamic banks that are listed in Kuwait. Kuwait Finance House is the largest Islamic bank operating mainly in Kuwait, Malaysia and Turkey. AUB is focused on Kuwait, Bahrain, UAE, Egypt.
Both banks have a common shareholder in the government of Kuwait. There is still a 12% spread. Expect the deal to close in Q1 2020.
Be sure to check out the rest of the presentations from Sohn London conference 2019.
Thursday, October 31, 2019
Glenview Capital Trims Brookdale Senior Living Stake
Larry Robbins' Glenview Capital now owns 9.59% of Brookdale Senior Living (BKD) with over 17.63 million shares, per a 13G recently filed with the SEC. This marks a slight decrease from the 18.43 million shares they owned at the end of the second quarter. The filing was made due to portfolio activity on October 30th.
Per Yahoo Finance, Brookdale "owns and operates senior living communities in the United States. It operates through five segments: Independent Living, Assisted Living and Memory Care, CCRCs, Health Care Services, and Management Services."
ValueAct Capital Reduces Alliance Data Systems Position
Jeff Ubben's activist firm ValueAct Capital has also filed both a Form 4 and a 13D with the SEC regarding its stake in Alliance Data Systems (ADS).
ValueAct now only owns 2.7% of the company with a little
over 1.377 million shares. This is down from the 3.7 million they
reported owning back at the end of Q2.
The Form 4 filing notes that ValueAct converted its previously disclosed 150,000 shares of Series A non-voting convertible preferred stock into 1.5 million shares of common stock. The 13D also indicates that ValueAct sold 2 million ADS shares at $101.50 on October 28th and sold another 1.83 million shares at $102 the next day.
Per Yahoo Finance, Alliance Data Systems "provides data-driven marketing and loyalty solutions worldwide."
Thursday, October 24, 2019
Third Point's Q3 Letter: EssilorLuxottica Thesis
Dan Loeb's hedge fund firm Third Point is out with its third quarter letter. In it, they touch on activist investing, their successful investment in Sotheby's (BID), an update on Sony (SNE) and Argentine Credit, and also outline their thesis on newer holding EssilorLuxottica.
Of the latter, they write:
"Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets. In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies. The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering. These initiatives will transform the way glasses are sold, significantly improving the customer experience."
Third Point sees the company earning over 8 euros of EPS in 2023 and for earnings and FCF to grow at a mid-teens compound annual growth rate.
Embedded below is Third Point's Q3 letter:
You can download a .pdf here.
For other recent hedge fund letters, you can also read Howard Marks' latest letter here.
Monday, October 21, 2019
New Howard Marks Letter on Negative Interest Rates: "Mysterious"
Oaktree Capital's chairman Howard Marks is out with his latest memo. It is entitled "Mysterious" and deals with the topic of negative interest rates.
He writes, "The fact that we know what they are–as we do with inflation and deflation – doesn’t alter the fact that we don’t know for sure why negative rates are prevalent today, how long they’ll continue in force, what might cause them to turn positive, what their consequences are, or whether they’ll reach the U.S."
The rest of his letter follows. Embedded below is Howard Marks' latest letter:
You can download a .pdf copy here.
For more from this manager be sure to check out his books Mastering the Market Cycle as well as The Most Important Thing.
Corvex Management Goes Activist on ForeScout Technologies
Keith Meister's hedge fund firm Corvex Management has filed a 13D with the SEC regarding shares of ForeScout Technologies (FSCT). Per the filing, Corvex now owns 7.2% of ForeScout with over 3.34 million shares. However, the 13D is being filed jointly with Jericho Capital Asset Management which also owns shares, bringing their collective exposure to 14.5% of the company with over 6.68 million shares.
The filing shows Corvex as buying throughout September and October initially at prices around $35.xx but really ramped up their buying when shares traded down to $25.xx.
The 13D also contains information about their new activist stance: "After the close of business on October 18, 2019, the Corvex Persons agreed with the Jericho Persons to work together to engage with the Issuer and its management regarding its business and prospects. The Corvex Persons and the Jericho Persons believe that combining their complementary expertise, skill sets and perspectives will be beneficial in discussions with the Issuer. The Corvex Persons and the Jericho Persons anticipate having private discussions with the Issuer as soon as practicable."
Per Yahoo Finance, ForeScout Technologies "provides network security products in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan. It offers CounterACT that provides for visibility and control capabilities across campus information technology and Internet of Things (IoT) devices, operational technology devices, data center physical and virtual devices, and cloud virtual devices; and SilentDefense, which offers visibility and control capabilities within the operational technology portion of the network."
Glenview Capital Files 13D on Meritor
Larry Robbins' hedge fund firm Glenview Capital has filed a 13D with the SEC on shares of Meritor (MTOR). Per the filing, Glenview now owns 14.7% of the company with exposure to over 12.1 million shares. This is inclusive of 4.9 million shares underlying call options.
This is up from the previous 7.2 million shares Glenview had exposure to at the end of the second quarter, per their most recent 13F filing. So basically Glenview has added call option exposure and then gone activist on the name.
The filing also includes the standard activist investor boilerplate: "The Reporting Persons intend to engage in discussions with the Company and the Company’s management and board of directors, other shareholders of the Company and other interested parties on issues that may relate to the business, management, operations, assets, capitalization, financial condition, strategic plans, governance, board composition and the future of the Company. Glenview Capital Management has entered into a customary confidentiality agreement with the Company in order to facilitate these discussions."
Per Yahoo Finance, Meritor "designs, develops, manufactures, markets, distributes, sells, services, and supports integrated systems, modules, and components to original equipment manufacturers (OEMs) and the aftermarket for the commercial vehicle, transportation, and industrial sectors. It operates through two segments, Commercial Truck; and Aftermarket, Industrial and Trailer."
Mantle Ridge Files Form 4 on CSX
Paul Hilal's investment firm Mantle Ridge LP has filed a Form 4 with the SEC regarding its stake in CSX (CSX). Per the filing, Mantle Ridge sold 3.45 million shares on October 17th at $67.91. The filing notes this was "in order to repay Mantle Ridge Fund obligations under a secured credit facility. The Reporting Persons have no current plans to sell any additional shares of the Issuer, although they reserve the right to do so in their discretion."
The Form 4 also shows Mantle Ridge made pro rata distributions of over 34.49 million shares to direct and indirect owners of the Mantle Ridge funds. Also, 36,813 shares were contributed to certain charitable organizations.
Prior to founding Mantle Ridge, Hilal worked at Pershing Square and runs a similar activist strategy, though more concentrated.
Thursday, October 17, 2019
Sohn San Francisco Notes 2019: Kacher, Yusko, Kawaja & More
The Sohn San Francisco Investment Conference just concluded and featured hedge fund managers sharing their latest investment ideas to benefit charity. The event benefits the Excellence in Investing for Children's Causes Foundation and a portion of the proceeds also go to The Sohn Conference Foundation.
We've already posted up notes from Next Wave Sohn San Francisco which featured emerging managers. Now below are notes from the main event.
Sohn San Francisco 2019 Notes
Kevin Oram, Praesidium Investment Management Company, LLC
Idea: Instructure (INST)
• Hidden value that can be unlocked
• 2 key products:
o Canvas is a leader in education learning software which is ~90% of revenue
o Bridge is corporate learning software
• Canvas is student and educator collaboration software
• Biggest competitor is Blackboard – which has a legacy on premise software and has had trouble transitioning to a cloud model
• Software is a great business but vertical software is even better as it serves a very specific market
• Believe there is a significant margin expansion opportunity from 24% in 2019 to 40%+ by 2022
• Has an opportunity to roll up software in other adjacencies given a lot of fragmentation of players in education software
• Believe it is worth $2.5bn versus current valuation of $1.5bn
• Undervalued due to large losses in Bridge – corporate learning
• Bridge software is good but significant competition in the corporate market with entrenched players
• Bridge has very little synergy with Canvas given different source code and dedicated sales team
• Opportunity to unlock value by divesting from Bridge via sale, shutdown and focus on Canvas
• Engaging actively with management over last several months to present case on value destruction of Bridge
• Dec 3rd – Will have an analyst day to describe company’s new strategy and operating model – could be the catalyst market has been looking for
Gil Simon, SoMa Equity Partners
Idea: Sailpoint (SAIL)
• Believe that there is 100% upside to $35-40 per share
• Best of breed software trading at a reasonable valuation (<3x 2022e="" p="" sales="">• Identity is central to enterprise security but this is difficult because the modern large enterprise is running hundreds of applications
• Identity and access management is the #1 priority within security
• Identity Governance and Administration (IGA): Ensure employees access only what they need to access
• 2 key products: Identity IQ and IdentityNow
• ~1,300 customers
• Extending the lead over legacy competition like IBM and Oracle
• 8,500 customers market opportunity from legacy competitors
• CA and Oracle not likely to focus on this space
• Buying opportunity on missed execution; have recently strengthened the management team
• Expect revenue growth to re-accelerate which should drive a snap back in the share price
Adam Fisher, Commonwealth Asset Management
Idea: China Interest Rate Convergence
• Japanese working population peaked in 1995
• China is a good analog for Japan – working age population peaked in 2015 – projected to fall by 125 million through 2040
• China’s 4 megacities are already as rich as the rest of East Asia
• Ne net: Believes that interest rates in China are coming down and going to zero
Glen Kacher, Light Street Capital
Idea: Talend (TLND)
• $6.5bn data integration market growing >10%
• Most robust platform across on-premise and cloud environments
• $218mm of ARR, growing 29% yoy with mix shift towards cloud
• 87% recurring revenue
• Founded in 2005 and went public in 2016
• Focused on ETL products: Extract, Transform, Load
• Talend is the growth leader in the data integration market
• Hadoop hit a wall but Talend benefits from the cloud database wave
• Revenue model is based on seat based subscription software revenue, seat and consumption based saas revenue, 3) project based revenue
• Cloud mix shift should increase over time
• Believes value could be +86% in the base case
Debbie McCoy, Blackrock
Pitch on theme of sustainable investing and ESG (environmental, social, government)
• Increasing sustainable investing adoption across large money managers
• Built an internal model to evaluate companies rather than using third party ESG scores
o Look at employee happiness as a factor in the model
o Incorporate other unique factors that third party scores don’t take into account
Myron Scholes, Janus Henderson Investors
The Advantages of Time Diversification: Risks from Option Prices that Inform Investment Decisions. Tails are important to investors – if you remove the extreme tail gains, realized return falls to almost zero and take out extreme tail losses, realized return nearly doubles over the very long term
Connor Browne, Thornburg Investment Management
Idea: Alkermes plc
• Biopharma company focused on patient inspired solutions
• A unique focus on hard to treat patients - 2 key drugs for opioids addiction and schizophrenia
• Vivitrol – treatment for opioid misuse disorder; blocks the opioid receptor in the brain
o Competes with methadone and suboxone and aimed on getting you off the drug
• Aristada
o Long acting injectable for schizophrenia
o Strong revenue growth
o Expect market share to grow from 5.8% to 9.9%
• Some optionality in other drugs under development
o Vumerity – novel oral fumerate for the treatment of multiple sclerosis
o ALKS 3831- efficacy of olanzapine (Zyprexa) without the associate weight gain
o ALKS 4230 – novel selective IL-2 fusion protein; more early stage
• Valuation
o 4 different scenarios of value: currently approved drugs, +Vumerity, +3831, +Vumerity and 3831
Mike Wilkins, Kingsford Capital Management (short-only firm)
Idea: Shorts and frauds
• Focused on shorting pump and dump schemes
• Large flows into passive investing creates opportunity
• Russell 2000 inclusion is very rules based and rebalances in May– if you can get to $150million market cap, index will include you with no regard to if it is a legitimate company
• Russell 2000 stock promotions – get into index in May and then get ETFs to buy in June and then dump the stock after
• Several fraudsters have taken advantage of the Russell 2000 fraud including Jason Galanis, Benjamin Wey, Howard Appel
• Class of 2019 potential frauds – gained admission to Russell 2000 in June but have not gone to zero yet
o YCBD – merged with Level Branding to get listed on NYSE
o Pareteum: telecom
o Wrap Technologies: next gen solution for non lethal law enforcement
Mark Yusko, Morgan Creek Capital Management
Macro Idea: Don’t Cry, It’s Me Argentina
• Argentina – very low % of their GDP is equitized versus the US which is very high; bullish on long term prospects for Argentina
• Investors fled Argentina when they should have been buying
• Argentina Stock Picks
o Pampa Energy is top stock pick to play this thesis
o Argentinian banks
o YPF is a double play on Argentinian shale
Carl Kawaja, Capital World Investors
Idea: D. R. Horton (DHI)
• Largest homebuilder by volume in the US with over 55k homes sold in 2018
• Housing market has room for growth
• Best in class operator
• Changing their business model that will make it more valuable
• Limits on credit have driven slower but steady growth in housing
• Home ownership will continue to become more attractive as mortgage rates fall alongside interest rate
• Much better deal to buy versus rent in many of DR Horton’s markets
• Industry leading ROE
• DR Horton wants to be more like NVR
• DHI made a strategic shift to focus on lower priced homes with Express Homes and tilts more to the lower end of the market versus competition
• Trying to transition to a business model that is less capital intensive by using land options
• Asset light model yields much higher NPV and IRR
• Should trade closer to other asset light home builders like NVR
Be sure to also check out notes from Next Wave Sohn San Francisco featuring emerging managers and their ideas.
Next Wave Sohn San Francisco Notes 2019: Perkins, Sinantha, Venkatesan, Weldon
We're posting up notes from the Sohn San Francisco Investment Conference which featured hedge fund managers sharing their latest investment ideas to benefit charity. The Next Wave segment featured emerging managers Stephen Perkins (Toronado Capital), Touk Sinantha (AltraVue Capital), Raj Venkatesan (Trinity Alps Capital), and Christopher Weldon (Stamina Capital).
We've also posted up notes from the main event of Sohn San Francisco so be sure to check that out as well.
Notes from Next Wave Sohn San Francisco 2019
Stephen Perkins, Toronado Capital Management
Idea: Blackline (BL)
• Software business models are great but software is not undiscovered anymore
• Blackline (BL) – software company modernizing finance and accounting processes for mid-size enterprises
• Replaces excel with a vast process improvement
• Strong user growth – 19% CAGR in users from 2015- Q2 2019
• SAP relationship will help drive future growth
• Market is large and underpenetrated and little competition
• Strong renewal rates at 97-98% dollar retention over last 5 years
• Founder led with the founder owning ~10% of the company
• Competition is really thin
• Focus on this one part of the enterprise is a competitive advantage
Touk Sinantha, AltraVue Capital – value investing firm
Idea: SIGA Technologies (SIGA)– Specialty Pharma
• Post bankruptcy microcap
• Focused on biodefense and only company with vaccine for Small Pox
• US and Russia continue to keep stock of the virus and possible to recreate the virus synthetically
• Siga was a good business that went bankrupt because of legal fight over acquisition by another company
• Continue to provide Small Pox vaccine to national stockpile
• Stock became orphaned for a number of reasons
• $600mm BARDA contract
• Core value estimated at $7 per share or ~30% upside
• Optionality:
o International sales: ~$4 per share
o TPOXX Label expansion: $2 value
o New products: $0 value
• Sum of the core value and potential upside value = $7+$4+$2= $13 per share
• Risks: BARDA funding risk, Capital allocation risk, new competition, liability risk
Raj Venkatesan, Trinity Alps Capital Partners (long only, global and sector agnostic)
Idea: Afya (Brazil – but trades as an ADR)
• Focused on medical education
• Good reform happening in Brazil that are tailwinds to the business
• Population in Brazil is aging and healthcare spend is growing at low double digits
• Low number of doctors on a per capital basis and applicants/openings for med schools have declined
• 70% of medical education in Brazil is private
• Path to become a doctor and specialist is long (like the US)
• Earnings power of a specialist doctor is very high
• Payback for general physician education is 5 years
• Pure play way to play medicine in Brazil
• Multiple growth levers:
o TAM doubles in 5 years to R$32B
o Roll up strategy
o Regulated brownfield and greenfield growth opps
o Asset light monetization of content - vertical and horizontal
• Value: Think Afya is a double
• Risks: Macro/currency, regulatory framework, Recent IPO/limited history
Christopher Weldon, Stamina Capital ($200mm AUM, 3 years in)
Idea: Adyen long (3 year double)
• Payment processor/merchant acquirer based out of the Netherlands
• Visa is a good case study for Adyen – great operating leverage as revenue and costs are completely unrelated
• Lowest cost operator
• Value: believe it can double in 3 years driven by ~35% revenue, >50% FCF CAGR
• Displacing legacy merchant acquirers given cost advantage: First Data and WorldPays of the world
• Growth levers:
o Customers growing quickly
o Wallet share gains
o New customers
o New services
• Digital payments are a secular share gainer in global transactions
• Very large TAM of $25 trillion card based payments
• Base case: +80% upside; Reward Case: +250%; Risk case: -25%
Click here to also read notes from the main event of Sohn San Francisco.
