Notes From Sohn London Investment Conference 2019

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)

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.

Sohn London Investment Conference: Only 2 Weeks Away

The 8th annual Sohn London Investment Conference is only two weeks away.  It will take place on the 14th November at London Marriott Hotel, Grosvenor Square. 

It will feature some of Europe's top fund managers sharing their best investment ideas to benefit charity including the Sohn Conference Foundation, which is dedicated to the treatment and cure of paediatric cancer and other childhood diseases.

This year also includes the second Sohn Women's Brunch, as a forum for women in finance aiming to promote diversity in the industry. 

You can get more information about the conference here: https://www.sohnconference.org/london/


Sohn London 2019 Speakers List

- Brian Baldwin, Trian Fund Management

- Catherine Berjal, CIAM

- Fadi Arbid, Amwal Capital

- James Hanbury, Odey Asset Management

- Jason Ader, SpringOwl Asset Management

- Lucy Macdonald, Allianz Global Investors

- Måns Larsson, Makuria

- Pieter Taselaar, Lucerne Capital Management

- Per Johansson, Bodenholm Capital

- Tamas Eisenberger, Sikra Capital


Conference Details

When: 14th November 2019

Where: London Marriott Hotel, Grosvenor Square


This should be another great event as always. You can click here to register for the conference.

Notes From Sohn London Investment Conference

Below are notes from the Sohn London investment conference late last month.  Apologies for the delayed posting.  Click each link to go to that speaker's presentation.


Sohn London Investment Conference Notes 2018

Vikram Kumar (Kuvari Partners): Short Kier Group


Benoit Colas (PrimeStone Capital): Long Spirent Communications


Dureka Carrasquillo (Canada Pension Plan): Long Ferrari


Andrew Dickson (Albert Bridge Capital): Long Micro Focus


Luke Newman (Janus Henderson): Long Rolls Royce


Rachel Reutter (J O Hambro Capital UK Opportunities Fund): Long Smiths Group


Per Lekander (Lansdowne Partners): Long Carbon Credits


Maxime Franzetti (Mubadala Capital): Long Korian


Andy Brough (Schroder Investment Management): 2 Long Ideas


Bernie Ahkong (UBS O'Connor): Long Paddy Power Betfair

Vikram Kumar Short Kier Group: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Vikram Kumar of Kuvari Partners who presented a short of Kier Group.


Vikram Kumar's Presentation at Sohn London Conference

(Note: On the day after the conference Kier Group made an emergency rights issue of £264m and the shares fell 34%.)

Kuvari have held a short position in Kier Group since August 2017. They are currently short 0.71% of the company’s stock. They previously held a disclosed and successful short position in Carillion, the support services company that collapsed in Jan 2018.

Kier Group are in the construction and contracting business, mostly in the UK. The UK government is a big customer – infrastructure services, road maintenance and development and civil work such as schools and hospitals.  They also build residential houses and commercial buildings.

Kuvari do not like these types of businesses because they are low margin, commoditised and competitive. If government contracts cost more than anticipated to fulfill the company is liable.

Kumar called the accounting aggressive. The contract nature of the business means that income does not come in steadily but in lumps.  The contracts can be multi-month and multi-year. There is a temptation to try to smooth revenue by booking work that may have been done but not paid for. With the IFRS 15 regulation coming in Kumar believes the company will be forced to re-state some of its revenue.

With short positions, Kuvari pay great attention to working capital and particularly receivables – how quickly once you’ve invoiced your customer can you collect cash? Kumar believes that Kier’s customers are slow to acknowledge the work that has been done and slower to pay up. He believes that Kier have been booking income before customers have acknowledged work has been done.

There is a lack of cash generation in the business. According to their accounts, Kier generated £95m in cash over the last five years. Kumar believes that they have overstated that cash. Kier had to restate their full year 2017 FCF from over £100m to -£56m after pressure from regulators.

The most worrying aspect of Kier’s business is the high leverage. Kuvari estimate debt could be as high as 6.8 times, taking them well into distressed territory. Kier owns the equivalent of 68% of the equity in JVs. Kumar believes that the JV’s are being used to hide the leverage. The debt is not being consolidated. Kier also calculates leverage at a low point during the financial year and does not average it which would lead to a higher figure.

Be sure to check out the rest of the presentations from the Sohn London investment conference.

Benoit Colas Long Spirent Communications: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Benoit Colas of PrimeStone Capital who presented a long of Spirent Communications (LON:SPT)


Benoit Colas's Presentation at Sohn London Conference

PrimeStone have been invested in Spirent for 3 years. Spirent is a fairly complex business that designs, manufactures and tests solutions for communications equipment across a wide range of technologies.  It operates in three divisions: Network and Security - helps Nokia and Cisco test equipment; Connected Devices - tests mobile devices for Apple and Samsung; Lifecycle Service Assurance – helps Telecom Korea.

Despite being a London listed company, it creates 90% of its sales in the US and Asia Pacific. Sales have been stable for the last 10 years. Gross margin has crept up from 65% to 72% over the same period. PrimeStone was attracted by the high EBIT margin of over 20% which lasted until 2013 when they fell below 10% and then rebounded a bit. PrimeStone invested in Spirent with the belief that they could get the EBIT margin back above 20%.The company enjoys a strong and stable global market share and long-lasting relationships with customers. PrimeStone are pulling levers to bring about change at Spirent.

-    There is scope for cost reduction. In 2015, PrimeStone convinced management that they did not need to spend more on product R&D to keep up with competitors.

-    The balance sheet is strong and offers potential. The company has over $100m of cash and PrimeStone have been pushing for this money to be either distributed to shareholders or spent on share buybacks. If there was a $100m buyback the company would remain debt free.

-    There is potential to refocus the business on the most attractive parts. The weaker businesses like Connected Devices should be sold off.

Spirent trades at a discount to its US peers. Colas’ thinks the main reason for the discount is the depressed EBIT margin. As they work to get the margin back above 20% the stock price will rise.


Be sure to check out the rest of the presentations from the Sohn London investment conference.

Dureka Carrasquillo Long Ferrari: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Dureka Carrasquillo of Canada Pension Plan who presented a long of Ferrari (RACE).


Dureka Carrasquillo's Presentation at Sohn London Conference

In 2017 the luxury car market was valued at $570bn. Estimates suggest it will grow at about 9% for the next 5 years. Ferrari sits in the category of luxury goods that is considered an ‘experience’ and that category is projected to grow at an even higher rate.

One hallmark of a luxury goods company is it is a price maker. Carrasquillo thinks Ferrari can increase the price of their cars by about 4-7% per year. During the Marchione years prices were raised regularly.

Special cars have historically been about 2% of sales but they will become a larger part of the business.  She estimates that by 2022 special cars will represent 20% of revenues. These cars which are limited editions – often 500 cars - sell for more than $1m each and sometimes sell out on the day they go on sale. Gross margins on special cars are about 3x base cars. If the number of special cars is increased in the way that Carrasquillo predicts EBITDA margins for the whole group could increase from 33% to 38%.

Another hallmark of a luxury goods player is careful management of supply. Current product capacity is about 16,000 cars per year yet only 9000 are made. In comparison, Porsche sells 25,000 to 30,00 911s per year. Carrasquillo thinks that Ferrari could increase production to 16,000 cars per year and still sell them. Ferrari intends to launch 15 new models in the next 5 years – that’s a lot more than in the past. It takes about 40 months to produce and launch a new car.

3 potential risks to the Ferrari growth thesis:

1.    Do wealthy millennials want a Ferrari? Do they even want to drive at all? There could be a demographic timebomb for Ferrari? The Ferrari sweet spot is in the 35 to 50-year-old age range. Even though fewer millennials drive during their 20s than previous generations by age 30 they catch up.

2.    Are there enough wealthy buyers? Ferrari buyers tend to be high net worth individuals with investable assets of more than $1m – this is the starting base of an entry level Ferrari customer. Ferrari only manages to sell cars to 0.5% of this group. In the ultra-high net worth bracket they have 3.25% penetration. Carrasquillo concluded that there is a good runway for growth.

3.    Changes in consumer preference. Consumers may become more environmentally conscious? They might prefer to use autonomous cars? The most bullish forecasts suggest that EVs may become 30% of the fleet by 2030. In addition, Ferrari are aiming for 60% of their new cars to be hybrid by 2022. The hybrid cars will have higher price tags and be more profitable.

Luxury goods companies with a similar financial profile to Ferrari have an average P/E 27. If you put Ferrari on that multiple it implies 60% upside. Valuing Ferrari by its cashflows, implies a growth requirement of 3.5% per annum, yet it has been growing its top line at 10% per year for the past 20 years.

There is room for further sales. Ferrari have sold almost no cars in China. Surprisingly the embedded fleet in China is less than 500 cars.

Be sure to check out the rest of the presentations from the Sohn London investment conference.

Andrew Dickson Long Micro Focus: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Andrew Dickson of Albert Bridge Capital who presented a long of Micro Focus (LON:MCRO).


Andrew Dickson's Presentation at Sohn London Conference

Micro Focus is a FTSE 100 company that has an acquisitive business model. It buys mature legacy software businesses, particularly in the enterprise application software area. These are ‘melting ice cube’ businesses but the Micro Focus team have figured out a way to put them in the freezer to make them last longer. Their model is the antithesis of traditional tech investing. They find businesses that have stopped growing. They are not looking for businesses that are taking share or accelerating growth. Once they have bought a software company they try to change the culture away from growth to ‘trying to stay relevant’.

Micro Focus was founded in 1976 and listed in 2005. Until last year the stock was up 25x since 2005. In 2017 they made their biggest acquisition buying Hewlett Packard’s software businesses for $8.8bn. Digesting the HP businesses has been difficult so far. In January and March 2018 there were two profit warnings. Micro focus’s shares sold off from $20 per share to $0.9 in three days and the CEO left. Albert Bridge added to their position at that time. Since then, the company has been getting back on track but the shares are still down 40% year to date.

Dickson believes that Micro Focus’s long experience of turning around businesses will allow them to successfully integrate the HP businesses over time. In the end, they will do what they have done in the past and take businesses with 20% EBITDA margins up to 45%.

Short interest is quite high. Dickson thinks the shorts misunderstand the business. They point to the lack of top line growth when the model is all about slowing the pace of revenue deterioration. Some analysts have suggested that they need more acquisitions. The shorts also point out that the CFO is leaving after less than a year in post. Dickson thinks he is only leaving to work with a previous boss.

Currently, Micro Focus is reasonably priced at PE 9.5x. In July 2018 it announced it would sell one of its highest growth businesses, Suse, for $2.5bn. There will be a special dividend for shareholders early next year. In six months the sale will be completed and the company will still be able to produce $2 of EPS. By then it will be on a PE 7.5x, 15% FCF yield.


Be sure to check out the rest of the presentations from the Sohn London investment conference.

Luke Newman Long Rolls Royce: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Luke Newman of Janus Henderson who presented a long of Rolls Royce (LON:RR).


Luke Newman's Presentation at Sohn London Conference

At its heart Rolls Royce is a razor to razorblade business model – the razors - or the engines in this case - cost billions of dollars to design, deliver and install and come with an obligation to buy razorblades - service contracts - for the next 25 years. The gross margins on the service contracts are  high between 50% to 70% but the engines are sold at a loss.

The secular trends in air travel are supportive driven by increasing wealth and emerging markets. Air passenger kilometres over the last 70 years have grown at 6% CAGR. If passenger growth continues at 4.5% and assuming planes have a 25-year life, 425 new wide body planes are required every year to keep up with demand. That’s 37 new wide-bodied planes every month. The production schedules for Boeing and Airbus for next year are slated at 34 per month creating positive pricing dynamics for all participants.

Rolls Royce has the engine orders, the challenge is to execute: deliver the engines and carry out the maintenance contracts. There is also an organisational challenge. When Warren East took over as CEO he described Rolls Royce as an athlete that needs to lose weight. New management have been brought in to run finance and operations. A Cost reduction plan was announced earlier this year cutting 25% of non-engineering jobs. In addition, cash consumptive and loss making businesses have been sold. Rolls Royce has always traded on its high levels of technology and market share. Now Warren East is holding it financially accountable by setting cash flow targets of £1bn by 2020 and an increase to £1.8bn by 2023.

Over the last 20 years what was a 3-player market has become a duopoly. Pratt and Whitney took the rationale decision to concentrate on narrow body engines and ceded their market share to Rolls Royce. That did not come for free because Rolls Royce had to spend billions of dollars developing new engines to take the market share. The good news is that this year is the first year in which most of the revenue will come from the high margin aftermarket business. The company has reached a critical inflection point.

GE, the other member of the duopoly, has been in harvest mode, maintaining share and enjoying good aftermarket revenues. GE has lots of problems, but the engine business has not been one of them. GE’s engine margins have been consistently high.

There has been a correlation over the years between Rolls Royce’s share price and FCF per share.  The 2023 target of 1.8bn FCF should equate to a share price of just under 1000p per share.

Management are incentivised to grow FCF through bonus plans. To maximise their bonuses RR executives need to generate 158p of FCF in 2018, 2019 and 2020. Analyst consensus now is 117p – leaving 35% upside if the stretch targets are hit. Newman believes that Rolls Royce’s past performance is misleading analysts. He thinks they are behind in understanding just how cash generative the business has become.

Warren East bought £74K of stock in December suggesting he has faith in the way the business is performing. If Rolls Royce could execute as well as Safran and MTU their shares could go far higher.


Be sure to check out the rest of the presentations from the Sohn London investment conference.

Rachel Reutter Long Smiths Group: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Rachel Reutter of J O Hambro Capital UK Opportunities Fund who presented a long of Smiths Group (LON:SMIN).


Rachel Reutter's Presentation at Sohn London Conference

Perceptions of Smiths Group are stuck in the past. The management team that was appointed in 2015 has solved the pension overhang, shored up the balance sheet and now they are diverting cashflows into R&D to become market leaders in several businesses.

More recurring revenue type business is being done – 57% of revenues are from the aftermarket. Smiths has 17% operating margins. It has a diverse set of cashflows that are multi-product, multi geography, varied customers with multiple cycles.

The management are good allocators of capital. The balance sheet is strong.

Since 2015 Smiths has gone from being market leader in 60% of their businesses to 80%. The quality of the company is rising. Areas of market leadership include: airport security and particularly scanners. There are strong barriers to entry in this area because of trust and relationship issues involved in the security sector. Airmiles are set to grow at 5% per annum and the threat of terrorism seems to be ever present and becoming more sophisticated. Borders are understaffed and only 2% of containers are checked. Governments have no choice but to spend on security equipment, the underlying market is growing at 5% per year.

Other leading businesses include: John Crane, the maker of seals for the oil industry; Inclusion Systems, the maker of medical devices - 20% market share, 82% of sales are recurring.

Smiths is sensibly valued, FCF yield 6.5%, dividend 3.5%, cashflow is growing at 5% per year.

Reutter expects the medical division to be sold in the next few months. There is plenty of upside potential.


Be sure to check out the rest of the presentations from the Sohn London investment conference.

Per Lekander Long Carbon Credits: Sohn London Conference

We're posting up notes from the recent Sohn London investment conference.  Next up is Per Lekander of Lansdowne Partners who presented a long of Carbon Credits.


Per Lekander's Presentation at Sohn London Conference

Emissions credits were introduced by the EU in 2005. Companies with high emissions either had to cap them or buy credits. The carbon market will begin to go from over supply to under supply.

In 2019, new supply will be cut by 24%. The market will balance in two years. After that there will be a shortage of credits and prices will rocket.

The market is liquid and deep.

Carbon Credits are a highly regulated and synthetic market. Lekander noted the risk of political interference.

Be sure to check out the rest of the presentations from the Sohn London investment conference.