The LO Funds – Europe High Conviction outperformed the market by 1.67% in March. The Fund was up 0.86%, while the European market (MSCI Europe Index) fell by 0.81%.
March was a month of two halves, initially with a market fall of around 4.5%, followed by some recapturing of these losses in the final couple of weeks.
Stock specific news in two positions, Iliad and Jazztel, which had a combined positive contribution of 1.04% (gross), helped our outperformance in the Telecoms sector. In addition, some of our larger positions, as with the aforementioned stocks, combined with the likes of Sika, performed well, adding value.
Alpha was a big driver of returns since many of the sectors we are overweight actually underperformed the market, yet the stocks we own outperformed.
Finally, the impact from not investing in Financials and Energy had a positive contribution of 0.08%.
PORTFOLIO ACTIVITY
We trimmed our positions in Amadeus and Iliad given their size following recent performance. We recycled the cash to initiate a position in Telecity, another stock where we see great value and growth potential. On average, the Fund had a cash balance of over 4.3% of assets under management in March.
QUARTERLY OUTLOOK
We continue to run the Fund in a cautious manner given our long-held concern about Europe’s sovereign debt issues and their impact on the overall economy. We retain an eye on actions taken by governments and central banks, although our view is that there will be no quick fix to the sovereign debt issues in the euro zone.
STOCK PERFORMANCE: TOP CONTRIBUTORS AND TOP DETRACTORS
CONTRIBUTORS
The three stocks that contributed the most to Fund performance in March were our positions in Iliad, Jazztel and Sika.
Iliad: consolidation in the French telecoms market appears to be taking shape. Whether Bouygues or Altice acquire Vivendi’s SFR remains to be seen. Either way there may be an agreement with Bouygues for Iliad to take on some of their assets.
Jazztel: our ‘Event’ investment thesis may be taking shape, as Orange has reportedly hired bankers to look into acquiring assets in Spain. Speculation that Jazztel is the likely target continued to drive the share price upwards during the month.
Sika: strong results at the start of the month with ~9% top line growth and good margin improvement. Broker upgrades and good feedback from the investor meetings helped the performance of the stock.
DETRACTORS
The three positions that cost the Fund the most in March were Wirecard, Burberry and Amadeus.
Wirecard: the shares have performed well recently, so with little news in March investors may be taking profits. We still believe the business offers long-term value and has highly attractive structural growth dynamics.
Burberry: news out of China about potentially higher taxes on luxury goods along with some weaker data from peers have weighed on the share price this month. We believe that this is temporary and therefore has no effect on our investment case.
Amadeus: apart from a broker downgrade, we did not come across any meaningful news on the stock.
STOCK OF THE MONTH: ANSALDO STS (MARKET CAPITALIZATION USD 1.3 BILLION, EUR 1.0 BILLION)
Ansaldo STS is a supplier of railway signaling and control systems for passenger and freight trains.
The company comprises of two main businesses: signaling which generates 55% of sales and transport solutions which is 45%. This latter business includes turnkey projects integration and services.
Finmeccanica, a large Italian industrials conglomerate, owns around 40% of Ansaldo STS.
WHY WE LIKE THE STOCK...
1. We see the company as a likely acquisition candidate given in part to the M&A activity in the sector over the past few years. In November 2012, Siemens bought the rail signaling business of Invensys for GBP 1.75 billion, ~2.2x FY revenues and ~15x EBIT. At that valuation Ansaldo should be worth significantly higher. There are quite a few potential buyers in General Electric, Bombardier, Hitachi and CSR/CNR (China), who would easily incorporate the Ansaldo STS asset.
2. The other reason for our conviction to put this in the “opportunities” bucket is the financial position of its largest shareholder, Finmeccanica. The conglomerate has high levels of debt which are unsustainable and going forward has no choice but to sell assets, as has already been seen with the sale of its stake in Ansaldo Energia in October 2013.
3. As a stand-alone business, Ansaldo STS is an attractive company, being one of the leading rail signaling companies in the world with a strong order backlog, generating solid free cash flow and high returns.
4. Attractive valuation levels of ~1x sales and ~10x EBIT provide significant upside potential not only in a M&A event but also in a stand-alone scenario.
