Confidential prognoses
What a week has just passed!
Hundreds of results have come out and dozens of companies in our portfolios have reported. 
We thought we’d do a little summary, focusing on the companies that reported disappointing results or reacted badly to the results, while remaining among the major stocks we have in our various portfolios. There is no point in talking about the “patients” who are gradually recovering; we are proud and happy to assist them in their well-deserved rerating. Instead, we focus on patients whose condition remains critical, those that require the most attention and where often, if you have time and are well diversified, you can invest while waiting for them to recover with an excellent risk/benefit profile.
Intel
Intel reports results above expectations, but with a very cautious outlook. The company is increasing its investments by more than 50% by 2022 to almost 40% of sales. It is investing in American manufacturing in a market, that of semiconductors, which the company sees more than doubling between now and 2030 and in a post-COVID context in which the need has emerged for each major political/economic bloc to maintain margins of independence in the most strategic sectors. The new Alder Lake microchip should limit AMD’s erosion of market share in the desktop sector, a market in which Intel still has a hegemonic share of over 80%, which we believe will decline. Overall, the Computing division, of which the desktop division is part, and the Data Center division are growing, but IoT and 5G are the areas where, albeit from a very low base, Intel will see its growth explode. The new CEO, Pat Gelsinger, is a high quality individual who spent nearly thirty years at Intel where he was also CTO, before gaining valuable experience at EMC and VMware. If you espouse the growth path for this sector, and not espousing it means having doubts about the digitisation of the economy, buying this sacred monster at less than 7x EBITDA represents an opportunity in our view. In the coming months, on likely further weakness we will be happy to accumulate the stock further.
IBM
IBM is a good company. Diversified, solid and with ample room for improvement in its cost structure. The company represents a defensive solution to expose itself to the whole spectrum of digitalisation: consulting, software, cloud, semiconductors. It is also one of the leaders in AI. Because of its so-called ‘legacy’ component, the one that is gradually being transported to the cloud, which is in sharp retreat, its growth is diluted and remains barely visible. The spin-off of Kyndryl that will take place these days is a first small step to separate the part of the company that is not growing from the part that is. The journey is still long. The quarter’s results have for a few months put to bed the aspirations of a strong resumption of growth in the near future, ignited by the new CEO. The recovery will be gradual. However, with IBM we are buying a company with strong revenue recurrence, an important franchise in many areas and modest valuations. Any further downside from these levels should in our view be used to accumulate the stock.
Enel Chile
The company and its shareholders are undoubtedly unfortunate. The current alignment of events is extremely rare. As is often the case, however, these phases of great and interminable cold expose the company to strong selling pressure and thus to extremely attractive valuations. Let’s go in order. The company is Chile’s leading utility by generation, transmission and distribution. It is also active with Enel X Chile in consulting and management for electrification projects for mobility, microgrids, storage, etc. Chile is the only country in South America considered developed and with solid macroeconomic fundamentals.
-In October 2019 violent protests rock the country and cause the currency to weaken sharply and market rates on Chilean debt to rise. The company then goes from around 5 usd per share to 4 usd per share, incorporating higher country risk as well as higher debt costs.
-A new Constituent Assembly is elected on 15 May 2021 and the result is that the centre-right coalition fails to reach the minimum number of votes to have a blocking minority. The new Constitution will therefore be written by the new left that emerged from the 2019 turmoil. The share price falls from 4 to 3 usd per share. On 20 May, the share price dropped 21 cents to 2.8 USD per share, recovering after a few days to 2.9 USD per share and remaining stable.
– On 2 July, polls showed Marcelo Diaz, an extremist Marxist, as the candidate for the presidential elections in November for the new left-wing party, Apruebo Dignidad. The share price falls to 2.69.
-On 18 July, Marcelo Diaz was beaten in the primaries and Gabriel Boric, a young New Leftist much more balanced than Diaz, was elected to the November elections for Apruebp Dignidad. The stock rebounds to 2.9. But it is short-lived.
The company’s half-yearly report, presented towards the end of July, is merciless: the dramatic drought that has gripped the country (largely caused by a mass of hot water in the Pacific, known as the ‘blob’) has severely reduced the company’s hydroelectric generation capacity, which has therefore had to buy gas on the market, and this has weighed on the accounts. The stock fell to 2.4 usd per share.
-a better feeling about the outcome of the November elections, even if the new left wing wins, made the Chilean market rebound and the share price in August was at 2.6 USD per share. Even this rebound does not last.
– the further descent of the currency and the increase in interest rates that begin to discount a less rigorous budget of the new executive puts pressure on the Chilean market and the company marks a new low at 2.2 USD per share.
– After a technical rebound that brought the stock back above 2.4, the company dropped to 2.12 USD per share on Friday, only to close at 2.17 USD per share, following the quarterly results. The results emphasised the negative elements of June, with gas still rising sharply and the drought worsening, dramatically reducing margins. In addition, interest expenses that rose from less than 2% to 5% in just a few months are not good for a naturally indebted utility.
Finally, the fact that new utility legislation is set to be finalized in 2022, after the presidential election, adds to the tension.
What is the stock discounting here? A lot. 1) The company now trades below tangible equity and this discounts low profitability indefinitely; 2) The 2021 drought is unlikely to be repeated; 3) and even if it were, the company is balancing hydro capacity with solar and wind, and in fact in 6 months Enel Chile will have about 2 Giga more capacity in renewables; 4) the price of gas is unlikely to remain so high, but we do not exclude that the company may postpone the closure of the last coal plant to maintain an important capacity back up that, with the new capacity in renewables, should limit surprises in the future; 5) the company is one of the utilities in the world with the most renewable capacity (around 70%) and this will continue to increase, inevitably attracting investors and putting it in a favourable position politically; 6) the company has extremely ambitious hydrogen projects that it wants to produce with the huge surplus of renewable energy that it will have in a few years’ time (the IEA estimates that the country can produce 7x more renewable energy than it can consume due to its geographical characteristics, even assuming a 100% switch to renewable); 7) We believe the company retains an ability to produce a minimum normalised net profit of USD 400m and EBITDA of over USD 1.2bn, even with rates and exchange rates at these levels, i.e. the company trades at 7x and 5x normalised and conservative profits and conservative normalised EBITDA. A stabilisation of the situation and a return of the stock to 7x EBITDA (keeping estimates unchanged) would bring the stock back to close to USD 4 per share.
The situation remains very volatile and we continue to gradually accumulate the stock on subsequent weakness.
Orange
We expected that as the Orange season approached it would recover, but this is not yet the case. However, that date is still two or three months away.
It is difficult for us to understand Orange’s assessment. After results that we would describe as solid compared with consensus expectations, the share price fell. There are various explanations floating around the market, but none make much sense to us. The stock is worth €9.44 and trades at 8.7x earnings and 4.9x EBITDA 2022. Even less if you consider that in about a month’s time the company will pay a dividend of 30 cents. The company’s dividend yield is now close to 8%, in a world of zero rates.
Returning to the results, it emerges that: 1) the investment cycle is coming down and the free cash flow yield will increase well over the next 3 years; 2) France disappoints a bit, while Spain does less worse than expected – emerging countries and Benelux (Orange Belgium) well; 3) CFO Ramon Fernandez in a meeting with analysts confirms after a recent visit to Brussels that the Commission recognizes that telcos are suffering too much and that there should be a rebalancing between the treatment of technology and telcos; 4) Overall stable results and moderate debt that give visibility on the large dividends to be collected in the coming years.
GAM Holding
The company reports well, at least compared to the stock’s stock market performance, a performance that was disappointing both before and after the results. The Private Label division lost CHF 20 bln in assets out of CHF 80 bln under management, which was bad, but was announced in January. Moreover, that money had very low profitability. The directly managed division lost less than CHF 2bn (out of CHF 34bn), with fixed income outflows but equity inflows, which are doing very well. On the GAM Greensill fund they confirm total capital preservation and maybe a little more. This is very important for us for reasons of reputation and liabilities related to possible lawsuits. The company has not reported results, but we expect another small loss year. Unfortunately reducing the cost structure in line with revenues is not easy. Gam is among the most sustainable companies in its sector. With nearly CHF 200m in cash and a market cap of CHF 240m, we believe GAM is a tempting morsel for anyone looking to multi-boutique at Natixis and, at the same time, this asset manager has the means and time to restructure and relaunch.
Renault
Reported sales down due to a lack of components (particularly chips), but reiterated guidance for the year, a sign of confidence in its offering and visibility of demand. The electric Dacia, Zoe and Clio are now the cheapest options for the European consumer to buy an electric city car and we believe Renault will post incrementally positive results here, although for now the market seems not to notice. Excluding its market-value stake in Nissan (which is particularly depressed at the moment), the latter attributes a value of around €2bn to Renault, which is less than the free cash flow it should generate this year. Two bln euros for a profitable company with over 50 bln euros in revenues ….. Its excellent exposure to electrics in city cars and light commercial vehicles can bring visibility to a forgotten stock in a market context where ‘potential’ future electric players are trading at valuations of 10x or 20x Renault’s 2 bln euros. We are also confident that the new management will be able to bridge the huge gap between the quality and opportunities Renault offers and the market’s perception of it.
Panasonic
Trying to look on the bright side of things, yet another disappointment from Panasonic allows us and a part of the market that looks at the fundamentals to buy more. The results show monetization of their battery franchise is slow compared to the increasing volumes. But this is based on old contracts. That will change soon. In 12/18 months there will not be enough batteries and inflation will start. A process that the market anticipates for example for CATL but not for the hapless Panasonic, busy with too many businesses that limit their understanding.
Panasonic is transforming itself into a more visible and efficient company. Its new configuration, consisting of new independent divisions, is what the company needs. The company is a jewel and is active in many high-growth areas now drowned in the more traditional business. NCA’s battery division, Tesla’s largest supplier, and NCM’s battery division, Toyota’s largest supplier, make it an exceptional player in electric mobility. Its Connected Solutions division is a player in 5G, IoT, payments and security. Its Lifestyle division is one of the leaders in air conditioners, a business that is growing and has significant market valuations. Their housing division provides an energy independent and sustainable product.
The diversification of the company provides stability to the business and the division into independent companies will prevent, as has been the case up to now, weaker parties being subsidised by stronger ones just to maintain jobs, a policy which then inevitably leads in the long run to losing jobs rather than creating them. We believe that the possibility of a listing of the battery division is still alive, and this would create a lot of value in a very short time. For those who believe that the best of the electric revolution will happen in the next 12-18 months, but don’t want to risk a bubble bursting with permanent losses, we believe Panasonic is a good option, as is our EMN fund which uses a value approach.
Atos
Results in line with expectations. The management team has been renewed and we are pleased about this. A solid industry veteran, Rodolphe Belmer, has joined the team. The company says it has several offers on the table to sell its legacy business which is slowing its growth. The stock is extremely cheap, trading at less than 0.7x sales (Capgemini 2x, Accenture 4x). The company is quality. More than half of the business is on new growth areas (cloud, cyber security, AI, decarbonization, etc). It is unanimously one of the most sustainable companies in Europe. We are confident that something will happen and patience could pay off.
I can’t stand you anymore, really! (Zucchero Fornaciari)
After Turkey was grey-listed by the FATF for practices deemed sub-par to prevent money laundering and terrorist financing, we sold the few Turkish securities in our portfolio (about 0.5% on NEF SDG). In spite of ourselves, given the stock and currency valuations. 
Erdogan’s recent attitude does not seem to bode well for the country, its stock market and currency. However, there are signs of change burning beneath the ashes. Several factors indicate that we may not be far from the end of this almost 10-year nightmare: 1) Erdogan is well down in the polls and therefore needs to revive the economy. We therefore expect a more moderate attitude, both politically and economically; 2) A very weak currency has made Turkey more self-sufficient over the years. And let us remember that the trade deficit is the country’s Achilles heel. September’s figures show a surplus before the energy component and only a slight deficit if this energy component, although now very expensive, is considered. The country has also done a great deal on the energy front, investing enormously in renewables and developing gas and coal domestically; 3) Industrial associations and even the Koc family, the most powerful family in Turkey, have for the first time asked for the independence of the Central Bank; 4) The country is far from being Islamised, especially in the cities, and indeed there remains a strong desire for westernisation. For this reason, the West will maintain pressure on the Country, but without cutting it off, waiting for a political change; 5) The Turkish manufacturing power is now working at full speed. 
The country is endowed with creativity, efficiency and technology from which it benefits today, thanks also to the weakness of the lira; 6) Further weaknesses of the lira, although they would have positive effects in the tourism and construction sectors (the industrial area closest to Erdogan), could generate a financial crisis. Someone will point this out to Erdogan. There is room for a major rally of the Turkish lira if something positive moves and Erdogan keeps quiet.
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