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Spring

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Europe sees the light. We have now reached an average of 70% of vaccinated people over 60 years of age (a category which accounts for 95% of the deaths recorded so far) coupled with falling hospitalisations. However, there are unfortunately still many deaths, a consequence of past hospitalisations. Yet, in a fortnight’s time, this figure will finally fall. We are in the midst of reopening, a phase that is not far removed in terms of perception, from the end of a war. The fact that we are in spring can only amplify the feeling of rebirth. The results of European banks in recent days fits well into this picture, offering signs of recovery after almost 14 years of acute suffering. Capital, commissions, costs, credit quality. Everything is in the green and we still have net interest income ahead of us, which will have to grow again. Valuations remain ridiculous.
In Japan, between 1990 and 2012, the investor who had never sold shares at every bounce, after accumulating them on weakness or at the first signs of strength, would today be poor if he had invested for himself, or would be out of work (and poor) if he had invested for others. The market is not immune to Darwinian selection laws, and so it adapts. Today, the Japanese market is still full of traders professionally raised in a secular bear market, who do not believe in long term investment and buy on weakness or the first signs of an upturn, ready to take profit at the first negative breeze. Something is changing, but it will still take time. The same concept can be applied to European banks. The temptation to sell on strength is great. Being positive about the banking business model or simply its stock market future often generates hilarity. I have even heard from value managers who would say that banks cannot be a value investment under any circumstances. Indices now have very little exposure to the sector and, consequently, the ETFs that follow them. We believe that it is better today not to look at bank stocks in the portfolio, avoiding the temptation to sell them, and waiting for growth, passive and “debancarised” value managers to return to investing in the theme.

Blue hydrogen, green hydrogen, free hydrogen…

Chile is considered by many institutions, including the OECD, to be a developed country, the only one in South America. It has an interesting history. The indigenous population, the Mapuche, successfully defended the country from the Incas, limiting their expansion, and were a hard nut to crack for the European conquistadors who never managed to subdue them completely. In 1818 the country gained independence from Spain. In 1880 the surface area of the country increased by 50% thanks to the victory in the Pacific War against Peru and Bolivia. As a result, Bolivia lost its access to the sea and Chile permanently lost cordial relations with two of the three countries with which it borders. Ten years later it faced a bloody civil war that saw the power of parliament and democracy strengthened. For 80 years things proceeded fairly smoothly, with the country controlled by a small elite who maintained political and economic stability but also kept the wealth in the hands of a few. As a reaction to this status quo, a Marxist Prime Minister (Salvador Allende) was elected in 1970. This upset the American government, who had invested heavily in the mining sector in Chile. Three years later, this supported a coup d’état, opening the door to Pinochet’s cruel despotism, which lasted until 1990. However, during this humanly dark period, important economic reforms were promoted, again stimulated by the Americans through the famous Chicago boys. These reforms helped the development of the country, which, as already mentioned, today represents an example of economic success in South America. As of 2017 the President is Piñera, a pro-market billionaire.  The country is one of the largest producers of basic materials, including copper and lithium. It is over 6000 km long (over 5 times the length of Italy) and only 175 km wide on average (300 km Italy). This allows it to have extremely diverse microclimates, excellent for agriculture and tourism. Only 18 million inhabitants live on this territory, a density of 23 inhabitants per KMQ (196 the density in Italy). In 2019 there were popular uprisings, again in protest against social inequality, however, which were much less pronounced here than in other South American countries. These tensions can be linked to the populism that has pervaded the globe in recent years, linked to a slowdown in growth and too rapid globalisation that have led to social inequalities, the same drives that also led to phenomena such as Brexit or Trumpism. This phase has now passed and Chile is one of the most politically and economically stable states in South America.

The stock market in Chile peaked during the commodities bubble in 2011 and has since underperformed other major markets. Despite this, valuations remain rich. Among the exceptions is a company controlled by Enel, Enel Chile. This company is one of Chile’s largest utility firms. It is active in the generation, transmission and distribution of electricity. Enel Chile generates as much as 2/3 of its electricity through renewable sources. This production is diversified between hydro, solar, wind, tidal, and biomass. Together with Siemens Energy, the company is launching a project in Patagonia for the production of green hydrogen, i.e., hydrogen produced without CO2 emissions. The country, with its Atacama Desert in the north, boasts the highest degree of solar radiation in the world, and its fjords in the south, where the wind blows tirelessly, has enormous potential for renewable energy production. Exporting. How? Through hydrogen, it will be possible to store green energy and sell it to distant countries. According to the IEA (International Energy Agency), Chile could produce 160 million tonnes of green hydrogen per year. This is a project that will see results in 10 years. Exactly like those of NEL or Ballard, which are also worth enormous sums of money. Poor Enel Chile can be bought for 5x EV/EBITDA, 9x profits and 1.5x tangible net worth. The company has modest debt and pays over 5% in dividends. ENEL owns 65% and the Chilean pension fund 14%. In the event of delisting, we exclude that minorities will not be respected. We therefore have a utility that produces and distributes electricity from renewable sources at low valuations, with a robust dividend, and with the possibility of a minority buy-out. Not bad in itself. Plus, we have an option on hydrogen-related projects that is totally free.

Enel Chile is held by NEF SDG (0.6%), in the trendSDG Renewables, within the Infrastructure Theme.

Logbook

It has been a busy week. Several stocks in our portfolios reported quarterly figures.

Let’s start with the US. Nu Skin (held in Pharus Asian Niches, Neglected Luxury niche, Personal Care & Beauty sub-niche) surprised positively with sales and profits. We expect the new skin devices launched in the first quarter to have a positive impact on the coming quarters and believe they will do very well. At 14x earnings and with growth in excess of 15% per annum, we believe the stock remains attractive.

Gannet was then reported, the largest US publisher (held in Pharus Asian Niches, Niche Internet Victims, sub-Niche Publishers). Results were slightly worse than expected on earnings and the stock fell. However, the company generated over USD 100m of FCF and achieved 30% of its business in digital.

CVS Health reported well on the back of its struggling pharmacy division. The turnaround continues and bodes well for its competitor Wallgreen, which we also hold in our portfolio. CVS is the largest US stock by weight held by NEF SDG in the Diagnostics SDG trend within the Healthcare Theme.

Office Depot also did well, with its share price rising following the planned spin-off of its business unit. Unisys reported results that were slightly below expectations but still solid. One year on from the sale of the government division, the stock has changed its face. With no debt, growth opportunities and attractive valuations, the company can be the subject of consolidation. Office Depot and Unisys are held by NEF SDG, in the Infrastructure for Work trendSDG.

Domtar, the US leader in coated paper, appreciated following good results and the possibility of a buy-out by the majority shareholder. The stock is held by NEF SDG, in the Plastics Replacement trendSDG, within the Materials Theme.

Pfizer also reports satisfactory results and outlook. We are particularly positive on the vaccines opportunity and think it will bring benefits for several years. The company is well diversified across themes with very high growth potential. Pfizer is held by NEF SDG, in the Epidemics & Pandemics trendSDG, within the Health Theme.

In 5G, Commscope reports strong results led by Broadband Networks, the US company backed by PE group Carlyle. We continue to see positive data in telecom equipment. Something is finally moving. The stock is held in NEF SDG, within the 5G SDG trend, included in the Communication Theme, and in the Pharus Asian Niches fund, in the 5G Niche.

Fresh Del Monte, an exotic fruit producer famous for its pineapples, posted surprising results. The company manages and owns the entire fruit supply chain, from farmland and ships to processing centres. Margins are very low and the business case here is for them to increase. The asset safety margin is important, given the brand, organisation, and land holdings. The company trades at 1.4X tangible equity and 0.5X EV/Sales. Fresh Del Monte is held by NEF SDG, in the Sustainable Agriculture trendSDG, within the Food Theme.

In Europe, Siemens Energy was affected by the downward revision of estimates for its subsidiary Siemens Gamesa. However, the traditional turbine business, which is posting ridiculous margins, seems to be gradually recovering. The stock represents a value way to get exposure to the wind power and hydrogen trend. The company trades at 9x EV/Ebitda 2022. Excluding its stake in Siemens Gamesa, industrial, generation and transmission are trading at 0.5x EV/Ebitda 2022.  Generation and transmission are trading at 0.5x EV/Sales, with good room for improvement. Siemens Energy is held by NEF SDG, in the Renewables SDG trend, within the Infrastructure Theme.

Volkswagen’s results were good, but already expected by the market. After the good movement on Battery Day, we will have to wait for new catalysts for further rerating. Volkswagen is held by NEF SDG, in the Electric Mobility trendSDG, within the Mobility Theme and by Pharus Electric Mobility Niches within the Satellite Areas Niche.

Many banks in the portfolio reported in Europe. We refer in general to the considerations made in the first of this weekly commentary.

Bpost reported encouraging results, in line with the entire postal services sector. Parcels are growing well. Although many believe that the reopening will bring an end to this trend, we believe that if you are confident about the outlook for online B2C you cannot but be positive about the sector. Bpost is held by Pharus Asian Niches, in the Internet Victims niche. Finally, we mention the reassuring results of Mediaset Espana held by NEF SDG, in the trendSDG Inclusive Education, within the Communication Theme.

Japan Airlines reports ugly but expected results in Japan: the stock is solid and ready to withstand the impact of the Covid tail, whatever its magnitude. It trades close to tangible equity. We expect it to be one of the beneficiaries of normalisation. Japan Airlines is held by NEF SDG, in the Transportation trendSDG, within the Infrastructure theme.

As we write, Panasonic and Showa Denko have also reported. Panasonic is held by NEF SDG, in the Electric Mobility trendSDG, within the Mobility Theme and in the Pharus Electric Mobility Niches fund, in the Lithium Cells niche. The results are good and confirm the company’s recovery trend. The way in which we communicate is also more open and positive. The indications for the current year are also good, both in terms of profits and cash generated: the company will end next year without debt despite recent acquisitions. Showa Denko bought Hitachi Chemical, a bigger company than itself, at leverage in 2019. It went from a debt-free company to a heavily indebted company exposed to cyclical industries. Subsequently, the pandemic occurred. This apparently could have been fatal to the company. However, we did not sell the stock because: 1) the debt was in the hands of the group’s historic banks who would have been able to wait; 2) certain divisions such as anodes for electric cars, Electrode Graphite for EAF mills (those that recycle steel and use hydrogen) and semiconductors seemed extremely resilient. The company has reported outstanding figures and leverage can be dangerous for the shareholder, but it can help them when things are going well. Showa Denko is held by the Pharus Electric Mobility Niches fund.

As the quarterly earnings season in the US draws to a close, many of the stocks in our portfolios in Japan and Europe are still reporting this week. In the US Viatris. In Europe, E.ON, Allianz, Bayer, Prosieben, Telefonica, BT, Deutsche Telecom, Telefonica Deuts, Aegon, Commerzbank. In Japan, Nippon-Chemicon, Nippon Carbon, Stella Chemifa, Teijin, Mitsubishi Motors, Central Glass, TV Asahi, KDDI, NTT, Taiheiyo Cement, Sumitomo Chemical, Oji, Daiwa House, Hitachi Zosen, Nikon, Stella Chemifa, Toshiba, Fujikura, Sumitomo Electric. In Korea, Meritz F&M, Samsung Life, KT, SK Innovation. In Thailand, Airports of Thailand.