SKAGEN Kon-Tiki Status Report January The art of common sense

Transcription

1 SKAGEN Kon-Tiki Status Report January 215 The art of common sense

2 Highlights January 215 SKAGEN Kon-Tiki rose 3.7% while the MSCI Emerging Markets index increased 6.3% in January measured in SEK. The fund s underperformance was largely due to the fact that it is underweight Asia and specifically Chinese financials, which make up 4% of the MSCI China index and which rose 1% during the month. Bharti Airtel and Samsung Electronics tied the first spot in portfolio contributions in January. Bharti is taking steps to reduce its leverage by selling down its inventory of towers in Africa. Samsung reported earnings slightly better than previous guidance and announced a 41% increase in dividend, a key catalyst in our investment case. Hyundai Motor was the main detractor, shaving.4% off absolute returns. The company announced weak 4Q14 results due to FX headwinds and a number of one-off charges, although we do not expect these to recur in 215. We entered Petrobras, Brazil s leading integrated energy company with protected product pricing and significant production upside, which is not reflected in the current depressed valuation, similar to 23 levels. We sold out of Afren, an Oil & Gas company with operations in Africa and Kurdistan. The Philippines (+16%), India (+16%) and Pakistan (+15%) were among the top performing markets, while Nigeria (-11%), Colombia (-4%) and Peru (-3%) were among the bottom markets measured in EUR. During January, the European Central Bank took centre stage with its quantitative easing announcement, which far exceeded market expectations. We view this as a positive sentiment change for Europe coupled with falling oil prices and record low bond yields, making equities more attractive relative to bonds. India also announced its version of quantitative easing with a surprise rate cut, indicating inflation is under control and expected to be below 6% by 216. Finally, Russia s central bank cut its target rate by two percentage points to 15%, reflecting the need to address further weakness in the economy. Going into 215, EM valuations relative to DM remain at about a 3% discount. However, we think the political risk is notably lower in EM this year, as major markets including China, India, and Japan are implementing significant marketfriendly reforms. The fund s portfolio is currently valued at P/E 215e of 8.2x and P/B of 1.2x compared with 11.7x and 1.4x for the Emerging Markets index. 2

3 Results, January 214 SEK, net of fees SKAGEN Kon-Tiki A A A EM Index Januar QTD YTD 1 Year 3 years 5 years 1 Years Since inception* SKAGEN Kon-Tiki A 3,7% 3,7% 3,7% 2,% 6,8% 5,3% 12,3% 15,5% MSCI EM Index 6,3% 6,3% 6,3% 33,5% 7,5% 5,5% 9,7% 8,9% Excess return -2,6% -2,6% -2,6% -13,5% -,6% -,2% 2,6% 6,6% Note: All returns beyond 12 months are annualised (geometric return) * Inception date: 5 April 22 3

4 SKAGEN Kon-Tiki has beaten the index in 11/13 calendar years Percent 92 SKAGEN Kon-Tiki A* (EUR) MSCI EM Index (EUR) Note: All figures in EUR, net of fees * Inception date: 5 April YTD 215 4

5 Emerging Markets, January 215 (in EUR) Percent Philippines India Pakistan Thailand Egypt South Africa South Korea Kenya MSCI EM Index Taiwan Turkey Indonesia China (local) SKAGEN Kon-Tiki A MSCI World Index China (International) Malaysia USA Poland Chile Czech Hungary Russia Mexico Brazil Ghana Peru Colombia Nigeria

6 Cumulative net flows (USD bn) As of 31 January, 215 6

7 BRIC vs. Non-BRIC Manufacturing PMIs As of 31 January, 215 7

8 P/E Multiples EM vs DM 12-month trailing, Jan 95 - Jan Emerging Markets P/E Developed Markets P/E Hist. Avg 21 Hist. Avg Source: Bloomberg, SKAGEN research.

9 P/B for EM still at a discount to DM Last, Jan 95 - Jan 15 4,5 4 Emerging Markets P/B Developed Markets P/B 3,5 3 2,5 2 1,5 Hist. Avg 2,4 Hist. Avg 1,5 1,5 9 Source: Bloomberg, SKAGEN research.

10 Differences in EM country valuations become less profound if one adjusts for meaningful differences in sector weightings MSCI EM P/E country valuation Source: MSCI, Morgan Stanley Research 1

11 Main contributors, January and YTD 215 Largest positive contributors Largest negative contributors Company NOK (m) Company NOK (m) Bharti Airtel 196 Samsung Electronics 195 Naspers 146 Mahindra & Mahindra 128 Tech Mahindra 128 Great Wall Motor 112 Kiwoom 98 Familymart 93 State Bank of India 89 Shiseido 79 Hyundai Motor -321 Banrisul -119 Marfrig -94 Raiffeisen -93 ABB -88 Vale -88 Golar -69 Afren -65 Cosan -61 Diamond Bank -58 Total value creation YTD 215: NOK 699 million Note: Contribution to absolute return 11

12 Holdings increased and decreased, January 215 Key buys during January Key sells during January Petrobras (new) Brazil s leading integrated energy company with operations throughout the oil and gas production chain. Product pricing is protected for now and current valuation corresponds to depressed 23 levels, when oil price was about half today s level. One of the top 5 global hydrocarbon producers with target production of 4 million bbl/day by 218/19, twice today s level. Banrisul Brazilian bank growing 1-14% with 15% RoE and relatively conservative provisioning. Valuation of.9x P/BV is too low given growth and profitability prospects. Afren (out) The company significantly downgraded the reserves for its crucial Kurdistan field, which impaired our investment thesis. As a result, we exited the position. Heineken We reduced our position materially as the stock approached our target price. Massmart We reduced the position on stock price strength. Hindalco Asia s leading aluminium producer with an edge in recycling scrap metals. Well-positioned to benefit from strong recycling growth in automotive and construction segments. 12

13 Most important changes, January and YTD 215 Holdings increased Holdings reduced Petrobras (new) Euronav Banrisul Knightsbridge Golar Afren (out) Heineken NV Massmart Samsung Electronics Apollo Tyres 13

14 Largest holdings SKAGEN Kon-Tiki, end of January 215 Holding Price P/E P/E P/BV Div. yield Price Upside size, % 214e 215e last 14e % target % Samsung Electronics 7, ,9 7,1 1, 1, Hyundai Motor 7, ,1 3,4,5 2, Great Wall Motor 5,2 44,6 13,5 9,8 3,3 2, State Bank of India 4, ,4 9,4 1,5 1, Bharti Airtel 3, ,4 18,7 2,4, Mahindra & Mahindra 3, ,1 13,3 3,2 1, Sabanci Holding 2,9 1,4 9,4 8,6 1,1 1, AP Moller-Maersk 2, ,9 9,2 1,2 2, ABB 2, ,7 13,3 2,9 3, Naspers 2, ,5 34, 8,9, Lenovo 1,9 1, 15,4 11,2 4,4 3, Richter Gedeon 1, ,7 13,6 1,2 1, Weighted top 12 45,9 9, 7,8 1,2 1,9 43 Weighted top 35 73,9 9,6 8,2 1,2 2,1 46 Emerging market index 12,8 11,7 1,4 2,8 Top price target 14,8 12,7 1,4 1,4 Note: Valuation estimates are based on SKAGEN Kon-Tiki s independent analysis and may vary from consensus estimates. 14

15 SKAGEN Kon-Tiki is valued at a meaningful discount to EM despite a higher weight in expensive sectors and a low weight in cheap sectors 14 12, ,7 1 9,6 8 8, ,2 1,4 P/E +1y P/E +2y P/BV Kon-Tiki MSCI EM Index Note: Valuation estimates are based on SKAGEN Kon-Tiki s independent analysis and may vary from consensus estimates. 15

16 P/BV for SKAGEN Kon-Tiki versus emerging markets 4 3,5 3 P/BV SKAGEN Kon-Tiki P/BV MSCI EM Index 2,5 2 1,5 1,5 jan. 4 jun. 4 nov. 4 apr. 5 sep. 5 feb. 6 jul. 6 des. 6 mai. 7 okt. 7 mar. 8 aug. 8 jan. 9 jun. 9 nov. 9 apr. 1 sep. 1 feb. 11 jul. 11 des. 11 mai. 12 okt. 12 mar. 13 aug. 13 jan. 14 jun. 14 nov. 14 As of 31 January,

17 P/E SKAGEN Kon-Tiki versus emerging markets 18, 16, 14, P/E SKAGEN Kon-Tiki P/E MSCI EM Index 12, 1, 8, 6, 4, 2, - jan. 6 jun. 6 nov. 6 apr. 7 sep. 7 feb. 8 jul. 8 des. 8 mai. 9 okt. 9 mar. 1 aug. 1 jan. 11 jun. 11 nov. 11 apr. 12 sep. 12 feb. 13 jul. 13 des. 13 mai. 14 okt. 14 As of 31 January,

18 SKAGEN Kon-Tiki sector and geographical distribution Sector distribution Geographical distribution Fund Index Energy Raw materials Industrials Consumer discretionary Consumer staples Health Banking & Finance IT Telecom Utilities Cash Asia ex Japan EMEA Frontier Markets Japan Core EU North America The Nordics South America Cash

19 Key earnings releases and corporate news, January 215 Great Wall (4.9% weight): Preliminary FY14 in line with expectations Summary: FY14 net profit of RMB 8.5bn was in line with sell side and our expectations and down 2% YoY. 4Q14 net profit of RMB 2,321m rose 13% YoY and 42% QoQ. Sales rose 42% QoQ versus a 22% increase in volumes QoQ, which means a hefty increase in ASP as a result of a much higher share of SUV. Operating profit rose 12% YoY and 24% QoQ to RMB 2,526m. Hence, operating margin declined 18bp QoQ to 12.6%, driven by increase in R&D costs and depreciation, but also seasonal bonus costs (RMB 4-5m) which impact year-end result. Final result is due 23 March. Implications for Investment Case: ASP expansion is clearly positive and exceeded expectations. High R&D expenses are probably related to a busy launch schedule of new models in 215 and we believe 4Q14 margin will mark the trough. With 23% volume growth in December, less drag from decline in sedan sales into 215 (now only 9% of volume versus 24% into 214 with SUV sales +48% in December) and new models in 215, we believe the 16% volume growth guidance of management to 85, units for FY15 is conservative. SBI Holdings (1.3% weight): 9MFY15 result Summary: SBI Holding reported figures for 9 months 214/15. Net income rose to JPY 35.5bn vs 2.2bn previous year, EPS JPY 164 vs 93 per share. Lots of items affect the P&L, but major securities business kept earnings level despite a 25% lower market turnover. Ventures in insurance, wealth management and the crucially important backward integration with banks in both Japan and Korea, were on track and became profitable, a welcome change from last year. Dividend of JPY 25 per share is suggested. Implications for Investment Case: The company is a global pioneer in online financial services, integrating the various services into one platform. The company has by far the biggest customer base in Japan (more than 5% of online clients) and is number three in Japan for new tax-saving NISA scheme (end January 55k customers) behind the two giants Nomura and Daiwa. The retail market for financial online services is exploding on tax stimulation, and the company is using its lead to get a foothold in Korea, Cambodia and Vietnam, with Russia being put on the backburner for the time being. The bio-tech division so far mostly has entertainment value, but at a P/E of 7.5x and dividend yield of 2% and.7x book for now 1% RoE, it remains a compelling classic Japanese value case. Now that return to 25/26 RoE is complete, the market might give it a rerating to x book, for a 3x investment return. 19

20 Key earnings releases and corporate news, January 215 (cont.) Marfrig (1.% weight): Appointment of new CEO Summary: Marfrig announced that its CEO, Sergio Rial, has handed in his resignation. Mr. Rial will focus on his board positions, recently joining the Delta Airlines board and taking a position as chairman of Santander Brazil. He will be replaced by Martin Secco Arias, who comes from the position as head of Latin American beef operations outside of Brazil and has been with the company since 27. We met the whole management team, including the exiting CEO. Management re-iterated 214 guidance stating EBITDA margins will come out at upper end of guidance of % and pinpointed FX tailwind. Implications for Investment Case: This is negative from a capital market perspective as the outgoing CEO made a very good impression on investors. From an operational point of view, however, we are not concerned as the incoming CEO seems to be very hands on and the focus on operational improvements will be unaltered. Key to our investment thesis is an operational turnaround and debt reductions which will close the valuation gap to peers. EFG-Hermes Holding (.6% weight): Called off sale of treasury share; writing them off instead Summary: EFG announced the sale of its 37m treasury shares (6.4% of capital) but cancelled the sale due to price sensitivity and announced that the shares will instead be written off. In connection with the proposed sale, EFG also said that 4Q14 net profit will exceed EGP 1m with FY14 profit of more than EGP 5m as brokerage revenues rose more than 6% YoY for FY14 with asset management revenues up more than 3%. The Egyptian stock index rose 32% in FY14. Implications for Investment Case: This will have a positive EPS impact. Proceeds from the share sale were going to address expansion. Cancellation of the sale might lead to more prudent capital allocation. However, EFG still has excess cash for expansion. It is also positive that the board is aware of value. Stock trades a touch below book value. Key catalyst is an opening up of the Saudi Arabian stock market to foreigners and index inclusion. EFG at P/E of 15x for 215 trades below EM brokers, despite having a sizable asset management business which should fetch a higher multiple. 2

21 The largest companies in SKAGEN Kon-Tiki Samsung Electronics is one of the world's largest producers of consumer electronics, with over 155, employees. The company is global #1 in mobile phones and smartphones, the world's largest in TV and a global #1 in memory chips. Samsung also produces appliances, cameras, printers, PCs and air-conditioning units. Hyundai Motor is the world's 4th largest car maker, including their 39% stake in Kia Motor. Sold 4.7m cars in 213 and has a ca. 5% global market share. Focus on smaller/less expensive cars. Strong position in several countries and in emerging markets such as India and China. Great Wall Motor is a Chinese car manufacturer with sales of over 752, units in 213, up 24% YoY. It has a market share of more than 3.5% in China. Volume is divided between SUVs, sedans and pick-ups, where it is market leader. The cars are certified in the EU and Great Wall exports to 12 markets. It has its own engine and transmission production. Largest bank in India with 17% market share (ca. 25% including 5 associate banks). Also presence in life insurance, asset management and investment banking. 15, branches, 32, ATMs, 13 million customers and over 22, employees. Largest Indian overseas bank with 19 offices in 34 countries. Bharti Airtel is India s largest private integrated telecom company, and it is a leading global player (#4) with operations in 2 countries across Asia and Africa. They had around 287m customers across their operations at the end of June 214. They separated out their towers business into a part-owned unit (passive infrastructure). Bharti family and SingTel own 3% each. 21

22 The largest companies in SKAGEN Kon-Tiki (continued) Mahindra & Mahindra is the largest manufacturer of utility vehicles in India (5% market share) and tractors (4% market share). It has several listed subsidiaries including Tech Mahindra and M&M financial services (largest financier of UVs and tractors in India). Turkey s leading and financial conglomerate in sectors including financial services, energy, cement, retail and industrials. The company has 1 companies currently listed on the Istanbul Stock Exchange and operates in 18 countries across Europe, the Middle East, Asia, North Africa and North and South America. Controlled by the Sabanci family. AP Møller-Maersk is a Danish conglomerate with four core businesses which include Maersk Line (container shipping), APM Terminals (global terminal network in 68 countries), Maersk Oil and Maersk Drilling. The company is going through a process of streamlining the business by terminating non-core and underperforming assets. ABB is a leader in power and automation technologies that enable utility and industrial customers to improve performance while lowering environmental impact. The group operates in around 1 countries and employs 146, people. Approximately 5% of sales stem from emerging markets and this share is rapidly increasing. South-African listed media and internet holding company incorporated in They have a strong Pay-TV business in South-Africa and Sub-Saharan African countries and a fast growing internet division focused on commerce, communities, content, communication and games. They hold a 34% stake in Chinese Tencent and 29% of Russian Mail.ru. 22

23 23 Additional information

24 Positioning of EM countries and sectors (as of Jan 31, 215) Source: EPFR Global, HSBC. 24

25 Weekly net flows to EM as % of AUM*, by region (as of Jan 31, 215) *Note: AUM at each week s start; over past 4 weeks. Source: EPFR, Samsung Securities. 25

26 5-year total return MSCI indices (as of Jan 31, 215) Note: Total returns USD, -5Y rebased to 1, Total return = Index return + dividends. Source: HSBC. 26

27 Cumulative performance in USD Dec 12 - Jan Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Emerging Markets Developed Markets Source: Bloomberg, SKAGEN research. 27

28 EM equity volatility MSCI EM Index 3-day implied volatility, as of Jan 31, Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Bloomberg, SKAGEN research. 28

29 For more information please visit: Our latest Market report Information about SKAGEN Kon-Tiki A on our web pages Unless otherwise stated, all performance data in this report relates to class A units and is net of fees. Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on market developments, the fund manager s skill, the fund s risk profile and subscription and management fees. The return may become negative as a result of negative price developments. SKAGEN seeks to the best of its ability to ensure that all information given in this report is correct, however, makes reservations regarding possible errors and omissions. Statements in the report reflect the portfolio managers viewpoint at a given time, and this viewpoint may be changed without notice. The report should not be perceived as an offer or recommendation to buy or sell financial instruments. SKAGEN does not assume responsibility for direct or indirect loss or expenses incurred through use or understanding of the report. Employees of SKAGEN AS may be owners of securities issued by companies that are either referred to in this report or are part of the fund's portfolio. The art of common sense