IBERIAN PORTFOLIO
The net asset value of our Iberian Portfolio in the first quarter of 2020 was -41.1%, compared with -27.5% for its benchmark index. If we extend the comparison period since we started investing in equities until the end of 2019, it has obtained a return of -40.5%, while its bench-mark index has obtained a return of -23.9% for the same period.
Over the first quarter we changed the composition of the Iberian Portfolio to a significant extent. We invested in three new companies (Prisa, CIE and LAR) whose combined weight is nearly 3.4% at the end of March. On the other hand, we have completely sold six companies that together had a weight close to 4.6% at December 2019, with most significant being Repsol, Caixabank, Arcelor and Indra, each with a weight close to 1% at December 2019. In addition, we reduced our exposure to Bankia (by -2.4%) and Unicaja (-1.6%) for the reasons stated at the beginning of this letter.
During the quarter we reduced the target value of the Iberian Portfolio by 13%, to €161 euros/unit, compared to a fall of 41.1% in the net asset value, as a result of which the upside potential has risen to 171%.
In the Iberian Portfolio, we are 94% invested and, as a whole, the portfolio trades with an estimated 2020 P/E ratio of 6.1x, compared to the 12.0x of its benchmark index, and with a ROCE of 21%.
As with the International Portfolio, we have also adjusted the valuation of our Iberian Portfolio in line with the effects we expect the coronavirus to have on the economy. Specifically, we have adjusted our valuation by 13%, compared to the valuation we had at the end of 2019, to €161/unit.
Companies with a small impact
In nearly 45% of the Iberian Portfolio, the reduction in our valuation was less than 10%, with the average reduction being about 7%.
Elecnor (XMAD:ENO, Financial) (~9%): The impact will be minimal as ~40% of our valuation comes from businesses related to infrastructures, electricity transmission networks (Celeo) and wind farms (Enerfin). The remaining 60% of our valuation comes from the traditional engineering business, half of which are recurring maintenance services to various utilities, the other half are engineering contracts (EPC) with an order book of 1.5-2 years widely distributed across various sectors. Recently there was an independent valuation of Celeo's business that is higher than our valuation, so in this case we have barely touched on our valuation of Elecnor.
Técnicas Reunidas (XMAD:TRE, Financial) (~8%): It could be affected by the lower capex of the oil companies in the future, but the company has an order book at record highs that covers the next 2 years of sales, and it has not had cancellations even in projects that it has just won and that the client could have cancelled with no problem. In addition, the com-pany has a net cash position of nearly €400 Mn and access to credit lines, so we think the impact on valua-tion should be moderate.
Cyclical businesses with no major problems (~8%): Atalaya Mining (LSE:ATYM, Financial) is a cyclical company exposed to copper with no debt problems, and whose price could be affected in the short term, but we are optimistic in the long term as 2/3 of copper demand comes from Asia (China represents 50% of global demand) and copper is essential for growth and electrification of developing countries.
Befesa (FRA:BFSA, Financial) could be temporarily affected in the short term, but we are positive as Befesa is helping the steel industry to transform some of its waste into zinc concentrate. Lastly, in Ence, demand for tissue (toilet paper, napkins, etc.) is more than offsetting the fall in demand for pulp from other sectors.
Other solid businesses (~11%): Corporación Financiera Alba (XMAD:ALB) is a holding company controlled by the March family in which approximately 70% of our valuation comes from very stable businesses such as Naturgy (XMAD:NTGY), Euskaltel (XMAD:EKT), Ebro Foods (XMAD:EBRO), Viscofan (XMAD:VIS), etc. The Sonae Group (XLIS:SONC) is a Portuguese holding company mainly exposed to very stable sectors such as supermarkets and telecommunications, with significant market shares in both businesses in their respective markets. Logista and Miquel y Costas (MXAD:MCM) are companies with cash, and with clear competitive advantages exposed to the tobacco sector, but suc-cessfully diversifying into other sectors.
Companies with a negative impact
In nearly 50% of the portfolio, the reduction in the valuation was above 10%, with the average reduction being about 18%.
Semapa (XLIS:SEM, Financial) (~9%): is a holding company whose main asset is Navigator (~85-90% of our valuation); Navigator is a leader and the most cost-efficient producer of office paper in Europe. We believe that in a recessionary scena-rio it may suffer temporarily, so we have cut our target price slightly as a result of the delay in our normalised earnings from Navigator and the reduction in normalised earnings from Secil (its cement division).
Real estate developers (~9%): In Spain, virtually no housing has been built in the last 10 years, so the starting point is not at all comparable to that seen in the crisis of 2008. That is why we think that there is demand, and that depending on how severe the recession is, the purchase of homes will be delayed more or less, but that sooner or later it will end up coming back.
This investment is distributed among four companies (Aedas (XMAD:AEDAS), Metrovacesa (XMAD:MVC), INSUR and Quabit (XMAD:QBT)), all of them with core shareholders and with hardly any debt except for Quabit (~3%) which has a loan to value ratio (debt/asset value) of ~45%. But even in this case, the maturity of the debt is conditional on the delivery of the homes, many of them pre-sold and pending delivery. What we have done in recent months has been to strengthen our position in companies with no debt problems.
Vocento (XMAD:VOC) (~9%): A recession scenario could affect advertising revenues in the short term, but we believe that in the long term this crisis could help accelerate market con-centration, cost efficiencies and speed up the digital tran-sition. In any case, Vocento has a very moderate debt (~1x Ebitda).
Meliá (XMAD:MEL) (~5%): Melia may be one of the most affected in the short term, but we think it will be temporary, since it has very moderate debt, it has the support of the value of its properties and that of a family that has always acted with a long-term vision. A valuation made by JLL, an independent appraiser, assigned a value to its real estate of ~€16/share. Even so, we have cut our valuation.
Direct/indirect exposure to oil (~5%): We have three companies that will be affected by the drop in oil prices, Sacyr (XMAD:SCYR), Mota-Engil (XLIS:EGL) and Tubacex (XMAD:TUB). The main one by far is Sacyr. Although at Sacyr the bulk of our valuation comes from its traffic-free motorway concessions business, it also controls ~8% of Repsol, where falling oil prices have caused us to reduce its valuation.
