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Graham Griffin
Graham Griffin
Articles (195) 

AzValor Iberia's Top 5 Trades of the 4th Quarter

No new holdings for the second quarter in a row

Spanish and Portuguese stock specialist fund azValor Iberia FI (Trades, Portfolio) has revealed its fourth-quarter portfolio. Top trades include an addition to the fund's Tecnicas Reunidas SA (XMAD:TRE) holding and reductions in Elecnor SA (XMAD:ENO), Applus Services SA (XMAD:APPS) and Melia Hotels International SA (XMAD:MEL). The ENCE Energia y Celulosa SA (XMAD:ENC) holding was also eliminated during the quarter.

With several managers at the helm, the fund invests over three-quarters of its assets in Spanish and Portuguese companies listed on secondary markets, with Spanish shares capped at 90% of the fund. The fund managers seek undervalued companies with an easy-to-understand business, sustainable competitive advantages over time, high returns on capital and that are led by quality management teams. The overall goal is to obtain satisfactory and sustained returns over time.

Portfolio overview
At the end of the quarter, the portfolio contained 27 stocks with no new holdings. It was valued at $47 million and has seen a turnover rate of 6%. Top holdings include Tubacex SA (XMAD:TUB), Tecnicas Reunidas, Elecnor, Galp Energia SGPS SA (XLIS:GALP) and Compania de Distribucion Integral Logista Holdings (XMAD:LOG).

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By weight, the top three represented sectors are industrials (38.92%), basic materials (29.09%) and energy (12.15%).

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Tecnicas Reunidas

During the quarter, the fund's Tecnicas Reunidas (XMAD:TRE) holding was boosted by 76.5% with the purchase of 166,319 shares. The shares traded at an average price of 9.24 euros ($11.24) each during the quarter. Overall, the sale had an impact of 3.81% on the portfolio and GuruFocus estimates the firm has lost 17.84% on the holding.

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Tecnicas Reunidas is a general contracting company. It engages in engineering, design and construction of industrial facilities for international customers, including principal national oil companies and multinational companies. The company's majority of business is focused on large turnkey industrial projects and it also offers engineering, management, startup and operating services for industrial plants. Its business areas are oil and gas, power, infrastructures and industries. The company mainly operates in Spain, the Middle East, Latin America, Asia and the Mediterranean region.

On Feb. 11, the stock was trading at 12.18 euros per share with a market cap of 654 million euros. The GF Value Line shows the stock is a potential value trap and investors should think twice before buying shares.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rank of 7 out of 10. There are currently four severe warning signs issued for the company, including a declining operating margin, assets growing faster than revenue and an Altman Z-Score of 1.1 placing the company in the distress column. Debt levels have risen for the company in recent years and net income turned negative in 2019.

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Elecnor

Elecnor (XMAD:ENO), another of the fund's top holdings, was reduced during the quarter. The 150,525 shares that were sold reduced the holding by 29.64%. The shares traded at an average price of 9.53 euros each during the fourth quarter. The fund has gained an estimated 5.41% on the holding according to GuruFocus and the sale had an overall impact of -3.08% on the portfolio.

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Elecnor is a Spanish engineering and construction company. The company organizes itself into two segments: infrastructure and concessions. It generates the vast majority of revenue from the infrastructure segment. It generates electricity, operates power lines and substations, provides gas pipeline services, provides services for railways, develops telecommunications infrastructure and constructs and maintains other infrastructure projects. The company derives approximately half of its revenue domestically.

As of Feb. 11, the stock was trading at 10.85 euros ($13.17) per share with a market cap of 918.92 million euros ($1.11 billion). According to the GF Value Line, the stock is trading at a modestly undervalued rating.

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GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 7 out of 10. There are currently three severe warning signs listed for the company for declining operating margins, poor financial strength and an Altman Z-Score of 1.3 placing the company in the distress column. The current return on invested capital of zero percent does not support the weighted average cost of capital, meaning value will be destroyed as the company grows.

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ENCE Energia y Celulosa

With a short lifespan of less than two years, the portfolio saw the end of the ENCE Energia y Celulosa (XMAD:ENC) holding. The remaining 518,265 shares were sold during the quarter at an average price of 2.65 euros. The trade had an overall impact of -2.66% and GuruFocus estimates the fund lost 28.29% on the holding.

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ENCE Energia y Celulosa produces and sells pulp. The company owns and manages eucalyptus forests throughout Spain and harvests timber. The timber is transported to the company's mills, where it produces pulp for sale to paper manufacturers. Over half of the company's pulp is sold to tissue paper producers. Other customers include manufacturers of specialty paper, printing and writing paper and packaging paper. Ence also generates and sells electricity from forest biomass. The vast majority of revenue comes from Europe.

The stock was trading at 3.73 euros per share with a market cap of 910.16 million euros on Feb. 11. The GF Value Line shows the stock trading at a fair value rating.

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GuruFocus gives the company a financial strength rating of 3 out of 10, a profitability rank of 6 out of 10 and a valuation rank of 2 out of 10. There are currently two severe warning signs issued for poor financial strength and an Altman Z-Score of 0.65 placing the company well into the distress column. At the end of 2019, the company's net income fell off drastically and free cash flow dropped into negative territory.

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Applus Services

The fund's Applus Services (XMAD:APPS) holding also saw a large 61.02% reduction. The 144,727 shares that were sold traded at an average price of 7.69 euros each during the quarter. The fund has lost an estimated 4.22% on the holding and the sale had a -2.17% impact on the portfolio overall.

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Applus Services is a Spain-based company that provides testing, inspection and certification services. The company operates through four divisions. The energy and industry division, which accounts for the majority of revenue, is primarily engaged in industrial and environmental inspection, technical assistance, technical staffing and other services. The automotive division conducts statutory vehicle inspection services for safety and emissions. The IDIADA division provides vehicle proving grounds, engineering, design and other services. The laboratories division conducts product testing and certification services for laboratories. Europe, North America and Asia Pacific are the three biggest markets for the company.

On Feb. 11, the stock was trading at 8.82 euros per share with a market cap of 1.26 billion euros. The stock is trading at a modestly undervalued rating according to the GF Value Line.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rank of 5 out of 10. There is currently one severe warning sign issued for revenue per share declining. Despite the warning sign, the company has slowly increased revenue and net income since 2017.

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Melia Hotels International

Another reduction rounded out the fund's top five trades with a 33.86% cut in the Melia Hotels International (XMAD:MEL) holding. Managers sold 208,487 shares that traded at an average price of 4.50 euros per share during the quarter. Overall, the sale had a negative impact of 1.53% on the portfolio and GuruFocus estimates the fund has lost a total of 43.62% on the holding.

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Melia Hotels International is a Spanish owner and operator of hotels. The company operates midscale, upscale and premium hotels across several brands, including Sol Hotels & Resorts, Melia Hotels & Resorts and Gran Melia. Melia may either own or lease the hotels it operates, and hotel operation contributes the majority of company revenue. In addition, hotel owners may operate hotels under a Melia brand in a franchise agreement, or can contract Melia's management services to operate the hotel on its behalf.

As of Feb. 11, the stock was trading at 6.13 euros per share with a market cap of 1.29 billion euros. The GF Value Line shows the stock trading at a significantly overvalued rating.

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GuruFocus gives the company a financial strength rating of 2 out of 10 and a profitability rank of 6 out of 10. There are currently five severe warning signs issued for the company, including days inventory building up, poor financial strength and a low Piotroski F-Score that implies poor business operation. The cash-to-debt ratio of 0.08 ranks the company lower than 82.95% of competitors and the company is struggling with negative operating and net margins.

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Disclosure: Author owns no stocks mentioned.

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