A clear example is LG Electronics prefered shares (XKRX:066575, Financial). We have been analysing this company for years in order to benchmark our investment in Samsung, which is also present in the mobile and household appliance businesses. The highlights of LG are that it has: i) a home appliances and OLED TV business, which generate a stable cash flow with a leading technology; ii) a loss-making mobile phone business, which, after years of studying Samsung, we consider uncompetitive; iii) finally, a Vehicle Components business that contributes a significant part of the value to General Motors' electric car. The latter provides a high growth potential even though it is still in the investment phase.
Despite the fact that LG capitalised at close to €20 billion, we believe it is not well covered by analysts. LG is cove-red by technology analysts and has long been priced at a discount compared to its technology competitors due to its poor mobile business. The market has exaggerated mobile losses, while it has underestimated the stable cash flow of the other businesses. After all, the house-hold appliance division is too "boring" a business for technology analysts/investors. This situation gave us the opportunity to buy good businesses at a discount. In addition, preferred shares trade at a significant discount (50%) to common shares, giving us an additional safety margin.
An important moment in LG's history came in 2018, when the current chairman inherited the empire due to the sudden death of his father and began to review LG's broad portfolio of businesses, with the aim of focusing on profitable businesses by exiting those in which they were not competitive.
In fact, LG recently (December 2020) announced the creation of a JV with Magna for the electric vehicle components business, and last April LG decided to exit the mobile phone business. These decisions will bring to the surface the value of LG, for which they have been applauded by the market and have appreciated by more than 100% since the announcement last December.
From Francisco Garcia Parames (Trades, Portfolio)' Cobas Asset Management first-quarter 2021 shareholder letter.
