Dear Investor,
During the first half, our international portfolio increased by 2% and our Iberian portfolio by 12%, while our internal valuations increased by 1% and 9%, respectively. As a result, our estimated upside was 156% and 122% at the end of the quarter. These are very high upside potentials, which is why Cobas continues to increase investment in our funds, with Cobas employees and shareholders being the second largest investors.
Since the start of our new phase six and a half years ago, our revaluations have not yet been satisfactory. Since then, we have been very transparent about the underlying reasons that have delayed a better performance, most of which, due to their casuistry, are unlikely to be repeated.
In 2023, the fall in oil and gas prices has temporarily reversed part of the returns obtained in the previous year. The market has penalised the share prices of companies in this sector, making them more attractive, even in cases where their profits do not depend on commodity prices.
Where the oil price does have an impact, note that the market price is currently $75-80, and our profit estimates assume a price of $60-65 per barrel. These are especially conservative if we consider that the cost per marginal barrel is also $60-65. This means that, should the oil price fall (due to a temporary mismatch between supply and demand) to below $60, supply would soon contract, and the price would recover.
Thus, under this assumption, we would be acquiring these companies with oil price exposure at 4 times earnings. Of course, if demand continues to grow and supply does not increase sufficiently, as we believe will be the case, then the outlook for prices and profits would be even better.
On the other hand, it is noteworthy that during the last six months we have received five takeover bids: three in the international portfolio (Exmar, Gaslog and Taro) and two in the Iberian portfolio (FCC and Applus). In practice, a takeover bid is a transaction in which a well- informed party launches a proposal to acquire a listed company.
Naturally, the buyer wants to extract the maximum profit from the operation, so it tends to offer a relatively low price. Even so, the five bids we have received have been very lucrative for us, with returns more than 30% annualised (except for Exmar, with 21% annualised).
As in the case of many portfolio companies, the share price of the "bought" companies has temporarily been much lower than the price of the first purchase (with loses of up to 30% and 65%) and yet we have made profits. This was not only because our valuations were reasonable, but also because we were convinced that the price at the time did not adequately reflect the intrinsic value of the businesses. We simply decided to wait and take advantage of opportunities to buy more shares. At the end of the first half, these companies represented almost 4% of the international and Iberian portfolios. We will receive the proceeds from these sales soon. By reinvesting these amounts between our existing companies and new ones, which we will mention in future letters, we will automatically generate additional value. With an above average reinvestment upside for our funds, the value of our funds will rise another 4%-5% just from this fact alone.
We know when we start investing, but not when we will finish.
While the results have not surfaced as quickly as initially expected, we think the market will reward our waiting. We see a lot of value in our funds, bought at a deep discount, without the need to speculate on how much value there is in future technologies, fads, transformational changes, or bubbles. As a result, we aim for satisfactory returns even when selling to smart buyers. And remember that the longer it takes for the market to recognise the value of our companies, the stronger and faster the fund's appreciation will be.
Our Portfolios
At Cobas AM we manage three portfolios: the International Portfolio, which invests in companies worldwide excluding those listed in Spain and Portugal; the Iberian Portfolio, which invests in companies listed in Spain and Portugal or which have their core operations in Iberian territory; and, finally, the Large Cap Portfolio, which invests in companies globally and in which at least 70% are companies with a market capitalisation of more than 4,000 million euros.
Please note that the target value of our funds is based on internal estimates and Cobas AM does not guarantee that these estimates are correct or will be achieved. Invest-ments are made in securities that the managers believe are undervalued. However, there is no guarantee that they are undervalued or, if so, that their prices will perform as the managers expect.
With these three portfolios, we are building the various equity funds that we manage as of June 30, 2023:
International Portfolio
For the first half of 2023 our International Portfolio returned +2.0%, compared to a return of +11.1% for its benchmark, the MSCI Europe Total Return Net. If we extend the comparison period from inception to 30 June 2023, the International Portfolio returned -3.2%, while its benchmark returned +45.3% for the same period.
During the first half of the year, we made some changes in the International Portfolio. We have completely exited Teekay Corp (TK, Financial), Continental (XTER:CON, Financial) and Fresenius Medical Care (XTER:FME, Financial). As of June, these companies had a combined weighting of between 2% and 3%. And we have entered in FNAC Darty (XPAC:FNAC), Greencore (LSE:GNC, Financial), Hochschild Mining (LSE:HOC, Financial), IPCO and Seacrest Petroleo. These companies, at the end of June, have a combined weighting of just under 5%. In the rest of the portfolio, we have reduced our position in Renault (XPAR:RNO, Financial) and Aryzta (XSWX:ARYN, Financial) due to their good performance during the first half of the year. On the buy side, we increased our position in Golar (GLNG, Financial) and Energean (LSE:ENOG, Financial) to take advantage of their falling share prices.
During the first half of the year, thanks to market volatility and our rotation, the target value of the International Portfolio increased by just over 1% to around €248/share, implying a potential upside1 of 156%.
As a result of this potential1 and confidence in the portfolio, we are around 98% invested. The whole portfolio trades at an estimated 2023 P/E1 of 5.6x versus 12.4x its benchmark and has a ROCE1 of close to 29%. But if we look at the ROCE excluding shipping and commodity companies, we are close to 38%, which is indicative of the quality of the businesses in the portfolio.
Iberian Portfolio
The Iberian Portfolio's net asset value performance du-ring the first half of 2023 was +12.2% compared to +16.1% for its benchmark. If we extend the comparison period from inception to 30 June 2023, we obtained a return of +11.6%, while the benchmark index returned +35.1% for the same period.
During the first half of the year, we made few changes. We did not enter any company and only exited completely from Sacyr (XMAD:SCYR) and Repsol (XMAD:REP), taking advantage of the good performance of their share prices. At the end of June, these companies had a combined weighting of between 3 and 4%. In the rest of the portfolio, the most important movements were on the sell side, Indra (XMAD:IDR) and Tubacex (XMAD:TUB), while on the buy side, Almirall (XMAD:ALM) and Catalana Occidente (XMAD:GCO).
During the first half of the year, we adjusted the target value of the Iberian Portfolio upwards by nearly 9% to €247 per unit. After this adjustment, the potential upside1 stands at 122%.
We are nearly 98% invested in the Iberian Portfolio, and as a whole, the portfolio trades at an estimated 2023 P/E of 7.4x versus 11.3x its benchmark and has a ROCE of close to 21%.
Large Cap Portfolio
During the first half of 2023 our Large Cap Portfolio returned +0.2% versus +12.6% for the benchmark MSCI World Net.
In the Large Cap portfolio we have made some changes. We have completely exited Aryzta, China Mobile (SHSE:600941), Qurate Retail (QRTEA) and ACS, which at the end of June had a weighting of close to 3%, and we have entered Kosmos Energy (KOS), Energean and BW Energy (OSL:BWE) with a weighting of close to 3%.
In the rest of the portfolio, the most important movements were on the sell side, Renault, and Heidelberg Materials (XTER:HEI), due to their good performance during the half year, while on the buy side, Fresenius and Bayer (XTER:BAYN).
During the first half of the year, we have slightly adjusted the target value of the Large Cap Portfolio upwards by 2% to €229/share. This represents a potential1 upside of 149%.
We are nearly 99% invested in the Large Cap Portfolio. Overall, the portfolio trades at an estimated 2023 P/E1 of 5.8x versus 17.0x for its benchmark and has a ROCE1 of 29%.
