In the third quarter we have seen how our funds obtained negative results, mainly being burdened by our investment in Aryzta as occurred in the previous quarter. To be more precise, exposure to this company has had a negative effect on the profitability of the international portfolio by approximately 3%, while the total negative profitability of said portfolio in the quarter was about 4%.
Since the beginning of the year the negative impact of Aryzta has been 10%. The performance of the remainder of the International Portfolio has been reasonable and has even surpassed its benchmark index.
The impact of Aryzta (XSWX:ARYN, Financial), which currently accounts for 6% of the International portfolio, should not make us forget the positive characteristics of the remainder of the portfolio, which we continue to value at almost 100% above its cur-rent net asset value. Some of these values have already reflected this (Nevsun and GIII for example with revalua-tions close to 100%) and the remainder will do so in time.
Moreover, time helps us to be firmer in our convictions. In a large proportion of the companies we have been share-holders for two years, which assumes an additional level of certainty. Our analytical process is continuous and details which escape us when we first come into contact with a business become familiar to us over time. In any case, volatility must be our friend and falls on the mar-kets such as that of October should be considered oppor-tunities to reap the profitability of the future.
Volatility must be our friend and falls on the markets should be considered opportunities
Together with this message of optimism we would also like to transmit one of calm. We believe that our interna-tional portfolio is defensive in nature against a possible fall of the cycle and only 20% of the same is exposed to a drop in the demand for consumption (mainly the compa-nies of the car industry and Consumer discretionary goods). The remaining 80% is made up of defensive companies which should not suffer unduly during a fall in the cycle (such as Babcock) and also of companies which depend on their own bid phases and which will inevitably obtain better results once the excess capacity of their respective sectors is cleaned up (such as Teekay and International Seaways). In order to illustrate the forego-ing, we will now take a look at our five main positions on the International Portfolio, with the exception of Aryzta which we will subsequently analyse separately.
Teekay (TK, Financial). The Teekay Group, by means of Teekay LNG and the parent company, Teekay Corp, is one of our most significant investments. This investment has a low cor-relation with the behaviour of the market as it depends on specific actions of the Group. The reasons that made it share price dropped (a cut in dividend to finance its ambi-tious growth plan) will shortly be the reasons for the market to again appreciate its qualities. Teekay LNG is the main source of potential for them both and has per-fectly implemented its growth plan, which involves long-term contracts for its LNG transport ships. The exe-cution risk is now very low and it is interesting that the market appears to be in agreement regarding the genera-tion of the expected operating cash flow at Teekay LNG, but this is not yet being reflected in the share price. Now we are waiting for the plan of the company so as to reini-tiate the distribution of cash while they reduce their bor-rowing. In any case the accumulation of value will be evident and we hope that this will be reflected by the market, this time sooner rather than later.
Babcock (BW, Financial). The Brexit and the inappropriate comparisons made by the market with a company as unique as Babcock, which is no. 1 or no. 2 in practically all the busi-nesses and regions in which it operates, give us an extraordinary opportunity to purchase good businesses with unique well-managed assets at very attractive prices (PER 8x; an expected annual profitability of 11%).
Babcock is particularly strong in the maintenance of nuclear submarines and frigates in the United Kingdom, in emergency helicopter services in Western Europe, and in the support and dismantling of nuclear power stations, all of which are good businesses which are difficult to replicate.
International Seaways (INSW, Financial). We have a significant investment (almost 10% of the International Portfolio) in the oil ship-ping business, in which International Seaways is one of our favourite companies. The current situation, which is the lowest point of the last 30 years, encourages invest-ment in favour of the recovery of the cycle of maritime transport, in particular of crude oil. Several factors con-tribute to the current weakness, and we can gradually see how each and every one of them is returning to normal (inventories of crude oil, demolition of the fleet, and the drop in orders for new ships, among others). This means that supply and demand are being adjusted as is shown by the daily freight rates and the price of new ships. With International Seaways we moved into position for this recovery through a company with moderate levels of debt and with revaluation potential, even if the company should be liquidated today before the recovery of the cycle.
Renault (XPAR:RNO, Financial). This is a clear case of hidden assets, as according to our estimates the value of 43% which Renault holds in Nissan is higher than the market capitalisation of Renault itself. In other words, we are investing “free” in the Renault car business (we estimate some 4mn units sold in 2018), its financial business, and the 1.6% it holds in Daimler, all of which are undoubtedly of quality according to our analysis. The market does not quite believe this situation, but we believe the current manage-ment team has the intention of freeing the value of the company in the medium term.
Dixons (LSE:DC., Financial). The Brexit has allowed us to purchase Dixons, a leader in electronic distribution in the United Kingdom, the northern countries, and Greece, at 5 years minimums (PE 7x), while Best Buy, which is operating in exactly the same business but in the United States, is trading at close to its historical maximums (PER 13x). At a time when the shadow of disruption threatens the distribution sector, Dixons has not only shown that it can compete effective-ly with Amazon but has consistently increased its market share over the last 5 years.
To conclude, we have confidence in the strength of our current portfolio and we are taking advantage of the market volatility to improve its quality and revaluation potential even more. It should be remembered that after periods of losses there will always be periods of recovery, which are stronger than the former.
Once again we are grateful to you all for the confidence you have placed in our business model and in particular to the 672 new co-investors who have taken advantage of the negative profitability in the last quarter to invest with us, together with the 2,679 existing investors who have decided to increase their positions. We are convinced of the high underlying value of the businesses in which we are investing and that if we are patient time will allow us to achieve high revaluations.
Finally, we welcome our new Korean colleague Hwi Soon Chan, who will strengthen our analytical team. He will work from Shanghai together with our colleague Ming-kun Chan, with whom we have been working for ten years.
