International Portfolio
Over the first quarter of 2019, our International Portfolio posted a positive return of +10.8% versus the 12.8% profi-tability posted by its benchmark index, the MSCI Europe Net Total Return index. Since the fund Cobas Internacio-nal FI began investing in equities in mid-March 2017, it has obtained a return of -19.7%, while its benchmark index has obtained a return of +7.4% for the same period. Obviously, this result is not acceptable, but we will gra-dually recover thanks to the upside potential and the confidence we have in that potential.
The greatest contribution to the positive returns in the portfolio during the quarter was mainly generated by Aryzta (+2.5%), Teekay LNG (+1.9%) and Dixons Carphone (+1.0%).
The target price of the International Portfolio, 173€/share, implies a revaluation potential of 116%. This target price is similar to the one we had in December 2018, as we have not made major changes in the portfolio's composition.
Obviously, and as a result of this potential, we have invested close to the legal maximum limit of 99%. Overall, the portfolio trades at an estimated 2019 P/E ratio of 7.9x and a ROCE of 25%. If we look at ROCE excluding shipping and raw materials companies, we are at 33%, which means that we have a portfolio made up of very good quality companies.
Below we explain Saipem in more detail, which was one of the incorporations made during the first quarter.
Saipem
Saipem (MIL:SPM, Financial) is one of the world's leading engineering and construction companies in the oil and gas sector. It is present in the refining, petrochemicals, gas liquefaction, development of marine deposits and drilling sectors, among others.
The company has taken advantage of the crisis in the sector to restructure and simplify its internal structure, reducing costs, improving margins and placing it in a good position for the recovery that is taking place in the oil and gas industry. In addition, the capital increase car-ried out in 2016 has allowed it to substantially reduce its debt, giving rise to a healthy balance sheet structure with which to face the growing number of projects that its clients want to carry out in the coming years. Its manage-ment team is focused on the generation of value and as an example of this they have decided to focus on those businesses in which Saipem is stronger, thinking about valuing those that are not strategic, such as drilling.
In our standard scenario, Saipem is trading at 7x ear-nings, with a return on capital similar to that of its com-petitors and a very attractive upside potential.
Iberian Portfolio
The performance of the net asset value during the first quarter of 2019 of the Iberian Portfolio was +8.3%, slightly below the performance of its benchmark index, which was +9.1%. However, when expanding the comparison period from its launch to the end of March 2019, the diffe-rence with the benchmark index is +2.7% in our favour. The greatest contribution to the positive returns in the portfolio during the quarter was mainly generated by Sacyr (+1.8%), Técnicas Reunidas (+1.5%) and Mota Engil (+1.3%). But the most important thing about the first quarter of 2019 is that, thanks to the rotation we have carried out in the portfolio, we have been able to create value. Specifi- cally, we increased our target price by +2% to €178/share, implying a 74% upside potential. It is worth noting that since the launch of the fund, we have increased its target price by 34%.
Like our International Portfolio, in the Iberian Portfolio we have also invested close to the legal maximum allowed of 99% and, as a whole, the portfolio trades with an estimated 2019 P/E ratio of 9.4x and a ROCE of 28%. This means that we have good quality companies with significant potential.
However, unlike our International Portfolio, in the Iberian Portfolio there are significant changes. We have incorpo-rated 4 new stocks, the main one Caixabank with a weight close to 4%, and we have completely exited from 4 stocks. In addition to these changes, we have increased the weight by more than 1% for 6 stocks and decreased it by more than 1% for 7 stocks.
During this quarter, the highlight of the Iberian Portfolio has been the greatest weight we have given to three Spa-nish banks, which now have a weight of approximately 12.5%. Thanks to the recent falls, they are trading at lows, the margin of safety is higher and, as a result, investing in them is more attractive.
Years before the crisis erupted, we avoided investing in banks because we perceived great risks that eventually materialised. In particular, an expansion of credit that was channelled disproportionately into the real estate market.
Until 2013 we did not invest in banks as we believed that their accounting did not adequately reflect the losses they accumulated. In that year we invested in Bankinter, because it had little exposure to the real estate market and, moreover, we were buying the banking business for free, as the valuation of Linea Directa, its insurer, alone, justified its price per share. Today Bankinter trades at almost three times the price. Also in 2013 we bought Bankia after its nationalisation, recapitalisation (clea-ning up of losses) and its return to the Stock Exchange with a new president, José Ignacio Goirigolzarri, of whom we had good references. Within a few months, its price more than doubled, and we sold much of our position.-Since the creation of Cobas we have invested in three banks: Bankia, Unicaja and CaixaBank. In Unicaja (XMAD:UNI, Financial) we invested for the first time in its IPO in June 2017 at a very attractive entry price. This occurred shortly after Banco Popular was sold to Banco Santander for 1 euro, which generated a very negative sentiment towards small banks. In addition, we had very good references regar-ding its Board, and we were comforted by the evidence of prudence in its accounts. In less than a year, it went up more than 40%. We sold, and we bought back shares when they fell months later.
We would have purchased CaixaBank (XMAD:CABK, Financial) during the fourth quarter of 2016, so we had it ready when we launched our Cobas Iberia fund, but for formal reasons we could not launch the fund until April 2017. By then, its share price had risen 40% and it was not so interesting anymore. For-tunately, during the first quarter of 2019 the price has fallen again and the market has given us another oppor-tunity to have a leading bank in Spain in our portfolio.
After 11 years since the crisis, the Spanish banks in our portfolio have improved substantially. They have become bigger, competition is somewhat smaller, they have cleaned up their balance sheets, they have shown that they are able to adjust their branch network without damaging their business, they have faced adverse laws-uits and judgments, and they have managed to accumu-late an excess of regulatory capital. After these efforts, and at lows, we believe that these banks are worth signifi-cantly more than they are trading at and that is why they have the weight they have in our Iberian Portfolio.
Parques Reunidos (XMAD:PQR, Financial) was also clearly undervalued, a com-pany that at the end of March had a weight of close to 4% in our Iberian Portfolio, and in which, as the time of wri-ting this letter, we have received an offer for all of our shares with a premium of close to 30%. We thought that investing in Parques Reunidos was a good opportunity because it has a business with good assets, and that it was penalised by the market due to temporary problems, trading at approximately 10x normalised earnings com-pared to the 18-20x of its main competitors.
Elections in Spain
With regard to the elections on Sunday 28 of April, we simply want to comment that we are not excessively concerned about their outcome (we write this before knowing the result), as the Spanish economy is on a path of healthy growth.
But, in any case, if someone were afraid of what could happen in Spain, only 23% of our Iberian Portfolio is exposed to Spain's economic cycle.
Large Company Portfolio
During the first quarter of 2019, our Large Company Port-folio had a return of +9.1% versus a 14.5% rise in the benchmark index, MSCI World Net. Since the Cobas Grandes Compañà Âas FI fund began investing in equities in early April 2017, the return has been -20.2%. In that period, the benchmark index rose by 12.5%.
The largest contributors to the positive returns in the portfolio during the quarter were mainly Aryzta (+2.4%), OCI (+1.6%) and Teekay LNG (+1.5%).
The target price for the portfolio is €165/share, a long way above its current net asset value, with potential upside of 107%. Overall, the portfolio trades at an estimated 2019 P/E ratio of 7.3x and has a ROCE of 27%.
In the Large Company Portfolio the main incorporation has been Israel Chemicals, a company that we had already had in our portfolio and that we sold at the end of last year. Thanks to the decreases in recent months we repurchased this quarter.
In conclusion, we would like to thank the nearly 23.000 co-investors for their confidence in this team and in our management model, including nearly 500 who have invested in our funds over the last quarter.
