Markets were extremely volatile and down significantly during the third quarter, mainly as a result of concerns about China’s growth and its impact on future earnings of companies around the globe. It was another period during which investors panicked and sold securities indiscriminately, with no regard to valuation. As always, we sought to take advantage of the volatility and associated investor anxiety. We had many opportunities to “nibble” and add to positions at compelling valuations throughout the quarter. Despite the volatile environment, we were pleased to see considerable net inflows of assets from new and existing investors during the quarter.
For the quarter and year-to-date periods ended September 30, 2015, performance for the Fund’s Institutional Class shares (“EVGIX”), the MSCI All Country World Index (“MSCI ACWI”), and the HFRX Event Driven Index (“HFRX ED”) was as follows:
The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month end may be obtained by calling 866-EVERMORE (866-383-7667). The Fund imposes a 2% redemption fee on shares redeemed within 30 days. Performance data quoted does not reflect the redemption fee. If reflected, total returns would be reduced. Please Click Here for standardized performance of the Evermore Global Value Fund.
A stalled, yet unresolved Greek debt crisis… The devaluation of the Yuan and slower growth in China… The U.S. Fed decision to not raise interest rates… Low oil prices… An across-the-board tumble in commodity prices and its impact on Latin America… Our take on the macro environment – it’s a lot of noise. Not that we don’t take into account what slower growth in China or Latin America means to the prospects of existing and prospective portfolio companies. We absolutely do, but, amidst the so-called chaos, our goal is to find the most attractive special situation investment opportunities that arise from companies that are engaging in transformative restructuring initiatives. At the same time, there continue to be many positive developments occurring, especially in Europe, that get lost in the shuffle, and may soon become more evident as companies report results in the coming quarters.
In September, Thomas O, one of our senior research analysts, and I spent another week in Germany and Spain. We met with management teams from 19 companies, as well as representatives from several large regional investment banking firms. Our take-away based on these meetings was that restructuring activity in Europe is more prevalent than ever and it reinforces our view that much of our investment focus should continue to be on European special situations. Companies that failed to be first mover- restructurers continue to wake up to the benefits of streamlining their businesses that the European financial crisis has afforded them. Culturally, corporate boards are now leading the charge more than ever. As we alluded to last quarter, we have also been spending more time looking for opportunities in Japan, as Japanese Prime Minister Shinzo Abe continues to lead and push a sea change in corporate attitudes towards governance and increasing shareholder value. The bottom line is, regardless of where we are searching for ideas, we will never deviate from our investment discipline based on short- term market volatility and the associated “noise”.
Portfolio Review – Characteristics
The Fund ended the quarter with 43 issuer positions and several hedges with the following geographic breakdown:
Below are our quarter-end strategy classification breakdowns for our portfolio holdings, which we believe help present an informative picture of our concentrations.
Portfolio Review – New Investments
We added several new positions during the quarter, which included Aurelius AG (Germany), Bilfinger SE (Germany), Exor S.p.A. (Italy), LSB Industries Inc. (U.S.), Sonae SGPS SA (Portugal), and WMIH Corp. (U.S.). A discussion of several of these new positions follows.
Founded in 1880, Bilfinger SE (GBF GY), a €1.5 billion ($1.68 billion) market cap company, was once one of the leading construction companies in Europe and second largest in Germany. In early 2000, Bilfinger started to move away from its traditional, large-scale construction projects and into power and energy solutions, environmental technology and facility maintenance. Over the last 12 years, the company aggressively spent around €3 billion ($3.35 billion) for acquisitions. This failed “transformation” coupled with an unimpressive (and frankly inept) former management team led the company to stumble and issue multiple profit warnings during the past two years. As a result, the stock price fell from over €80.00 ($89.39) per share to less than €32.00 ($35.76).
After closely monitoring and carefully assessing the situation for over a year, we concluded that Bilfinger was substantially undervalued and reached a level that we felt provided a good margin of safety. We estimate that Bilfinger is trading at a 35-50% discount to our range of intrinsic values. We believe the new management in place since the second quarter is very capable and experienced with restructurings and turnarounds. Also, we believe activist investor, Cevian Capital, which owns a 26% stake, will work constructively with management to further increase shareholder value by de-risking the operations, disposing of non-core assets and de-leveraging the balance sheet.
Founded in 1959, Sonae SGPS S.A. (SON PL) is a €2.2 billion ($2.46 billion) market cap holding company based in Portugal. Sonae is controlled by the Azevedo family (53% stake) and is the primary source of their wealth. The company owns the largest operator of hypermarkets, supermarkets and specialty retail outlets (sporting goods, fashion, and electronics) in Portugal. It also owns and operates shopping centers. In addition, Sonae owns a 90% stake in Sonaecom, a €680 million ($759.8 million) market cap telecom (traditional fixed line and mobile) operator and an effective 27% stake in NOS, the largest TV, cable and satellite provider with a €3.8 billion ($4.25 billion) market cap. Sonae also manages an investment portfolio of unlisted assets including stakes in a travel agency, insurance brokerage and DIY retail.
Based on our estimates, Sonae is trading at least at a 40% discount to our intrinsic value estimate. We believe the core retail assets are implicitly “created” at under 5 times EBITDA compared to 9 times for the peer average. There is also significant value underpinned by the €1.2 billion ($1.34 billion) book value of real estate, which we believe will be monetized through sale leasebacks and proceeds to be used for debt repayment. Today, over 70% of Sonae’s food retail stores are owned. Investors are paid while they wait for future sale leasebacks with a 3.3% dividend yield, which has been supported by consistently strong cash flows.
WMIH Corp. (WMIH) is a publicly-traded vehicle whose primary asset is a $6 billion net operating loss (“NOL”) carryforward arising from Washington Mutual’s emergence from bankruptcy in 2012. The company’s mandate is to acquire businesses with taxable earnings in an effort to maximize the value of its massive tax shelter. WMIH is being run indirectly by KKR & Co. (“KKR”), which effectively owns 30% of the company. As such, management is extremely well-aligned with minority shareholders. Thus, we believe KKR will do all it can to make savvy deals, and that when the first of such deals is announced, the market will re-value the stock to reflect the intrinsic value of the new entity’s tax-minimized cash earnings stream. Today, however, WMIH is trading at a significant discount to what we believe will prove to be the net present value of its NOL asset. Whereas many asset managers may be prohibited from investing in these types of tax loss holding company special situations, WMIH showcases Evermore’s ability to go anywhere in its hunt for value with catalysts.
Portfolio Review – Investments Exited
We exited three positions in the quarter – DeLclima S.p.A., Magnolia Bostad AB and SC Fondul Proprietatea SA. We sold our DeLclima position for a substantial short term gain after the announcement that the majority shareholder accepted an all cash takeover offer from Mitsubishi Electric at 82% above the prior day’s closing price. We were only able to amass a small (less than 1%) position in Magnolia Bostad, and as a result, decided to exit this position for a small gain to take advantage of other opportunities. We also decided to exit SC Fondul, the Romanian closed end fund, at a loss as it did not revalue as we believed it would after becoming the largest closed-end Fund listed in the UK early this year.
Portfolio Review – Top Contributors/Detractors
Our top five contributors and detractors to performance during the third quarter were:
I’d like to highlight several of the top contributors and top detractors to performance.
Marine Harvest ASA (MHG NO), one of the largest seafood companies in the world, and the world’s largest producer of Atlantic salmon, returned 22% including distributions during the quarter. As expected the salmon market continues to exhibit tight supply helping to support industry-wide pricing. During the company’s most recent quarter, Marine Harvest continued to showcase its strength in controlling costs, growing its fledgling feed business, and increasing profitability in downstream prepared consumer products. Marine Harvest is leading the consolidation of this industry, which has, and we believe will continue significantly increase shareholder value.
Our investment in Lifco AB (LIFCOB SS), which we initiated less than a year ago, performed well during the third quarter. Lifco is a SEK 16.6 billion ($1.98 billion) market cap, Sweden-based conglomerate with businesses primarily in dental consumables and prosthetics and remote-controlled demolition machines and tools. The company is also involved in other businesses, including interior retrofitting for ambulance and service vehicles, environmental technology and contract manufacturing. Over the last 25 years, Lifco has grown both organically and through acquisitions under the leadership of the Swedish value creator, Carl Bennett, who owns more than 50% of the company.
We believe we are getting a high growth company at a modest valuation. Even at the current price, we believe that Lifco is not yet fully understood by the market, especially concerning the benefits of the on- going operational improvements and potential for asset sales over time. The company continues to generate extremely strong cash flows and high cash conversion as a result of efficient working capital management and low capital expenditure requirements. We view our investment in Lifco as a strong compounder.
Prisa (PRS SM) was the largest detractor to performance in the quarter and we believe was one of the most susceptible stocks in our portfolio to the volatility and indiscriminate selling during the quarter. We have been mostly wrong on this investment since we made it back in 2011. I was just in Spain and met with the CEO and CFO of the company and got a more positive update on the company than I have over the prior four and one half years. In addition, I met with the previous CEO to get his perspective on the business and current management. And so, what happens now that the company has streamlined its business, has dramatically improved its balance sheet, and is probably in the best operating position it has been in during the last ten years? Its stock fell precipitously during the quarter, probably as the result of an exit of a large shareholder and investor concerns about its textbook and media businesses in Latin America. Prisa has become a small Fund position that we are re-evaluating in the context of the other opportunities we are evaluating.
ThyssenKrupp AG (TKA GY) underperformed during the third quarter. With a €9 billion ($10.06 billion) market cap, this company is a 200+ year-old, diversified industrial conglomerate based in Germany. ThyssenKrupp operates in two primary businesses: steel (Steel Europe, Steel Americas, Material Services) and value-add capital goods (Elevator Technology, Components Technology, Industrial solutions). The company is undergoing a major transformation led by highly talented ex-Siemens management that came on board in 2011.
Recent volatility in the markets driven primarily by the China slowdown concerns led to indiscriminant selling during the third quarter. Despite the recent weakness, we believe the company’s fundamentals continue to be intact as underscored by strong earnings and the progress of realized cost savings (94% of the target has already been achieved year to date). We took advantage of the share price decline and opportunistically added to our position.
Although the Fund’s performance suffered in the third quarter, I take some solace in the fact that the Fund ended the quarter up for the year. The extreme volatility and decline in stock prices we saw in the third quarter actually gave us opportunities to add new investments that we had been tracking (in some cases for long periods of time) at attractive valuations. I continue to be encouraged by the proliferation of investment opportunities we are seeing, especially in Europe. It is our job to carefully sift through these opportunities and only select what we believe to be the best opportunities for the Fund.
I am heading back to Europe with another one of our senior research analysts in late October, this time with visits to Sweden and France. I will discuss the takeaways from this trip in our year-end letter.
As always, I thank you for your continued confidence and support.