International Fund August Monthly Report
Trade wars continued to make headlines in August. US president Donald Trump doubled tariffs on imports of Turkish aluminium and steel to 20% and 50% respectively. The Turkish Lira has depreciated more than 35% against most major currencies this year.
Cement-maker Cementir (BIT:CEM) is the only portfolio investment with a Turkish business. When the Fund first purchased shares in Cementir in early 2017, the Euro value of this business had already halved due to the weakening Lira. Since then the Lira has fallen another 50% and Turkey is now a marginal part of Cementir, accounting for 15% of sales and less than 10% of operating profits.
Over the first half of 2018 Cementir sold its Italian operations to Heidelberg Cement (DB:HEI) for €315m and invested €87m to purchase an additional 39% stake in a US white cement manufacturer. Excluding the impact of these transactions and adjusting for currency movements, sales increased 6% to €589m and operating profit was up 17% to €60m. Cementir remains attractive, trading at a forecast price to earnings ratio of about 11.
Amongst European banks, German, Spanish and French institutions are the most exposed to Turkey with €120bn worth of assets in the country. Italian bank and portfolio holding UBI Banca (BIT:UBI) is not exposed, but its share price has still fallen.
UBI’s second-quarter net profit totalled €91m, slightly ahead of expectations. The bank announced that bad loans on its books would fall below its target of 10% of total lending by the middle of next year, earlier than previously expected. The bank’s exposure to non-performing loans remains a concern. So is its holding of Italian government debt. The spread between Italian long-dated government bonds and German Bunds—the latter considered the least risky in Europe—blew out to more than three percentage points over the past few months. That’s the highest level since the Greekled Euro crisis of 2011. UBI’s exposure is lower than peers and has been reduced in recent years. It continues to trade at half the value of its net tangible assets, a level that more than compensates for the risks.
King’s Flair (SEHK:6822) reported a 27% increase in half-year sales to HK$781m. Sales of its water bottles in China were particularly strong, growing 70% relative to the previous half. The gross margin fell to 19% from last year’s unsustainably high 21%, due to an increase in the price of raw materials.
Trade tensions between the US and China have not affected the business yet but this could change. Nevertheless, the company remains well capitalised with HK$500m of net cash on its balance sheet. The stock trades on a price to earnings ratio of 7 and sports an 11% dividend yield.
The Fund owns 7% of UK leasing company Thinksmart (AIM:TSL). The original investment thesis was that Australian investors were selling their shares for a song due to Thinksmart shifting its listing from the ASX to London’s AIM exchange. Eighteen months later, after a share price fall of some 60%, it was the sellers doing the singing.
At the end of August, though, Thinksmart announced a transformative deal with Aussie boom stock Afterpay Touch (ASX:APT). Thinksmart has sold most of Clearpay, its UK buy now, pay later business, to Afterpay. The consideration is one million Afterpay shares, worth around £12m. That stacks up pretty well next to its pre-deal £9m market capitalisation. Thinksmart has already sold 750,000 shares and will return the proceeds to shareholders. It still has £10m invested in its original leasing business and has kept a 6.5% stake in what will be Afterpay UK. That could be nothing, or it could be something substantial. Despite a large share price increase since the deal was announced, it still has some interesting upside. Unfortunately Thinksmart is tiny and illiquid and the Fund’s portfolio weighting is only around 1%, even at current prices.