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Monthly Report: International Fund August 2019

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International Fund August Monthly Report

Infant milk company Ausnutria (SEHK:1717) reported its results for the half year ended 30 June. While revenue and profit grew in line with our expectations, none of that profit turned up in the company’s bank account. Instead, Ausnutria’s inventories have been increasing alarmingly. From an already-high 176 days worth of sales at the end of December 2018, inventory levels jumped to 212 days by the end of June. That is a lot of tins of baby formula.

Just days after the results were released, investment firm Blue Orca published a detailed short report accusing Hong Kong-listed Ausnutria of improprieties ranging from overstating its sales to undisclosed related party transactions. After an initial tumble following the report’s release, the share price recovered thanks to a vehement defence from the management team. Combined with our concerns about the quality of the recent result, though, there was enough in the short-seller’s allegations to cause us concern. Rather than lose sleep at night, the investment was sold. We will be visiting Ausnutria in Holland during September and will continue to monitor it closely for more encouraging signs.

Flughafen Wien (WBAG:FLU) reported its results for the first half of 2019. Passenger numbers were up a whopping 20% on the same period last year, as the group embraced low cost carriers and continued to attract new long haul flights to Vienna Airport. Price incentives offered to encourage that growth, though, meant revenues grew a less impressive 7.5% to €401m. Due to the magic of operating leverage (most airport running costs are fixed) net profit rose 14.6%.

We expect the pace of passenger growth to curtail sharply over the coming months. Passenger numbers may flatline for a year or two. But some of those incentives offered to attract new airlines and routes unwind over time, so we expect some modest revenue growth. And the magic of operating leverage will continue to create faster growth in profits and dividends.

Gulf Marine Services (LSE:GMS) is in a state of disarray. In August, the owner of oil servicing vessels reduced its expectations for 2019 profit (again), fired its CEO and said it will breach covenants on its debt. Chair Tim Summers has stepped in as executive chair and is tasked with managing the company’s “active and constructive discussions with its banking syndicate” and establishing an “appropriate long term sustainable capital structure”. That’s code for a capital raising. The Fund has less than 1% of its assets invested in GMS and won’t be contributing any further money unless the solution is a comprehensive one.

Linamar Corporation (TSX:LNR) faces industry-wide headwinds in its auto parts and industrial businesses. In the second quarter, auto sales globally were down 5.6% versus the same period last year, with Europe and Asia weaker than North America. Linamar’s auto sales were down only 1.3% to just under C$1.5bn as the company continues to produce more of the content in each vehicle sold. Normalised earnings before interest and tax (EBIT) was down 17% to C$115m, with margins of 7.9% sitting towards the bottom of the 7-10% range that the auto business has historically produced and that management expects to produce in future. The Industrial segment had an even nastier quarter, with sales down 8% and EBIT down 18%. The trade war with China is causing skittishness with buyers for both its agricultural parts and industrial access equipment.

The near term outlook for both of Linamar’s segments has deteriorated over the course of this year. But the company continues to win market share in auto, agriculture and industrial equipment and, if anything, we expect those gains to accelerate if the downturn deepens. Linamar is well placed to ride out the storm and emerge stronger.