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Monthly Report: International Fund February 2019

28/02/2019
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International Fund February Monthly Report

Global stock markets continued to rally in February with the MSCI World Index up 5.3% in Australian dollar terms. That takes the gains this calendar year to more than 10%.

While the performance has been far from uniform, the Fund has roughly matched the index. Many portfolio companies reported results over the month. Here is how some of them fared.

Thanks to some rapid share price appreciation, data erasure software provider Blancco Technology (AIM:BLTG) remains the largest investment. The UK-based company reported revenue of £14.6m for the six months to December 2018, 19% higher than the same six month period in 2017. While sales increased more than 10% in each of the company’s three divisions, the Enterprise business stood out with sales growing 30% to £4.7m. This part of the business helps large corporates and their IT partners erase data from mountains of used hardware, as well as active servers.

After a calamitous 2017 financial year where the company had to restate its revenue, 2018 was a year of repair and this year is showing clear signs of a return to healthy growth for Blancco. The new management team, led by CEO Matt Jones, is taking a cautious approach to revenue recognition and focusing on building a strong, growing and reliable revenue stream.

He has some assistance. A proliferation in the number of electronic devices and increased cybersecurity concerns will ensure demand for data erasure services continues to increase. Blancco’s unique technology and strong customer loyalty leaves it in poll position to benefit. We are anticipating this company will grow for decades and the latest results, outlook and management meetings reiterate our confidence.

Cement-maker Cementir (BIT:CEM) reported 2018 sales of €1.1bn, a touch below 2017. Operating profits were barely changed at €131m. The company entered 2019 with net debt of €255m, down by €288m since the start of 2018. Management’s priority is to reduce this further. While we would welcome a dividend increase, especially considering the company’s 2% cost of debt, we trust management will continue to allocate capital wisely. With the exception of a poor deal in Turkey in the early 2000s, the track record is encouraging.

Cementir’s share price almost halved in 2018 on no specific news. We took advantage of this and recently increased the Fund’s investment in the company. Since then the price has rallied 20% and Cementir is now a 4.8% holding. On a price-to-earnings of less than 10, Cementir remains attractively priced.

Fire truck manufacturer Rosenbauer (WBAG:ROS) posted sales of €900m in 2018, 6% higher than in 2017. Operating profit was €47.9m, more than double the previous year. Management is overcoming the manufacturing issues that plagued profitability in recent years. Importantly, Rosenbauer’s order book continued to grow throughout 2018. The current order backlog is more than €1bn, higher than ever before. Record sales are all but guaranteed in 2019, and margins should also improve.

Assuming reasonable growth in sales and a 6% operating margin, Rosenbauer trades at 11-12 times 2019 earnings, with more growth to come in 2020. The stock is a 2.8% portfolio holding.

Alphabet’s (Nasdaq:GOOG) 2018 revenues increased 23%, an impressive rate considering the size of the business. Search, especially on mobile, continues to be the main driver of growth. The cost of generating that revenue—such as content acquisition for video portal YouTube and data centres—also increased rapidly at 31%. But what grew the most was capital expenditure, which totalled an astonishing $25bn. That’s almost double the amount spent in 2017.

Adjusting for surplus cash, Alphabet is trading at about 22 times earnings. Given relentless growth it’s hard to argue it is expensive. Still, we would prefer management return more of the company’s colossal cash balance and annual cash flow to shareholders. The board has recently authorised another $12.5bn in share repurchases. While good news, the buyback will merely stop the US$109bn cash pile from growing further this year, rather than making a dent in it. It’s a high quality problem to have.

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