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Monthly Report: International Fund May 2019

31/05/2019
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International Fund May Monthly Report

The MSCI All Country World Index had its first negative month this (calendar) year in May, falling 4.5% in Australian dollar terms.

Fund performance was ahead of the index, mostly thanks to a positive trading update from Blancco (AIM:BLG) on the first trading day of May, but still down 2.7% for the month.

Specialist engineering services provider Babcock International (LSE:BAB) reported annual results that were largely in line with previous guidance. But forecasts of a decline in profitability next year were larger than expected with some large contracts coming to an end.

There was some positive news from the result. The company continued to pay down debt, as promised. And international contracts are increasing and are now at 30% of group revenue and 42% of the pipeline. This diversification helps with any UK-specific concerns.

Annuities provider Just Group (LSE:JUST) has responded to a more onerous regulatory environment by putting its prices up. Unfortunately, economics 101 still works in some parts of some economies: customers responded by buying less of Just’s products. In the first quarter, annuity sales to retail customers were 23% lower than the same period of the previous year. Business from corporate clients—the transfer of corporate pension schemes—fell 90%.

Corporate business is inconsistent and management were at pains to point out that the second quarter had been much better. Overall, they claim to be on track for full year targets. Still, it’s a reminder that Just only has difficult choices under the new regulatory regime.

It doesn’t have enough capital to grow quickly. And it doesn’t have enough pricing power to grow profitably. It is now hard to see how shareholders earn a decent return on the substantial amount of capital tied up in the business. Given the market valuation is just one third of its book value, it is time for Just to seek more radical solutions, not least a sale of the business to a stronger player.

First quarter results from automotive and industrial equipment manufacturer Linamar Corporation (TSX:LNR) offered no surprises. Sales rose 4% to C$2.0bn, while operating profit fell 6% to a touch under C$200m.

Due to lower capital expenditure and tighter working capital management, Linamar will generate a lot of free cash flow over 2019, C$500-700m by management’s reckoning. Some of that is non-recurring in nature, but it will make a significant dent in the company’s C$2.1bn net debt by the end of this year.

Norwegian conglomerate Bonheur (OB:BON) continued its progress towards being a renewables-focused conglomerate. Several recent market transactions have confirmed valuations for Scandinavian wind farms, of which Bonheur owns two and is building a third. Meanwhile, secondary market prices for cash generative UK wind farms—in which Bonheur is heavily invested—have improved significantly. During the quarter the company refinanced some of its UK wind assets at more attractive interest rates, releasing £87m cash out in the process.

Our valuation for Bonheur has moved up modestly since the Fund first bought the stock in 2017. But the stock price reaction has been more acute. It’s up 65% since the start of 2019 as the shareholder base naturally shifts from value investors to a more normal crowd of growth and ESG investors. The Fund has been taking profits and the stock currently makes up 4.0% of the portfolio.

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