Monthly report December 2019
Portfolio and market
The Antaurus Europe Fund (AEF) rose 0.4% in December. As a result, the December closing price is €244.96. From its inception in 2006, the price has more than doubled and the average annual net return is +7.0%. The return in the fourth quarter of 2019 was -0.9% and was realized with an average net gain of -4%. With this, the AEF had a lower risk profile than an equity investment. European stock markets rose in the fourth quarter. The AEX Index and the broad European DJ Euro Stoxx rose 4% and 5%, respectively, in the fourth quarter.
Performance and risk since start
Antaurus Europe Fund (NAV)
|Performance||AEF (%)||1 month||0,4|
|Year to date||5,0|
|3 years (annualized)||3,4|
|5 years (annualized)||7,2|
|Since start (annualized)||7,0|
|Risk analysis||1 month||5 years||Since start||Gross position (Long + Short in %)||136||137||131|
|Net long (Long - Short in %)||-2||25||43|
|Beta adjusted net long (%)||-2||22||37|
|Positive months (%)||57||62|
|Maximum drawdown (%)||-6,0||-20,9|
|Best monthly return (%)||5,6||11,9|
|Worst monthly return (%)||-6,0||-8,6|
European stock markets more than recovered in 2019 from the negative price trends of the previous year. European stock markets rose ranging from 13% to 28%. The AEX index rose 24% while the broad European index Stoxx Europe 600 rose 23% (excluding dividends). The AEF's average long weighting was 3%, so the beta made a very limited positive contribution to earnings in 2019. Stock selection (alpha) contributed substantially positively to the annual return.
The best performing long positions were D'Ieteren (auto glass replacement and auto distributor), SBM Offshore (oil and gas industry machinery) and Takeaway.com (online marketplace). The only performing long position was Meyer Burger (solar energy). The fund closed the remaining position in Meyer Burger in September. More than three-quarters of the short positions contributed negatively to the annual return.
D'Ieteren's share price rose 102% (including dividends), contributing the most to its 2019 returns. D'Ieteren is the world market leader in auto glass replacement and repair with its best-known brand being Carglass. In addition, the company is the largest importer of cars in Belgium. The share price rose after the company had to raise its annual operating profit forecast several times during the year. On top of that, the board announced in August that it was going to buy back its own shares for 150 million euros. At that time, that represented more than 6% of the number of shares outstanding. The board also commented positively on medium-term growth prospects for its largest activity, Belron (active in automotive glass replacement and repair).
SBM Offshore's share price rose 30% (including dividends). Later in this post you will find a comprehensive update on our investment in SBM Offshore.
Takeaway.com's share price rose 40% in 2019. At the end of 2018, Takeaway.com announced the acquisition of its major German competitor. At the beginning of 2019, Takeaway.com reported that the integration of this went smoothly. During the year, it became known that the cost synergies of this acquisition will be amply achieved. With this, Takeaway.com's German operations are now also profitable. Furthermore, it was announced in the summer that Takeaway.com intends to merge with its British competitor JustEat. Eventually, investment company Prosus also interfered in this bidding war. Both parties have since submitted a final offer to JustEat shareholders. JustEat shareholders must decide by Jan. 10 which bid they will accept. Rumors are that Takeaway.com's bid appears to be winning.
Investment Case: SBM Offshore
SBM Offshore is the world market leader in medium and large FPSOs: floating drilling rigs with storage capacity. Together with the Japanese company Modec, SBM Offshore has virtually a duopoly in this market. Other parties have not been able to prove that they can build an FPSO without delay and within budget.
There are a number of factors why Antaurus expects a positive share price development for SBM Offshore shares. First, there are a good number of concrete orders for new FPSOs. Second, the lease fleet of FPSOs gives a very high, guaranteed free cash flow until 2035. Third, SBM Offshore has a hefty pile of cash combined with shareholder-friendly governance.
Demand for FPSOs fully recovered in 2019. Demand for complex FPSOs is approaching its peak from 2010 to 2013. However, the number of competitors has decreased significantly since then. SBM Offshore won three contracts for FPSOs in 2019 with a total estimated investment value of $5 billion. This makes 2019 a record year for SBM Offshore in terms of new orders. SBM's major competitor Modec has also won three orders for FPSOs in 2019. Moreover, there are reliable sources that Modec will add two more orders in the near future. In total, Modec will then work on eight orders simultaneously. It is expected that Modec will need all its capacity for these eight assignments. So capacity is very tight. This allows SBM Offshore to charge good prices. The expected profitability and return on capital employed is very high. SBM Offshore has indicated that it expects to make a net profit of roughly €1.50 per share on the construction of one large FPSO. The three orders won by SBM Offshore in 2019 thus represent an estimated potential value creation of €4.50 per share.
We expect SBM Offshore to announce at least two more new orders in 2020. The company recently ordered two hulls. SBM Offshore orders these hulls only when it has visibility of orders based on concrete discussions with customers. We expect SBM Offshore to be assured of orders beyond 2020 because it is Exxon's preferred supplier for a giant oil field off the coast of Guyana (neighboring Suriname). Exxon has set a goal of having five floating rigs in production by 2025. So far, SBM Offshore has received all three orders. The orders that Exxon will award in 2020 and 2021 will most likely also be awarded to SBM Offshore. Experts expect that Exxon will need at least ten FPSOs. So even in the years after 2021, SBM Offshore seems assured of lucrative orders.
We estimate the present value of future net free cash flow from the lease fleet in operation and the three new orders at €16 per share. We expect SBM Offshore to achieve net free cash flow in excess of $2 billion over the 2020-2025 period. This cash flow is equivalent to an estimated €10 per share. This means that, based on current contracts, SBM Offshore will thus recover 60% of its current market capitalization over the next 6 years. The lease fleet will continue to provide a substantial guaranteed income stream in the years beyond 2025 through even 2045.
We expect the board to announce a new share buyback program in 2020 to distribute some of the excess cash. We estimate that SBM Offshore has at least $500m of available free cash as of the end of 2019. The company has indicated several times that it needs little capital to invest in new floating rig leases or working capital. The board is also in favor of distributing excess capital to shareholders through increasing dividends and share repurchase programs. The company repurchased shares in both 2016 and 2019. We expect SBM Offshore to continue share repurchases beyond 2020 to distribute substantial free cash flow in this way.
The AEF has held a position in SBM Offshore since December 2013. In 2018 and 2019, the AEF gradually increased the weighting of SBM Offshore to 12%. The reason for SBM Offshore's above-average weighting in the portfolio is its attractive risk-return ratio. Downside risk is limited because market value on the stock market of SBM Offshore is amply covered by the future cash flow from the lease fleet and by the cash position at the holding company level. Upside potential is substantial due to the strong market position and expected strong demand for FPSOs over the next decade. We expect SBM Offshore shares to quote well above €25 on a two-year time frame.
Strategy and outlook
In 2019, stock markets more than made up for the losses of 2018. A turn in policy by the Fed and ECB seems to have caused this in particular. As they turned from tightening policies in 2018 to stimulative policies, investors' appetite for risk seems to have increased again. Moreover, the result of the British election in December has provided more clarity on the Brexit. It also appears as if the trade war between the United States and China will not escalate further for the time being. On the other hand, economic growth continued to weaken in the second half of the year.
As of mid-2018, weakening soft economic indicators show a downward trend. As a result, growth forecasts for most economies have been continuously revised downward since then. The European economy is currently growing at around 1%, while the U.S. economy is growing at around 2%. The Chinese economy looks set to grow below 6% for the first time in 2020, driven in part by the trade war with the United States.
At the same time, many companies are struggling with rising costs. Because the labor market is tight at this late stage of the economic cycle, many companies are forced to increase salaries. In the US, wage inflation is close to 4%, while wage growth in Europe is over 2%. With the current limited economic growth outlook and rising costs, we expect corporate earnings growth to be limited.
After almost a decade of accommodative monetary policy, rising inflation forced the U.S. central bank (Fed) to finally normalize monetary policy in late 2018. In 2018, the Fed implemented four interest rate hikes. With financial markets falling sharply in late 2018, the Fed decided to cut interest rates again in early 2019. It eventually cut policy rates three times in 2019. In addition, the Fed started another large-scale purchase program in September. With this, the Fed is largely back to square one.
The European Central Bank (ECB) made a similar turn. In early 2019, it stopped its bond purchase program (which artificially depressed interest rates). In mid-September, however, the ECB announced a new stimulus package. The deposit rate was lowered to minus 0.5% (from minus 0.4%). At the same time, starting in November, the ECB resumed the purchase program by buying bonds worth 20 billion euros per month.
All in all, the AEF remains cautiously positioned. It is likely that interest rates will remain extremely low for the time being following recent central bank statements. Compared to current low interest rates, equity valuations in Europe are still reasonably attractive. However, the outlook for corporate earnings growth is currently moderate.
The current positioning is approximately neutral. The risk profile of the portfolio has thus been substantially reduced. With the current positioning, a rising stock market will have little impact on returns. On the other hand, this also applies in the event of a falling stock market. When prices fall, short positions (a short position is a downward position that allows investors to profit from falling prices. Antaurus goes short by borrowing shares in order to then sell them immediately. This is done with the intention of buying back the same shares cheaper in the future and then also delivering them back to the lending party) will generate profits. With the current strategy, we deliberately limit the influence of the stock market on the portfolio. As a result, stock selection will be the largest source of potential returns. Since inception, stock selection has also been the largest contributor to the average annual return of 7%.
Performance and risk since start
|Top 3 positions||Weight||Long|
|Fund size AuM (€m)||354|
|ISIN code||EN 0000 686848|
|Net long range||-50% to +75%|
|Administrator||Bolder Fund Services|
|Management Fee||1.8%, p.a.|
|Performance Fee||20%, quarterly|
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