Commentary

Global market sentiment remains driven by economic data coming out of the US. The data in January had suggested inflationary pressures may be easing, whilst February’s data suggested otherwise causing falls in equity markets led by the US, a rise in bond yields and a rise in the US dollar.

At a stock level, the largest negative contributors to relative performance, in order of their impact, were LG H&H (-10% total return in local currency, but -16% in US dollars), Alibaba (-20%), Eni (-5%) and KT&G (-4% but -10% in US dollars).

LG H&H has been impacted by Covid and the Chinese lockdowns but the recent sales success with end consumers suggest to us that the all-important luxury skincare brand, The History of Whoo, remains in good health. Over the short-term, LG H&H has higher than normal inventory on its balance sheet and is re-negotiating commercial terms with the Chinese resellers. As travel between Korea and China returns to normal, we expect to see sales recover strongly led by Duty Free retail sales. Other global luxury brands like L’Oreal and Estee Lauder have also faced similar challenges in the travel retail channel. Longer-term, we think the shares are a bargain given that, adjusted for the net cash on the balance sheet, they are valued at just 14 times the net profit expected in 2024.

The shares of Alibaba, the Chinese ecommerce giant, gave up the entirety of the gain made in January. They announced quarterly results which reflected the Covid lockdowns in China, explaining the decline in value of products purchased on Alibaba’s websites compared with the previous year. However, cost reductions meant profits increased. Now that China has moved on from its Zero Covid policy we expect Alibaba to return to growth. Markets’ expectations have fallen sharply with the share price but we are more optimistic on the level of growth it can achieve over the next few years. Even using consensus views on profit and cashflow over the next couple of years, the share price, adjusted for the value of the net cash expected, trades on a single digit multiple of expected net profits.

KT&G, the Korean tobacco company, reported a satisfactory set of full-year results. Looking forward, sales from Next Generation Products (NGP) continue to grow strongly, and the company announced that it has extended its agreement with Philip Morris International (PM), whereby PM will distribute KT&G’s NGP devices and sticks in all markets outside Korea. At a recent investor day, KT&G outlined an ambitious 2027

Commentary

revenue target implying +10% CAGR driven primarily by NGP. Adjusting for its net cash, KT&G also trades at a single digit multiple of net earnings.

The largest positive contributors to the fund’s relative return during the month, in order of their impact, were BT Group (+12%) total return in local currency), Exor (+7%), Henkel (+5%) and Svenska Handelsbanken (+2%).

BT Group, the leading fixed and mobile phone operator in the UK, reported a solid set of results at the beginning of the month for their fiscal third quarter ending December 2022. While cashflow was a little lighter than expected this was easily explained by the phasing of capital expenditure during the year. The fibre roll out is going extremely well, with better than expected take-up from the homes passed. The company was able to reiterate its outlook for the full year and give investors confidence that the tide is turning for BT’s investment thesis. More importantly perhaps, Ofcom, the telephony and media regulator in the UK, gave the provisional go-ahead for Openreach’s Equinox 2 pricing package. We agree with management that Equinox 2 improves BT’s competitive position against the smaller alternative network providers (“alt-nets”). The alt-nets managed to raise significant sums of money during the era of free money but which have yet to make a real impact with their relatively nascent fibre builds. Due to lack of scale, the alt-nets have higher costs per line installed. Equinox 2 provides BT with the opportunity to lower prices for the bulk purchase of their full fibre broadband to levels that, while good for BT and the end consumer, provide unattractive returns to the alt-nets. BT’s enterprise value is just 5.3 times 2024’s operating cashflow before interest and tax and the shares offer an attractive 6.3% dividend yield. We think the shares should double from current levels over the next two to three years as the market appreciates BT’s strong and improving competitive position.

The strategy’s weighted average total upside on a two year view is 44%, and this on estimates we think conservative. The strategy has a forward price to earnings ratio (P/Es) of 9.2 times and a price to book multiple (P/B) of one. The MSCI EAFE Value index has a forward P/E of 9.5 times a P/B multiple of 1.1 times.

Commentary

Commentary

Commentary

Commentary