Commentary
The recovery in share prices continued in the first week of June but then stalled, leading to a flattish month for both the strategy and its benchmark. The best performers were Spirit Airlines (+37%), Petroleum Geo-Services (+22%) and Shop Apotheke (+15%); while the worst were Stagecoach (-12%), Wetherspoon (-12%) and IWG (-10%). UK companies were particularly weak but there was no specific news on the largest movers. Prem Watsa invested nearly $150m into Fairfax shares, which means that now seven of the top ten holdings have seen net additions from insiders in the past six months.
Stagecoach and CLS holdings
We have attended several virtual conferences over the last two months which we would normally have had to fly to. This has saved both time and money and we believe is one of a few major positive developments that will come from this pandemic. It has enabled us to see a lot more companies than in previous years. In each meeting with management we have asked about the long-term impact on their business. Almost without exception, they have said that not only can a large portion of their employees work from home, but they are also more productive. Most of these companies are now looking at how they might reduce the amount of office space they use.
If spending more time at home and less time in the office does materialise, this could have a long-lasting impact on both office demand and public transport demand. Ultimately, if productivity is increased, it should be positive for the economy but there will be winners and losers. In this strategy, we think that IWG, the global leader in flexible office space, will be a winner because many companies will shift towards flexible office space but CLS holdings, a European office focussed real estate company, and Stagecoach, a UK bus business, will be impacted negatively.
CLS Holdings has a very high-quality tenant base on long leases. It also has been selling properties in the last few years, so is sitting on a lot of cash. We are now assuming that the company will experience rental pressure in the years ahead and have reduced our view of fair value, but, at just over 0.6x book value, we think it is still set to deliver good returns from here.
Bus businesses have been relatively resilient in previous recessions as people have traded down to bus travel during tough times. The companies have also had the ability to reduce frequency and/or increase price on their monopolistic routes. Nevertheless, the decline of the high street and the reduction in commuter volume will hit Stagecoach. Potentially offsetting some of this will be a reduction in car ownership over time as the cost of ownership increases and, if other cities follow London’s example with low emission zones, bus travel could get a boost.
The operating profit of Stagecoach’s bus business has ranged from £100m to £150m over the past seven years. The enterprise value is now just £700m, which is cheap for what should be a stable business but, because of the added pressure on demand, the position is currently under review. It represents 2% of the portfolio.
Portfolio
The competitive landscape has improved for most of the companies in this strategy because many rivals have fallen into financial distress. Interest rates are at record lows, energy prices are low, and savings rates are high; offsetting this, cases of COVID-19 continue to grow around the world, unemployment has ballooned, and government deficits are setting records. The macro picture is murky, but we remain focussed on finding good companies, run by able and shareholder-aligned managements at attractive prices. The portfolio is trading on one times book value and a single digit multiple of what we believe to be normal earnings. Upside to our target prices is a just over 90%.
Jamie Carter is leaving the firm to take up a position at Longview Partners. Jamie was one of the founding partners of the firm with Richard Oldfield and Nigel Waller in 2005, and has been chief executive since 2013.
Jamie has played a key role in the development of the firm over the last 15 years, and all his partners are grateful to him. He goes with our best wishes.
The board has asked Nigel Waller to become chief executive. He will delegate a great deal of the running of the firm and client relations to his colleagues on the management committee Chris Driver, John McEwing, Ed Troughton and to David Gallagher in the US. This will allow Nigel to remain firmly focused on his role managing the global and EAFE strategies with Andrew Goodwin and as chief investment officer. The investment team are not impacted by Jamie’s departure.
Commentary
The recovery in share prices continued in the first week of June but then stalled, leading to a flattish month for both the strategy and its benchmark. The best performers were Spirit Airlines (+37%), Petroleum Geo-Services (+22%) and Shop Apotheke (+15%); while the worst were Stagecoach (-12%), Wetherspoon (-12%) and IWG (-10%). UK companies were particularly weak but there was no specific news on the largest movers. Prem Watsa invested nearly $150m into Fairfax shares, which means that now seven of the top ten holdings have seen net additions from insiders in the past six months.
Stagecoach and CLS holdings
We have attended several virtual conferences over the last two months which we would normally have had to fly to. This has saved both time and money and we believe is one of a few major positive developments that will come from this pandemic. It has enabled us to see a lot more companies than in previous years. In each meeting with management we have asked about the long-term impact on their business. Almost without exception, they have said that not only can a large portion of their employees work from home, but they are also more productive. Most of these companies are now looking at how they might reduce the amount of office space they use.
If spending more time at home and less time in the office does materialise, this could have a long-lasting impact on both office demand and public transport demand. Ultimately, if productivity is increased, it should be positive for the economy but there will be winners and losers. In this strategy, we think that IWG, the global leader in flexible office space, will be a winner because many companies will shift towards flexible office space but CLS holdings, a European office focussed real estate company, and Stagecoach, a UK bus business, will be impacted negatively.
CLS Holdings has a very high-quality tenant base on long leases. It also has been selling properties in the last few years, so is sitting on a lot of cash. We are now assuming that the company will experience rental pressure in the years ahead and have reduced our view of fair value, but, at just over 0.6x book value, we think it is still set to deliver good returns from here.
Bus businesses have been relatively resilient in previous recessions as people have traded down to bus travel during tough times. The companies have also had the ability to reduce frequency and/or increase price on their monopolistic routes. Nevertheless, the decline of the high street and the reduction in commuter volume will hit Stagecoach. Potentially offsetting some of this will be a reduction in car ownership over time as the cost of ownership increases and, if other cities follow London’s example with low emission zones, bus travel could get a boost.
The operating profit of Stagecoach’s bus business has ranged from £100m to £150m over the past seven years. The enterprise value is now just £700m, which is cheap for what should be a stable business but, because of the added pressure on demand, the position is currently under review. It represents 2% of the portfolio.
Portfolio
The competitive landscape has improved for most of the companies in this strategy because many rivals have fallen into financial distress. Interest rates are at record lows, energy prices are low, and savings rates are high; offsetting this, cases of COVID-19 continue to grow around the world, unemployment has ballooned, and government deficits are setting records. The macro picture is murky, but we remain focussed on finding good companies, run by able and shareholder-aligned managements at attractive prices. The portfolio is trading on one times book value and a single digit multiple of what we believe to be normal earnings. Upside to our target prices is a just over 90%.
Jamie Carter is leaving the firm to take up a position at Longview Partners. Jamie was one of the founding partners of the firm with Richard Oldfield and Nigel Waller in 2005, and has been chief executive since 2013.
Jamie has played a key role in the development of the firm over the last 15 years, and all his partners are grateful to him. He goes with our best wishes.
The board has asked Nigel Waller to become chief executive. He will delegate a great deal of the running of the firm and client relations to his colleagues on the management committee Chris Driver, John McEwing, Ed Troughton and to David Gallagher in the US. This will allow Nigel to remain firmly focused on his role managing the global and EAFE strategies with Andrew Goodwin and as chief investment officer. The investment team are not impacted by Jamie’s departure.