Commentary
It was a strong quarter for equities, albeit more muted performance for the strategy. The relative weakness was mostly explained by disappointing performance from HelloFresh, due to setbacks in its US operations – the US representing over half of overall sales. The US issues were twofold. First, was the delayed ramp-up of their new US capacity. While this has been an interim disappointed, it is not structural, and all issues have now been resolved, allowing for a potential €2bn in sales additional capacity.
The second issue for HelloFresh is more of a concern. We had expected the US meal kit business to return to growth this quarter, as the effects of COVID had now fully run through the business, and operations effectively normalised. However, management issued a warning that they had not seen as much demand in the ‘Back to School’ period as expected, so it is now unlikely the core US meal kit business will return to growth in the near-term. This comes at a time that other retailers, such as Walmart, have also cited weak consumer demand, so it is perhaps more transitory than structural, however it is an issue that we will continue to monitor closely.
Against this backdrop, HelloFresh remains an important holding within the fund, and we still believe it to be materially undervalued. Management appear to agree, announcing a €150m share buyback program, representing about 6% of current market cap. At the group level, they are still guiding to €10bn of sales and €1bn in EBITDA (translating into over €500m in free cash flow) by 2025. This is in the context of a market cap of just €2.3bn which is down 84% from its peak just two years ago. If they get even close to their guidance, it is clearly worth multiples of the current valuation. Regardless, it is still profitable, has a solid balance sheet and trading at about a third of sales – a similar multiple to most traditional ex-growth grocers.
We initiated a new position in Brembo, an Italian manufacturer of automotive braking systems. Founded in 1961 by majority shareholder Albert Bombassei, Brembo is a global business catering largely to passenger vehicles with its key products being brake disks and calipers. Its brightly coloured calipers are behind the wheels of many of the most premium and luxury cars, considered a status symbol among car enthusiasts. Brembo is the clear global leader within this space, enjoying an 80% market share in premium and luxury caliper sales. This includes its positioning as sole supplier to Ferrari and several other Formula 1 racing teams.
The near-monopoly position in high-end calipers is unusual among auto suppliers, traditionally a cut-throat industry. This position has been built over decades, leveraging Brembo’s first-mover advantage in high-end calipers to build global scale in production and research & development. With Brembo’s scale, reputation, brand and innovation, it is extremely challenging for competitors to catch up. The strong competitive position allows Brembo to extract premium pricing, leading to double digit operating margins and returns on capital.
Over the last ten years, Brembo has grown revenues by more than 10% annually driven primarily by two factors. First, Brembo has moved from supplying primarily luxury cars to also supplying premium cars. Second, the shift to electric vehicles has been helpful as it has driven premiumisation. To meet demand, Brembo is investing significantly to expand production capacity. Over the next two to three years, Brembo will increase capacity by 10% annually with 80% of the capacity already covered contractually. We believe Brembo’s valuation at 11x price-to-earnings does not account for the company’s entrenched market position and growth profile.
Although it was a relatively poor quarter, the year was the best in the strategy’s history relative to its benchmark. Performance was driven by exceptional earnings growth broadly spread across the portfolio. On a ‘look through’ basis, earnings were 60% higher than 2022 as companies fully recovered from the impacts of COVID. Earnings growth was well above stock performance resulting in the strategy derating from 11x earnings to 9x. Over the last twelve years, trailing ‘look through’ earnings have grown by 14% per annum. To put this into perspective, the Nasdaq, one of the best performing indexes in the world, has grown its earnings at 11% per annum over the same period. The Nasdaq trades on 30x forward earnings; this strategy trades on 8x.
Commentary
It was a strong quarter for equities, albeit more muted performance for the strategy. The relative weakness was mostly explained by disappointing performance from HelloFresh, due to setbacks in its US operations – the US representing over half of overall sales. The US issues were twofold. First, was the delayed ramp-up of their new US capacity. While this has been an interim disappointed, it is not structural, and all issues have now been resolved, allowing for a potential €2bn in sales additional capacity.
The second issue for HelloFresh is more of a concern. We had expected the US meal kit business to return to growth this quarter, as the effects of COVID had now fully run through the business, and operations effectively normalised. However, management issued a warning that they had not seen as much demand in the ‘Back to School’ period as expected, so it is now unlikely the core US meal kit business will return to growth in the near-term. This comes at a time that other retailers, such as Walmart, have also cited weak consumer demand, so it is perhaps more transitory than structural, however it is an issue that we will continue to monitor closely.
Against this backdrop, HelloFresh remains an important holding within the fund, and we still believe it to be materially undervalued. Management appear to agree, announcing a €150m share buyback program, representing about 6% of current market cap. At the group level, they are still guiding to €10bn of sales and €1bn in EBITDA (translating into over €500m in free cash flow) by 2025. This is in the context of a market cap of just €2.3bn which is down 84% from its peak just two years ago. If they get even close to their guidance, it is clearly worth multiples of the current valuation. Regardless, it is still profitable, has a solid balance sheet and trading at about a third of sales – a similar multiple to most traditional ex-growth grocers.
We initiated a new position in Brembo, an Italian manufacturer of automotive braking systems. Founded in 1961 by majority shareholder Albert Bombassei, Brembo is a global business catering largely to passenger vehicles with its key products being brake disks and calipers. Its brightly coloured calipers are behind the wheels of many of the most premium and luxury cars, considered a status symbol among car enthusiasts. Brembo is the clear global leader within this space, enjoying an 80% market share in premium and luxury caliper sales. This includes its positioning as sole supplier to Ferrari and several other Formula 1 racing teams.
The near-monopoly position in high-end calipers is unusual among auto suppliers, traditionally a cut-throat industry. This position has been built over decades, leveraging Brembo’s first-mover advantage in high-end calipers to build global scale in production and research & development. With Brembo’s scale, reputation, brand and innovation, it is extremely challenging for competitors to catch up. The strong competitive position allows Brembo to extract premium pricing, leading to double digit operating margins and returns on capital.
Over the last ten years, Brembo has grown revenues by more than 10% annually driven primarily by two factors. First, Brembo has moved from supplying primarily luxury cars to also supplying premium cars. Second, the shift to electric vehicles has been helpful as it has driven premiumisation. To meet demand, Brembo is investing significantly to expand production capacity. Over the next two to three years, Brembo will increase capacity by 10% annually with 80% of the capacity already covered contractually. We believe Brembo’s valuation at 11x price-to-earnings does not account for the company’s entrenched market position and growth profile.
Although it was a relatively poor quarter, the year was the best in the strategy’s history relative to its benchmark. Performance was driven by exceptional earnings growth broadly spread across the portfolio. On a ‘look through’ basis, earnings were 60% higher than 2022 as companies fully recovered from the impacts of COVID. Earnings growth was well above stock performance resulting in the strategy derating from 11x earnings to 9x. Over the last twelve years, trailing ‘look through’ earnings have grown by 14% per annum. To put this into perspective, the Nasdaq, one of the best performing indexes in the world, has grown its earnings at 11% per annum over the same period. The Nasdaq trades on 30x forward earnings; this strategy trades on 8x.
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