Sohn Monaco Conference 2019

Ideas inspired by ESG, recovery stories, cloud and internet

Conference review by Hamlin Lovell
Originally published in the August 2019 issue

At the third annual Sohn Monaco Investment Conference, four European, three US and one Asian investment idea(s) were presented by eight fund managers. Two of these have offices in Monaco. The event, held at Monaco Yacht Club, was generously sponsored by Churchill Capital; Compagnie Monégasque de Banque; SSVL; Tavira and Monaco Asset Management. A number of other fund managers, allocators, family offices and other local companies also attended.

Jean Castellini, Minister of Finance & Economy, for the Principality of Monaco, opened the conference by explaining how ESG criteria can be applied to investing without sacrificing returns. Monaco has a green fund for sustainable initiatives inside Monaco and is also carrying out some impact investing outside the principality. This is part of a wider drive for sustainability, which has included CleanEquity Monaco, which HSH Prince Albert II of Monaco co-founded with Mungo Park; a new Global Award for Sustainability and a Global Green Investment Bank.

Two investment ideas presented were growth stories with an ESG angle.

Monaco has a green fund for sustainable initiatives inside Monaco and is also carrying out some impact investing outside the principality.

Could a fuel cell maker be on single digit 2022 PE?

Hydrogen is perceived as a very clean and green power source, with no radiation or pollution and it also has 100 times the energy density of lithium. Rapidly growing supply lays the ground for a runway of growth. Odey Asset Management portfolio manager, Adrian Courtenay, has identified Plug Power shares as a key play on the growing use of hydrogen fuel cells for forklift trucks, where the firm’s GenDrive suite of products has a 95% market share. According to Courtenay, the addressable market for forklift trucks is 200 times greater than the current installed base of 23,000 units, while the total market size including delivery vehicles could be 1,000 times greater. He projects that Plug Power could be trading on a single digit multiple of projected 2022 earnings, after stripping out the cash on its balance sheet. Courtenay, who previously worked for the event-driven group at DE Shaw, runs a special situations strategy, which since 2016 has compounded annual returns of between 13% and 27% for different versions of the strategy.

Could SAP’s cloud migration support close to a tripling of free cash flows by 2023?

Man GLG portfolio manager, Rory Powe, points out that SAP is a rare beast as a global technology leader based in Europe: it is the world leader in enterprise software, and is roughly twice the size of the next largest player, Oracle. Powe is an award-winning fund manager with 30 years’ experience focused on European growth stocks, and believes SAP could be well-positioned for the future.

Powe points out that cloud subscription revenues, now at €5 billion or 20% of the business, could significantly increase as customers are migrated to the cloud-based S/4HANA suite. Moving to the cloud has temporarily depressed SAP’s gross margins, but Powe sees recovery potential in platform convergence. Were sales and marketing and G&A costs to grow slower than revenues, non-IFRS operating margins could well expand over the coming five years. Projections show that a tripling and doubling of annual free cashflows and EPS to €7 billion and €8 billion by 2023 could be one outcome, the latter contingent upon the firm returning more than €15 billion to shareholders via share buybacks over this period. Powe sees positive indicators for the resilience of such growth, with customer loyalty seeing 94% renewal rates, while “predictable” revenues from software support and cloud subscriptions could foreseeably represent a significantly higher proportion by 2023 than the approximate 65% today.

Could a Scandinavian spin-off unlock hidden value?

Sterling Strategic Value (SSVL) investment committee member, Dr Giulia Nobili, argued that Helsinki-listed Cramo is undervalued on a sum of the parts basis, and that financial markets should recognise the value of Cramo Adapteo when it is spun off and listed on Nasdaq Stockholm in 3Q 2019. Some 72% of the firm’s revenues come from Cramo’s leading position in equipment rentals, but hidden value lies in the 28% of revenues that come from Cramo Adapteo’s modular space business of relocatable buildings. These are mainly used for schools, municipal offices, day-care centres and accommodation, and the market is expected to grow by 9% per year over the next five years. Visibility is good with 67% of the customer base being environment and public service entities, which are committed to two to five-year contracts. Demographic factors in key markets bode well for Adapteo: Sweden’s population continues to grow, especially in large cities, while urbanisation in Finland is also spurring demand. Using the valuation of listed comparables, SSVL estimates share price upside of 30-75% depending on what EV/EBITDA multiple is ascribed to Adapteo when it lists on the Stockholm exchange. Shareholders of the firm include SSVL and Europe’s biggest private equity fund, EQT. SSVL – whose managing director, Louise Curran, formerly co-founded Knight Vinke Asset Management – has been pursuing activist investing in European small and mid-cap companies since 1999.

Pediatric Cancer

The Sohn Conference Foundation has raised over $90 million for children’s cancer research and treatment over the past 24 years. Its 11 conferences in 10 countries support local charities. For instance, one institution that has received funding from Sohn Monaco is the EU academic Consortium for Innovative Therapies for Children with Cancer (ITCC). Its President, Gustave Roussy’s Head of Clinical Research Professor Gilles Vassal, explained how pediatric cancer is the key cause of death after accidents, claiming 6,000 children each year in Europe. But it is not receiving enough attention: the paradox is that 1,000 drugs exist, but most do not work for children. The pediatric strategy forums, partly funded with donations made to Sohn Monaco, combining regulators, drug companies, patient advocates and others, are prioritising the choice of drugs and developing a dialogue over new types.

Could a post-bankruptcy oil services stock exploit a recovery in offshore oil services?

Altana Wealth, which was co-founded by Lee Robinson, has offices in Monaco and London. Steffen Dietel, portfolio manager of the Altana Distressed Opportunities Fund (ADOF), is currently focusing on offshore oil and gas. He scents deep value in the oil services sector, which has seen a feast and famine cycle that could be improving now, with Production Sharing Contract (PSC) term rates having troughed two years ago. His preferred pick is US-listed Tidewater, which has the largest vessel count of Anchor Handling Tug Supply (AHTS) and Platform Supply Vessels (PSVs). He expects that Tidewater which has exited Chapter 11 bankruptcy, has balance sheet strength that should provide a competitive edge over rivals that are still going through restructurings. The bullish case is that applying peak EBITDA to historical average valuation multiples would result in 50% share price upside. And even under bearish scenarios, he expects Tidewater should survive while rivals may perish. Before joining Altana, Dietel previously managed cross asset portfolios at Laidlaw Capital Management.

Could debt of a post-bankruptcy support services firm generate recoveries double or even quadruple its price?

Carillion is one of many UK support services firms that has run into trouble due to aggressive accounting. A number of hedge fund managers – including Kairos Investment Management Limited, who also spoke at the Sohn Monaco event, and Bodenholm Capital, which has spoken at the Sohn London conference – have publicly disclosed short positions in the equity of what in January 2018 became the UK’s largest trading liquidation. Tavira’s CIO of TCV Management, Alexander Paulick, is not a short seller, but rather seeks deep value in special situations including post-bankruptcies, which he believes are an inefficient and under-followed market. Such claims can generate returns uncorrelated with financial markets.

Paulick has acquired bonds, as a proxy for unsecured claims on Carillion, at prices around 2% to 2.5% of face value. Considerable uncertainty remains over how much may be recovered from Carillion; administrators refused to handle Carillion, because they were not confident about getting paid! But Paulick’s analysis gives him some confidence.

In the absence of management statements and real time data – and a lack of visibility over which assets may have been pledged sold or disappeared – there is indeed considerable uncertainty about possible recovery rates, but Paulick finds the paper attractive even under the low-case scenarios he has mapped out. The company had assets of over £5 billion, and only £100 million or 2% of that would need to be recovered for Paulick to break even on the trade.
He has examined assets such as receivables, joint venture stakes, and various claims, and applied a deep discount to them. He has also scrutinised liabilities, including financial debt, pension liabilities and off-balance sheet liabilities, which include payables, invoice financing and possibly intercompany debt. Some of these liabilities might even be double counted.

Paulick’s low case scenarios for both assets and liabilities would lead to a recovery of 5.2% and his high case for both would result in a recovery of 10.4% (before costs in both cases). As such, Paulick would expect to make a multiple of capital invested of between two and four times, over a three to five-year period. He expects that the bonds could start to reprice when a detailed liquidator’s report is published. Paulick has previously worked at Elliott Advisers (UK) Limited, and Avenue Capital. Tavira offers his special situations distressed strategy in a limited life, closed end fund structure.

Should an educational products maker be revalued as a defensive growth stock?

Kairos’s co-founder and CIO, Guido Maria Brera, reckons that Italian-listed FILA has seen its valuation unfairly de-rated, and should be due some re-rating. FILA’s educational products business has been in the hands of the Candela family since 1954 and has demonstrated one of the most defensive growth profiles of any company: solid organic sales growth of 4.5% with very low correlation to the business cycle.

The firm has been steadily making annual acquisitions since 2015. It has de-rated partly due to concerns over the acquisition of Pacon Corporation, and also because some of its divisions importing from China and Mexico are vulnerable to tariffs. These fears have compressed the valuation from a PE ratio of 20 to 11-12, and 8.5 times EV/EBITDA, with a 9% free cash flow yield. Brera expects that the firm can tackle tariffs by switching some of its sourcing to India. He also projects that FILA’s organic growth should soon revert to its historical averages and predicts a total shareholder return of 20% over the next two years, from a mix of earnings growth and valuation re-rating.

Are Chinese internet stocks at the trough of the cycle?

GAM Investment Management portfolio manager, Jian Shi Cortesi, has been watching the cycles of Chinese internet stocks since the late 1990s. Chinese internet has become the biggest digital economy in the world, thanks to mobile ownership, public infrastructure, and entrepreneurship. Internet companies have steadily grown two or three times faster than China’s economy, but their share prices have been very much more volatile. Cortesi has identified valuation, expectations and sentiment as the key drivers of three major share price cycles, which have seen upswings of 140-190% appreciation, and corrections retracing 30-40% of that. As of May 2019, a basket of internet stocks including, NetEase, Weibo,, TAL Education Group and iQIYI is 41% below the peaks reached in June 2018. Cortesi judges that a good entry point has been thrown up, and this basket could have 100% upside.

Does behavioural finance suggest that the US equity bull market has legs?

Jeremy Touboul, Partner and Senior Investment Manager of Natixis affiliate, H2O Asset Management, explained how behavioural finance has contributed to H20’s investment process. Investors are influenced by both logic and emotion, and markets can move through phases of discovery, scepticism, enthusiasm, pragmatism greed and fear. H20’s technical analysis, including Elliott Wave theory, suggests considerable upside risk in US equities. The US market did indeed make a new high a few weeks after the Sohn event.

Disclaimer: The organisations and/or financial instruments mentioned are for reference purposes only. The content of this material should not be construed as a recommendation for their purchase or sale.