During June, the Fund outperformed its benchmark by +1.89%, however it made a small loss of -0.64% on an absolute basis. The Fund finished the first half of 2017 up 17.63% on an absolute basis, outperforming its benchmark by +10.59%.
In spite of Macron’s victory in the French legislative elections, and supportive economic data for the global economy, European capital markets pulled back during June and gave back part of the gains from H1 during the last weeks.
In the context of general valuation levels in Europe and in anticipation of macro risks flagged by the adviser’s fundamental work, the Investment Adviser adopted a more cautious stance during recent weeks and decided to raise the cash level above the 15% mark. This positioning on the one hand enabled the Fund to reduce the potential drawdown, while on the other hand positioned the Fund to take advantage of the improved fundamental valuations resulting from declines in the market.
As is often the case in market volatility, the fundamentals of the Investment Adviser’s less crowded positions allowed the fund to overcome some of the short term market pressures. The largest contributors to the Fund’s monthly performance were Albioma, followed by Boozt (see May 2017 commentary) and Spie respectively. At the other end of the spectrum, Jacquet Metal, Tarkett and Alten SA were amongst the main detractors. The Investment Adviser’s view on their valuations has not changed. The number of positions remained constant in May as the Fund disposed of its investment in Corticeira Amorim (having reached its price target), and initiated a new position in Balta Group through an IPO.
Balta, which is based in Belgium, is one of the leading European manufacturers of soft flooring, which includes rugs for the consumer home furnishing market, as well as broadloom and carpet tiles for the residential and commercial markets. In the European commercial market, Balta is positioned as the number 3 player just behind Tarkett. The Investment Adviser has been following Tarkett for 4 years and the Fund has been invested since inception in May 2015. In addition, the Investment Adviser knew Balta’s recently appointed CEO from his previous experience as a CEO of Brussels listed, Deceuninck.
The Investment Adviser felt that the IPO process was not managed optimally by the syndicate, similar to Unieuro recently. In his opinion, too much emphasis was put on the risk linked to the exposure to the UK market via their residential carpets business unit, whereas key strengths of the company were underestimated. In the Investment Adviser’s opinion these strengths are: 1) the vertical integration with highly automated manufacturing sites with their own yarn production, reducing sensitivity to raw material prices and improving cost competitiveness and 2) a number 1 position in machine-made rugs in Europe (Balta for instance manufactures a third of all rugs sold by IKEA). According to the Investment Adviser’s assessment, the rug business is far less cyclical: not only did it report a 7.5% CAGR over the past 15 years, but it also grew in 2008 and 2009.
Going forward, Balta wants to use the IPO proceeds to reduce its debt burden and continue the consolidation within its 3 existing business units, which the Investment Adviser fully supports and feels is accretive to its valuation. Current market valuation multiples stand below 10x EV/EBIT for 2017 and 8.5x for 2018, indicating a substantial discount compared to the peer group and the Investment Adviser’s fair value estimate.
The views and statements contained herein are those of Pascal Investment Advisers SA in their capacity as Investment Adviser to the Fund as of 06/07/17 and are based on internal research and modelling.