A professional investor tells us where he’d put his money. This week: Joe Bauernfreund of the British Empire Trust highlights three overlooked bargains
At Asset Value Investors, the managers of the British Empire Trust, we seek out companies that are overlooked, unloved or ignored by mainstream investors. This leads to pricing inefficiencies and, we believe, the potential for outperformance. These companies are not priced inefficiently because of their inferior quality; they have been marked down as a result of particular circumstances that are unlikely to persist.
Three companies we are especially excited about highlight situations that tend to produce such temporary undervaluations: inefficient balance sheets in Japan, complex holding structures, and out-of-favour companies with catalysts for a re-rating.
Lift maker in bargain basement
Fujitec (Tokyo: 6406) is a global lift manufacturer with sales in Japan, China, Southeast Asia, North America and Europe. The most appealing aspect of the business is the maintenance contracts for the lifts. These last for decades, producing steady, recurring profit, which explains why Fujitec’s global peers trade on EV/EBIT multiples approaching 17. However, Fujitec, which operates the same business model, is on a multiple of just five. Fujitec’s balance sheet is hugely overcapitalised, which means we are, in effect, investing 58% of our capital in cash and listed securities and gaining exposure to a high-quality, profitable operating business at a low valuation – all the while receiving a 3% dividend yield.
A Brazilian sugar daddy
Cosan Limited (NYSE: CZZ) is a US-listed holding company for Brazilian billionaire Rubens Mello – dubbed the Sugar Daddy. Through stakes in two listed Brazilian holding companies, the group is exposed to a wide variety of Brazilian businesses, including fuel distribution, sugar and ethanol production, rail logistics and gas distribution. These companies have performed well in a turbulent economic environment, with first-class management focused on generating shareholder value.
However, the complex holding structure has created discounts on discounts, leading to an extraordinary group discount to intrinsic value of 55%. Management has begun share buybacks and ultimately aims to simplify the structure to eliminate the discounts. With our target discount of 25%, Cosan Limited offers almost 70% upside purely from discount contraction.
Manager back on track
Pershing Square Holdings (LSE: PSH) is a London-listed closed-end fund managed by high-profile US activist investor Bill Ackman. At the time of PSH’s listing, the manager had built up a very strong track record, generating an annualised net return of more than 20% over ten years. The opportunity to invest in PSH at a discount is due to Ackman’s disastrous investment in Valeant, a Canadian pharmaceuticals business. Still, our analysis of PSH’s current portfolio implies ample up-side from an attractive collection of quality large-cap US stocks, while our research into the manager’s historic investments showed what an unusual investment Valeant was. Crucially, we think it is untenable for Bill Ackman to preside over a vehicle trading at a wide discount to net asset value given his own activist credentials.