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Henderson European Focus manager loves Carlsberg

06
2017
December

Henderson European Focus manager loves Carlsberg – Henderson European Focus Trust has published results covering the year ended 30 September 2017.

Performance highlights

  • The ordinary share price(1) total return (including dividends reinvested) was 35.9% (2016: 8.6%).
  • The net asset value total return was 21.7% compared to a total return from the benchmark (World Europe ex UK index on a total return basis in sterling terms) of 22.7%.
  • The NAV total return for the five years ended 30 September 2017 was 129.7% compared to a total return from the benchmark of 100.1%.
  • Increased proposed annual dividend: interim and final dividends of 9.00p and 20.50p respectively making a total of 29.50p (2016: 26.4p).
  • Proposed special dividend of 1.40p per share.
  • The shares were trading at a premium to NAV of 1.3% (2016: -9.3%) as at 30 September 2017.

The board has tweaked the investment objective and policy “As part of its considerations on strategy, the Board reviewed the Company’s Investment Objective and Policy. In doing so, we were cognisant of the FCA’s recommendations in terms of clarifying and simplifying the wording used in this type of documentation.  We have taken the opportunity to enhance the Fund Manager’s ability to focus the portfolio and have dropped the lower level of holdings to 45. We have also clarified the level of NAV which should be invested in Continental Europe. The updated Investment Objective and Policy is included in the resolutions which will be put to the 2018 AGM.”

John Bennett’s manager’s report says that, once again, the fund’s year was influenced by a number of mid cap holdings. Particularly strong share price performance came from Interpump (73.5%), Tessenderlo (38.4%), IMA (36.0%) and IMCD (32.8%).

The manager also tells the story of why the fund has a holding in Carlsberg as an illustration of his investment style. “Carlsberg is a company operating in a mature sector: beer is not a growth industry (if measured by the top line). Historically we have avoided owning shares in Carlsberg, not because the industry was mature but because of the company’s strategy: Carlsberg previously thought it could be a high growth company in a low growth industry.  This often results in overreach, usually via acquisitions. Bankers often make the same mistake. In our view that very mistake, fuelled by leverage, is what led the banking system into trouble in the past. It is notable that our ownership of bank stocks is concentrated in those banks who are not in the business of overreaching, neither for yield nor growth, but are happy to stay “boring”. This means they stay largely in their domestic markets, as they prioritise profits over revenue. 

Having met with the management of Carlsberg earlier this year we became comfortable that here was a brewer finally ready to focus on profits rather than revenue. 

Taken from the company’s recent Capital Markets Day, Carlsberg’s margins are a shadow of its competitors’. This is where the mean reversionist gets interested. It is not necessary to believe that Carlsberg can approach the eye watering profitability of Anheuser-Busch InBev (‘ABInBev’). Indeed, the key reason that we have avoided owning ABInBev is that it sports optimised profit margins and a valuation to match. 

We need only get comfort that Carlsberg has a decent chance of nearing the profitability of Heineken. Indeed we firmly believe that this is what is, belatedly, driving the company’s management.  Only in the hands of the right management team will our thesis have a chance of playing out. In that regard it is worth highlighting that the CEO and CFO are newcomers to the group and recent meetings with both have confirmed that the nettle has been grasped. 

Unlike investors in Unicorns, Bitcoin or Tesla the investor in Carlsberg is not required to believe in new paradigms. And unlike such apparently alluring stories, beer is an industry that is unlikely to face existential or technological shocks. We need, therefore, only believe that the “iron law” of mean reversion will assert itself to the profit margins of Carlsberg. We need also to remind ourselves, however, that the commodity most precious to the mean reversionist is the commodity in short supply in modern financial markets: patience.  We shall enjoy a glass of Grimbergen, a monastery beer dating from the year 1128 and now owned by Carlsberg, while we wait.”

HEFT : Henderson European Focus manager loves Carlsberg

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