H1 2024 Portfolio Review

Full portfolio breakdown and discussion of each position

For the first half of 2024, the Superfluous Value portfolio gained 14.2% in AUD. Since I began formally tracking my portfolio in Aug 2018, I have gained a cumulative 75.9% (also in AUD), closely in line with the MSCI ACWI IMI index.

I am opting for a different format than usual today. Instead of any strategic discussion, I will dive straight into the portfolio’s positioning and include a summary of each company and why I own it.

Millicom: Millicom’s largest shareholder Xavier Niel has made a semi-serious offer to buy the company out at $24/share. It’s just not enough for anyone with a cursory ability to value the company- implying 5x EV/EBITDA just as the company is hitting it’s stride, entering a FCF harvesting cycle and is in the process of monetising Lati (the company’s tower portfolio). I would suggest a realistic fair value to be the same 6.2x multiple TIGO paid to buy out its Guatemalan JV partners in 2022, implying $36/share. But even this figure would leave a lot on the table with the growth profile in front of the company.

Cameco: I trimmed half my Cameco into strength at $52/share. It has been the most consequential stock to this portfolio by far. There is still ample fundamental evidence the uranium market is entering a structural deficit and it is very hard to see where the incremental supply could come from. Having said that, Cameco is mostly contracted out at fixed pricing until 2027, so would only be able to significantly benefit from higher pricing from this date. There is also a lot of scope for things to go wrong in mining, especially if you anticipate a significant chunk of your pay-off will happen post 2030 *if* pricing goes the way you hope/expect. I’ll just have to continue meditating on this one. I have considered switching to Kazatomprom or Sprott to reduce valuation or mining risk, but haven’t been satisfied to act yet.

KT Corp: Is another deep value situation without a catalyst. After a period without a CEO last year. The company now has Kim Young-shub who worryingly has talked about his vision to grow KT through “a company-wide AI transformation to innovate into an AICT company (apparently a mash-up of AI, IT and Communications Tech)”. Anyway, I don’t really like the sound of that, but the company remains highly profitable, in an oligopolistic position with a huge subscriber base so will hopefully be okay. KT’s net profit jumps around a bit due to non-operating gains/losses, but it trades for under 7x my normalised earnings and 55% of book with a 6% yield.

Petrobras: Just when the company had a bit of momentum, we saw another leadership change and renewed fears of dividend cuts. Whenever I feel frustrated with my PBR shareholding I simply go back and check out their most recent results. I’m just not inclined to sell a stock under 4x earnings and 3x FCF. We’ll gather more clarity on the dividend policy under Magda Chambriard soon, but my best guess is the halt of special pay-outs, but the continuation of regular dividends.

Babcock International: I trimmed Babcock in the first half, prematurely as it turned out. I followed the Peter Cundill rule of selling half when your initial investment has doubled which it had at 440p. The turnaround is now complete here and I would suggest most of the easy money has now been made. Babcock currently trades for around 13x my estimate of normalised eps and I will likely be moving on to the next idea if it reaches 15x.

Lloyds Bank: Investors today get to buy a high-quality, over-capitalised bank that was built on the suffering of post-GFC shareholders over a decade. Government support has been repaid, the PPI scandal is tidied up and in 2023 Lloyds paid out a shareholder yield of 11% of its current price and achieved an 11.5% ROE. This will likely continue. The balance sheet is now pristine and the loan book looks highly conservative, yet this situation can be bought for <6.5x earnings. I’ve already had a double out of this one, but still see good upside ahead.

Antero Resources: North American natural gas is some of the cheapest energy on the planet presently and yet demand is set to continue rising for decades, some of the main fields are rolling over and inventories aren’t historically large considering a couple of warmer recent winters. Antero remains the best way to play this trend in my view. The company has transformed itself from the brink of bankruptcy in 2020 to a survivor with net debt to 2023 EBITDA of around 1x, even in a miserable year for the industry. Antero’s upside should be impressive whenever Henry Hub nat gas perks up again.

Telefonica Brasil: My sleepy little find the investing world couldn’t care less about. The company continues to execute quite effectively and trades for under 4x EV/EBITDA with a 7% yield. Unfortunately management talks about buybacks on their calls, but only buys a percent or two back each year. The BRL also hasn’t helped over H1. Regardless, I believe situations like this should work out given enough patience, so I’ll wait it out for now.

Liberty Latin America: Finally seems to be getting some traction and has been very aggressive on the buyback/de-leveraging front. It’s quite a mountain of debt to get through, but if they can chip away at it, as well as grow profitability with GDP, it should accrue some very nice gains to the equity. There is no doubt LILAK has been a money pit for my portfolio, having originally entered in 2018 at twice the price, but I see signs of the turnaround bearing fruit now. Transferring their Chilean operations into an off balance sheet JV was a good move and seems to have significantly freed up FCF. This week, the company has gone a step further and said it will step back from adding further capital to Chile and allow it’s interest in the JV to fall from 50% to 9%.

Pan American Silver: is a complicated value proposition. The company recently diluted shareholders to buy substantial gold assets from Yamana, I would argue at an attractive price, but still an interesting decision for a company that describes itself as the world’s premier silver miner. The financials are messy, due to a large exploration and development pipeline and aggressive growth strategy. All of these factors have contributed to the stock underperforming the already woeful precious metals sector in recent years. But the future is bright, the company is buying back shares and a decision is expected on the reopening of their Escobal mine in Guatemala later this year, which is given no credit in the share price, but would add one of the world’s most significant silver mines to the financials.

Hysan Development: Hysan is a deep value situation, selling for under 20% of book value and a 9% yield. It entered the portfolio in the first half as sentiment towards HK property became and remains ridicuously negative, in my view. Its portfolio is high quality and focused on the Causeway Bay area of HK and the controlling Lee family have shown themselves to be safe stewards of capital over time. There are a lot of scenarios where Hysan’s property values are impaired but investors still do very well from these valuations.

Osisko Mining: Is an extraordinary situation. You can buy an outstanding deposit, run by proven people, with huge upside optionality, with no further dilution required to first production and which is now buying back shares for 3x 2026 cash flow. Osisko’s first pour at Windfall is scheduled for H2 2025 or H1 2026. Their share (50%) of what should be 306 Koz/year would equate to $230m of cash flow annually given their projected AISC of <$800 and the current gold price. Osisko’s market cap is currently only $730m. These cash flows are likely to run for multiple decades and further optionality exists with their vast exploration rights in the Urban-Barry district, much of which shows similar geology to the Windfall area. Osisko has more 10-bagger potential than anything else I own.

Jardine Matheson: Another deep value situation I have been early on. Jardine sells for 6.5x earnings, 36% of book and pays a 6% dividend. A wiser friend described the company as the “Berkshire of Asia” and while many Buffetteers would scoff, the company is an extremely diversified and cheap tax collector on the inexorable rise of the Chinese and wider Asian middle class. I expect management to continue in their solid, but unspectacular tradition and market sentiment to turn at some point.

Barrick Gold: Barrick is a collection of excellent quality assets, diversified across several hairy jurisdictions, held together with remarkable skill by Mark Bristow. Late last year saw the re-opening of their Porgera mine in PNG after several years of negotiation, only for it to close again in May due to landslides on the access highway. Not helping perceptions, Barrick is currently sinking large amounts of capex into their Pakistani copper-gold project Reko Diq. If any company can make this work it will be Barrick and the rewards would be vast- time will tell. In the meantime, Barrick sells for 1.25x book and 8x cash flow. Both near the lows of their historical range. It’s time for Barrick to lead the industry and show they can turn this bull market into decent shareholder returns.

CK Hutchison: Added to the portfolio in H1 on extreme HK weakness, it is another deep value situation trading for 25% of book, under 7x earnings and a 6.5% yield. I’m not sure how this one will work out, but the valuation is certainly compelling. Interestingly, a large portion of CKH’s business is based outside HK/China, with significant infrastrastructure and telecom assets throughout Europe and the world. The company also owns a 17% stake in Cenovus Energy which is worth around 1/3 of CKH’s current market cap (although there is significant debt in the structure as well).

Impala Platinum: Was another H1 purchase as the platinum market spiralled out of control. Yes, the company has major assets in South Africa and Zimbabwe, but it also has significant net cash and a history of operating these assets effectively. Even in a miserable 2023, the company still generated 14bZAR which equates to a mere 4x EV/FCF (after subtracting net cash of 25bZAR). The hatred of the PGM sector is so visceral currently, any turnaround could be explosive and Impala seems a stable and well-run company to wait in.

Aimia: Where to begin? Such a disgraceful case of value destruction by a group who should have had more (any) integrity and known better. Aimia managed to accrue corporate costs of $50m in 2023 on what is now only a $200m market cap. I voted with activist shareholder Mithaq Capital for this year’s AGM, but apparently not enough fellow investors felt enraged enough about their money being set on fire to restore shareholder-minded leadership at the company. This letter from Mithaq sums up the abuses of the current and recent leadership nicely. A buyback program has now commenced, so I can only cross my fingers a corner is being turned.

First Pacific: Management are doing good things here. Group debt has come down significantly, they bought out their unowned stake in MPIC at a great price and profits are reaching record levels as the pandemic recovery continues. The company trades for 3x earnings and pays a 6.5% dividend. It’s products are also mostly defensive making it a very easy hold.

CBD: Is an undersized and neglected component of the portfolio. The buyout of Exito gave me a 60% return on my investment in under a year and I essentially own CBD for free. The company decided to delist from the NYSE earlier this year, which was probably a fair cost-saving call, but triggered a wave of forced selling the price is yet to recover from. I am reluctant to add without a much deeper knowledge of the Brazilian supermarket environment than I possess. The company is hell-bent on de-leveraging having pushed through a heavily dilutive equity raise in March which brought down net debt to unneccessarily low levels of .4x EBITDA (ex-IFRS). The company sells for a ridiculous <2x EV/EBITDA (again ex-IFRS) and operations seem to be improving, so I’m inclined to let it develop.

Saipem- exited: This was an incredibly satisfying outcome. Longer-term readers will be familiar with my 2021 purchase only to be effectively wiped out when the company royally screwed up a couple of projects soon after. The asset value was still substantial, so I swallowed my loathing and participated in the restructuring equity raise that left the company debt free. I was able to exit in April having made back all the money I lost in the initial blow-up. I always think that most of successful investing is avoiding big losses, so clawing out of this one was a good result.

Cash: levels increased over H1, mainly due to my Cameco and Babcock trims, my exit of Saipem and the buy-out of Exito. The buying of CK Hutchison and Hysan as 4% weightings and Impala at 2% weren’t enough to outweigh these inflows. I am excited to deploy these funds as opportunities arise, but am happy with a decent cash buffer under present conditions.

Summary

It was a solid half. I am happy to have the opportunity to recycle some winners into the hated sections of the market, namely precious metals miners and asset-heavy Hong Kong companies. Feedback on any names mentioned is very welcome and I look forward to updating you at the end of the year. Thanks for reading and good luck to all.

Guy

PS. I have decided to remove myself from social media, so no longer have my @dodgingalpha account on Twitter. If you would like to reach out, please do so through Substack. I remain as keen as ever to discuss stocks.

I own positions in all the companies listed in the portfolio.

PS. As always (and especially when I'm mentioning so many stocks), this isn't investment advice. Please do your own due diligence and seek professional advice if you're unsure about your finances.