It’s worth digging around amongst the carnage of the last few days to pull out some interesting stories in the funds’ space.
First up Amedeo Air Four Plus, ticker AA4. Over the last week, its down a stonking 43% and currently trades at just 40p. Only a few weeks ago investors were celebrating a deal that involved selling planes back to the airline Emirates.
Today brought some terrible new news. According to Liberum Amedeo has “received a written approach from Thai Airways, to whom it leases four A350s, as to how it could support the airline given the current market backdrop. The board of AA4 is discussing the terms of any possible support. Thai Airways is currently up to date on its lease payments.”
Thai seems to be in terrible trouble. According to Liberum, Thai Airways is majority-owned by the Thai Government (51%) and the second-largest shareholder is the state-backed Vayupak Fund (15%). Thai Airways has a total fleet of 103 active aircraft of which 71 are leased. Thai Airways reported a Bt12.0bn ($375m) loss in 2019, wider than the Bt11.6bn loss it reported in 2018. Revenues declined 7.8% year-on-year due to a 0.9% reduction in RPKs (Revenue Passenger Kilometres) and a 6.8% fall in average passenger yield. On 31 December 2019, the airline had Bt21.7bn of cash and a total debt to equity ratio of 20.8x (12.5x interest-bearing debt to equity). The debt ratios increased significantly during 2019. The CEO resigned last week following the 2019 results.
This news shouldn’t come as a great surprise to investors – the airline industry is clearly in utterly desperate straits. Amedeo’s fleet comprises 12 aircraft of which most are leased to Emirates (6 A380s & 2 B777s) but Thai Airways also has 4 A350s.
“Based on the acquisition price paid and the remaining term on the leases, we estimate Thai Airways accounts for c.24% of the AA4’s remaining contracted income. The approach from Thai Airways also explains why AA4 has still been considering its options for the £130m of net proceeds from the sale of two A380s to Etihad, given the potential need to retain capital to maximise balance sheet flexibility.”.
I can’t help but think that this might be an attractive entry price for contrarian investors. Liberum has earlier estimated that the fund might be about to return the equivalent of around 30p a share, so the current share price looks a tiny bit anomalous.
Next up we have stand out hedge fund outperformer Pershing Square. Over the last week, this fund has seen its share price increase in price by 1% to date. Over the last month it is still down 12%. Why the positive number? Pershing has been active hedging its portfolio.
Here’s Matt Hose of Jefferies report on the latest NAV numbers which show that net assets were up 10.6% from the prior month-end valuation and was also substantially ahead of estimates, even taking into account the earlier announcement that it had recently acquired ‘large notional hedges which have asymmetric payoff characteristics’.
“We don’t have any visibility over the ‘various hedges’ but in all likelihood out-of-the-money options have been purchased (our guess is S&P 500 puts and/or VIX calls), that now have a lot more moneyness, so much so that market losses from the nine portfolio companies were more than offset. Together with the near-term uncertainty while we await the next NAV report, the initial result is a widening of the discount, with the shares closing Friday trading on a 40.5% discount to the published NAV. However, if we attempt to look beyond current events, this shrewdly-judged protection of capital immediately following a +58% NAV year, will further enhance the fund’s investment case and aid the ultimate contraction of the discount.”
With a strong portfolio of quality, high beta US large-cap equities and a still sizeable discount to NAV this looks like a completely compelling bullish investment idea.
Last but by no means least yesterday saw a dramatic decline in the share price of Schroder European Real Estate fund. Over the last week its down 30.7% and even today it’s still ticking down 2.44%, at 68p. One would reasonably expect that a European focused property fund might have a tough time given the lockdowns, but the sheer severity of the sell-off seems a tad drastic to me, given that the NAV was recently reported at 118.p which was, in turn, a 1% uplift over the previous quarter. One senses that there might be a big forced seller or two lurking out there, pushing the price down very aggressively.
Only a short while ago we saw numbers that suggested a Q4 NAV total return of 2.4%, with a portfolio valuation of €246.3m, an increase of 2.0% over the quarter adding 2.7c to NAV (+2.0c, 1.1% net of capex). In terms of geographical exposure, France comprises the biggest wedge of assets at 44%followed by Germany at 30% and the Netherlands at 17%. Office-based assets represent 47% of assets with retail at 26%.
Investors might possibly have been spooked by the fact that the dividend was only 88% covered from income in the period but according to Numis the fund’s management had “flagged a temporary reduction in cover as it undertakes asset management activity across the portfolio, the most significant of which is the refurbishment of the Paris office property Boulogne-Billancourt. These initiatives are expected to improve the longer-term income profile.”.
As of 31 December 2019, the portfolio comprised 13 properties located in growth cities of Continental Europe, independently valued at €246.3m at a blended net initial yield of 5.9%.
Here’s Numis’ view on the fund from a few days ago:
“Schroder European Real Estate has reported a solid performance in Q4 as management continues to make progress with asset management plans. While there is a temporary reduction in dividend cover, this was well flagged and reflects the impact of asset management activity being undertaken across the portfolio. The current share price of 106p represents a discount of 10.8% to the latest NAV with a prospective yield of 6.4% at current FX, an attractive valuation for exposure to a high quality, diversified European portfolio.”
With the discount closer to 50% at the moment, my suspicion is that the fund represents fairly compelling value.