Two quick updates on previous favourite investment ideas.
The first is our bullish long-term position on uranium, via AIM-listed Yellow Cake (which I own). Thanks to Ocean Wall for this update from analysts at Canaccord, who have upgraded their price estimate to US$60/lb (from $50/lb). The note is below:
“The acknowledgment of nuclear’ s critical role in providing cost-effective emissions-free baseload power has been slow in coming, but has now gained momentum. This has reduced the risk of accelerated plant closures in OECD nations and continues to drive growth in developing nations. Accordingly, Canaccord have increased their demand growth to 2.6%pa to 2035 (2.3% prior), a forecast which excludes any potential positive impact from small modular reactors (>300MW), which are garnering increased attention globally.
Primary supply remains under significant pressure, a situation which has only been compounded by the shutdown of Ranger in January (produced 3.5Mlb in 2020) and Cominak in April (approximate capacity 3.9Mlb). While the re-start of Cigar Lake (18Mlb) should provide some welcome near-term relief, they continue to expect a supply deficit of ~25Mlb in the 2021 uranium market, which follows on from a 25Mlb deficit in 2020 (CGe). Canaccord estimate that over the last five years mine capacity has been reduced by ~45Mlb/year, and this is before any consideration of COVID-19 related disruptions.
Lastly Canaccord acknowledge the fact that the incentive price for Tier 1 development projects (i.e., Arrow, Wheeler River) is below their long term uranium price, they note that these projects have significant upfront capital costs (in addition to outstanding permits). Based on their discussions with management, they do not expect these projects to be sanctioned at a price below US$50/lb. Their supply demand forecasts also indicate that these projects alone will not be sufficient to meet growing long-term demand.”
Next up is one of our Dynamic 35 funds, Oakley Capital Investments. The last time I looked the share price was 317p, on a discount of 21%, and yielding 1.4%. We’ve just had a portfolio update and here are two broker analysts’ notes on the update. First off Matt Hose at Jefferies.
“Digital focus: The digital focus of the portfolio was made very apparent. On an overarching basis, more than 70% of the portfolio delivers products or services digitally. A similar proportion of the portfolio has subscription-based or recurring revenue, understandably heavily overlapping with the digital investments in terms of individual holdings. In this context we would once again point to OCI’s 11.8x EV/EBITDA multiple on its portfolio (at 31/12/20) as conservative. While we would not expect to see much movement here, the upside to the valuations is likely to be captured upon exit, something that is also reflected in the many deals still held at, or close to, cost. We also note the holdings that fall outside of both these categories (i.e. non-digital/non-recurring) are some of OCI’s more challenged investments, such as North Sails and Iconic BrandCo, which have both suffered from the impact of COVID.
“Specific holdings/pipeline: Turning to specific holdings, the opportunity in the recent investment in idealista was articulated as underpenetration/undermonetisation of the online real estate classifieds in Southern Europe. In particular, combining with Casa to challenge for market leadership in Italy. This offers the potential to turn the €1.4bn entry valuation into a €3bn+ business. We feel the strength of the investment thesis is important here as Oakley lacks control, with EQT as the lead investor. A useful strategic update was also presented on North Sails, with all business lines showing signs of progress. Lifestyle, comprising of apparel and action sports brands, and acting as the driver of growth, appears to have an aggressive recovery in EBITDA budgeted for 2021. However, OCI could be rewarded with a similarly aggressive exit valuation (of 18-30x EV/EBITDA) if this can be achieved. On the deal pipeline, five out of nine opportunities are in the technology sector, highlighting Oakley continues to be able to use its extensive network to source deals in this ‘hot’ area of the market.
“Closing the discount: Encouragingly, there are only two red ‘traffic lights’ remaining regarding the progress in the vast number of initiatives aimed at addressing OCI’s legacy issues and therefore the discount. These are monetising the direct investments, comprising the North Sails debt and Time Out equity (together 18% of NAV), and moving NAV reporting from a bi-annual to a quarterly cycle. On the former, this is expected to be achieved over the next 12-24 months, being cognisant of the recent strength in Time Out’s share price (+70% YTD) following its oversubscribed placing. On the latter, we would expect the move to quarterly marks within the underlying Oakley funds to occur much sooner. For now though, the stale year-end NAV, coupled with the likely strength in valuations over Q1, points to an actual discount wider than the current 22.7% headline discount.”
We finish with Liberum’s conclusions:
“ The manager continues to source attractive investments away from traditional auction processes across its three core sectors. Digital business models account for 76% of the portfolio, helping to drive 20% EBITDA growth in 2020. OCI has delivered the highest NAV return in the listed private equity sector over the last three years and yet remains on one of the widest discounts. We see considerable upside for the shares through consistent NAV growth and a narrowing of the discount.
“In our view, the strong outlook for the portfolio and NAV returns remains underappreciated. Given how the portfolio is positioned and the potential for consistently high NAV returns, we would expect the shares to re-rate from the current 22% discount to NAV. This is close to the widest discount of the private equity funds (excluding those that are in realisation). OCI’s discount is also based off the December NAV and many of the peer group have reported strong uplifts for Q1 2021 as well, indicating further latent upside in OCI’s NAV.”
The graphic below from Liberum nicely sums up the value opportunity. My sense is that a discount of 15% is where the shares will end up, even assuming NAV stays the same.