RDR Capital 1Q17 portfolio update

RDR Capital’s MENA portfolio is down 0.5% in 1Q17 and up 15.4% since inception (the portfolio was incepted on the 1st of October 2016). Our global portfolio is up 0.9% in 1Q17 in GBP terms (up 3.0% in USD terms) and since inception (the portfolio was incepted on the 1st of January 2017).

The MENA portfolio struggled during the first quarter of 2017

The Middle East and North Africa (MENA) portfolio struggled during the first quarter of 2017, after a very strong performance in the previous quarter, as oil prices were under pressure during the quarter.

The portfolio was supported by a strong performance from Aramex, the logistics market leader based in the UAE, on the back of strong 4Q16 results and a positive outlook for 2017. We remain positive on the prospects of the very well managed Aramex and it remains one of our key holdings in the MENA region. Future growth in Aramex’s revenues is expected from both organic sources like growth in ecommerce (especially in Saudi Arabia), as well as potential strategic acquisitions with a focus on start-ups and technology firms that concentrate on last-mile delivery solutions. Aramex’s strong operational performance is supported by a strong balance sheet (net debt to EBITDA of -0.1x as at year end 2016) and management policies supportive of shareholder value creation. In addition, the launching of Noon and the acquisition of Souq.com by Amazon are likely to boost the growth in ecommerce over the medium term, and Aramex is well positioned to benefit from this growing market.

We have also initiated a position in Savola Group during 4Q17. The investment case is compelling due to the attractive valuation of the Group’s shares.

In the real estate sector, the Saudi government started levying the tax it imposed on undeveloped land (the “white” land tax) in the kingdom. The 2.5% tax on the value of the land will have to be paid within 12 months, as such we expect the financial impact to be felt in Akaria’s 2H17 results and onwards. It is difficult to estimate this financial impact, however Akaria’s shares were negatively impacted when the tax news was first released, so a significant part of the impact is already in the share price. Therefore, we maintain our investment in Akaria due to the nature of its operations and its material exposure to recurring income streams from its investment properties portfolio (rental income represented 100% of the company’s revenues in 2016).

We continue building our global portfolio

We continue building our global portfolio. The portfolio performance was dragged down slightly by our long volatility and leveraged short positions, despite the fact that these are very small positions representing c2.4% of the portfolio. In addition, the cash drag remains as our cash position still represented c69% of the portfolio at quarter end. We are still struggling to find value in global markets at current levels.

It has been an interesting quarter for some of our global portfolio holdings. Unilever, one of our core holdings, was approached by US-based Kraft-Heinz (backed by Warren Buffett’s Berkshire Hathaway and Brazilian private equity group 3G Capital) for a deal to create one of the largest consumer goods producers globally. However, the deal fell through within 2 days as Unilever’s management was hostile towards any potential transaction. Although a deal would have generated significant returns in our portfolio, we remain positive on Unilever’s prospects and it remains one of our core holdings. In addition, we believe that the failed bid will push Unilever’s management to accelerate cost cuts to boost margins as expected (and demanded) by the company’s investors, boosting the company’s valuation in the medium term.

On the flip side, another one of our core holdings, Reckitt Benckiser, agreed to a takeover of US-based baby milk manufacturer Mead Johnson. Although we see the potential growth opportunity inherent in the deal, we have concerns regarding the level of debt post deal, which is expected to be quite elevated at c3.5-4.0x EV/EBITDA (Enterprise Value to Earnings Before Interest Tax Depreciation and Amortization, a proxy for cash earnings), from year-end 2016 level of 0.5x. We remain positive on the company’s prospects, but we will keep a close eye on the increased execution risk now inherent in the investment case.

Final thoughts

Political risk remains our key concern for 2017, albeit at a reduced level now that the elections in the Netherlands are behind us. The coming presidential elections in France on the other hand remain a key material risk to global growth prospects.