Comments on Second Quarter 2018

In the second quarter, we have seen how funds obtained positive returns notwithstanding the poor performance of our main investment in the international portfolio, Aryzta, maintaining the portfolios stable. The knowledge of the businesses after a year and a half investing in the main companies has enabled us to continue with peace of mind and convinced that they are solid portfolios with a very high potential upside.

Most of the companies in which we are invested have seen how their business has improved positively, though our investors could certainly have the impression that this is not reflected in the net asset value of our funds. This is not the first time that we have faced such a situation, and it certainly will not be the last. Sooner or later, however, share prices will continue improving their underlying value as they have done in the past. As many of you already know, long-term investors can count on time, which is one of the main factors that always plays in our favour.

As we have mentioned previously, the good performance of most of the companies in our international portfolio was not reflected in the returns of the funds primarily because of the poor stock market performance of Aryzta, a well known company into which we will delve further below. The exposure to this company has negatively affected the performance of the international portfolio this year, particularly at the close of the second quarter by approximately 6%. Excluding Aryzta from our calculations, the performance would be neutral compared with the benchmark indexes in 2018. In other words, a single stock has temporarily spoiled the work of the rest of the portfolio (in this regard, Warren Buffett was quoted as saying that we would all be champions if we dropped all the bad shots from a round of golf). Fortunately, Aryzta will recover and we will significantly benefit from this recovery.

We thank all our investors for their trust in our investment process (with 1.427 new shareholders in the second quarter). This will enable all of us to benefit from the high revaluations arising from the undervalued assets in which we are investing.


At Cobas AM, we manage 3 portfolios: the international portfolio, investing in companies worldwide, excluding companies listed in Spain and Portugal; the Iberian portfolio, investing in companies listed in Spain and Portugal or that have their operational core on the Iberian peninsula; and, lastly, the large company portfolio, investing in global companies, 70% of which have over 4 billion euros in market capitalisation. With these 3 portfolios, we built and have managed the different equity funds as of June 30:

International Portfolio

Over the second quarter of 2018, the international portfolio posted a positive return of 3.2% versus the 4% posted by the benchmark MSCI Europe Net Total Return index.

Since the Cobas Internacional FI fund began investing in equities in mid-March 2017, the return has been -0.7%. The benchmark index was revalued by 6%.

The target value for the portfolio is €188.80/share, a long way above its current net asset value, with a potential upside of 90%. Our work is to continue boosting the value of the portfolio over time and we expect that this value will end up reflected in its net asset value.

Obviously, and as a result of this potential, we are invested to 98%, close to the legal maximum allowed of 99%.

Overall, the portfolio trades at an estimated 2018 P/E ratio of 9.0x and an ROCE of 24%. If we focus on the ROCE and exclude the shipping and commodities companies, it would be 34%.

The geographic distribution of the portfolio has not changed significantly over the quarter, maintaining an elevated exposure to companies outside Europe and the Eurozone.

The greatest contribution to the positive returns in the portfolio was generated by International Seaways (+1.38%) and Ensco Plc (+1.12%). Contrarily, Aryzta (-2.58%) and Renault (-1.00%) have had a substantially negative effect on the performance of the portfolio.

Positive news regarding some of the companies in the portfolio have also contributed to the positive returns secured during the quarter. Takeda’s takeover of Shire in early May is particularly prominent as we benefitted by offloading with a gain of approximately 30%. Nevsun was also threatened by a takeover in early May, resulting in a spike in its share price, though the company ultimately opted to refuse the bid and the share price dropped, an opportunity that we seized to increase our position at attractive prices. On 16 July, Lundin Mining announced that it would launch another bid, which Nevsun again rejected, reiterating that the bid undervalues its assets. GIII Apparel has also performed particularly well, doubling its listed price during these six months.

However, these returns have mainly been hampered by Aryzta. While we also received negative albeit less significant news (e.g., Dixons or Petra Diamonds), the rest of the portfolio performed favourably, creating value from quarter to quarter.

Aryzta and the challenge of bucking the trend

Our position in Aryzta in the different funds is:

7.35% Cobas Selección FI & Cobas Selection FI; 8.19% Cobas Internacional FI & 8.14% Cobas International; 8.38% Cobas Grandes Compañías FI; 1.35% Cobas Renta FI

This is neither the first nor the last time we are investing in a company with characteristics such as Aryzta. We need only to look back at the cases of Smurfit Kappa and Thales to get a glimpse of what we can expect from Aryzta.

The cardboard packaging company Smurfit Kappa was listed at 16.50 euros per share by mid-March 2007 after an IPO. From then on, the listing price began a downward spiral of 93% to hit a record low of 1 euro per share by the end of October 2008. We began building the position in 2007 and continued buying even at less than 1 euro. At this moment, the company had 237 million outstanding shares, resulting in a market cap of nearly 250 million euros compared with the 3.9 billion that it had on the date of the IPO. This share price descent was the result of an EBITDA that had fallen from 1,000 million euros at the end of 2007 to 740 million in 2009 and a debt in balance of approximately 3 billion euros. During such a delicate juncture for Smurfit Kappa, the company’s CEO Gary McGann maintained his resolve to defend the interests of the shareholders and not to destroy value by avoiding a capital increase at all costs. Today, 10 years later and after having weathered the worst financial crisis in the past 50 years, the company still has the same number of shares outstanding, which are listed above 34 euros, thus entailing an upside of over 3,000% since the record low in 2008 and capitalising over 8 billion euros. We sold our last shares at 8 euros per share. Aryzta’s current chairman is Gary McGann.

With Aryzta, we now have a company with an elevated debt level (1.8 billion euros, excluding the value of its subsidiary Picard) and an EBITDA that has shrunk from 600 million euros to 300 million euros expected, with the share price falling by over 84% from the maximum levels hit midway through 2014, nearly 90 Swiss francs per share, to bottom out this year under 15 Swiss francs per share. Similar to Smurfit Kappa, this stable and cash-generating business will gradually reduce its debt despite a financial situation that is hardly simple.

Aryzta is also reminiscent of the case of Thales, further proof of our resolve that going against the grain is an essential character of our investment process.

The French electronics company Thales develops information systems and services for the aerospace, defence and security markets. Midway through 2007, its stock was listed at around 45 euros and company was posting margins of 7%. However, deficient project management caused its shares to trade below 30 euros for most of 2010, with very low margins of approximately 2% for that period. We thus took this as an opportunity to build most of our position and continued buying until the share hit the minimum lows in December 2011 (below 22 euros/shares), when Thales reported margins of 6% in the shadows of the 10-12% that its competitors such as General Dynamics were reporting.

Such a visible difference in the margins made us ask ourselves why Thales wouldn’t also be able to generate such margins doing things the right way. The entry of Dassault Aviation (whose shares we also held at this moment) in the middle of 2009, which bought over 25% of the share capital, was also a key factor in our investment assumption, since it would help Thales develop projects thanks to Dassault Aviation’s already solid reputation for excellent project management. Hardly more than 8 years later, the company has posted its first-quarter earnings for 2018 and forecast for the next 3 years that entail a turnover increase from 3% to 5% and margins standing at approximately 11%. With a share price surpassing 110 euros in 2018, the upside since 2011 has exceeded 400%.

We are asking ourselves the same questions about Aryzta: How could it be possible for the sector’s leader to have EBITDA margins around 8% while its competition is posting margins between 10% and 15%? We believe that there are no sufficient reasons to think that this

European and American leader couldn’t improve on its present margins and achieve figures more in line with its competition.

Our past investments in Smurfit Kappa and Thales are two successful examples with similar key aspects to what Aryzta is currently going through.

We have therefore taken advantage of steep downturn to buy more shares with a view to increasing the potential upside of the position. Even in the possible worst-case scenario of a capital increase, this potential still remains greatly elevated.

Some of the most salient sectors representing an important weight in the portfolio are as follows:

Automotive sector

The “trade war” between the USA and China has bogged down many sectors this month, including the automotive sector, in which we have investments through Renault, Porsche, BMW and Hyundai. We took advantage of these falls, which have virtually erased the gains of the last 6 months, to increase exposure to Renault and Porsche, since we believe that the possible effects of this “trade war” are reflected in the price.

Maritime transport sector

Nearly 30 VLCCs (Very Large Crude Oil Carriers) were scrapped during the initial months of 2018 because they reached the end of their useful service life and in light of stricter regulatory developments, which include limits on sulphur emissions. There is therefore zero fleet growth and a natural adjustment for the offer and demand of tankers, which will entail a recovery in fleet prices. This future recovery effect is being felt in recovering share prices of oil companies such as Euronav, DHT and International Seaways in the second half of the quarter.

Iberian Portfolio

During the second quarter of 2018, the Iberian portfolio posted a positive return of 3.6% versus a 2.5% increase in the benchmark comprising I.G.B.M. Total index at 80% and PSI 20 Total Return Index at 20%. We have continued to increase the target value of this portfolio, which is now at 172.5 euros, with the upside potential standing at 51%, compared to 44% in the previous quarter.

Since the Cobas Iberia FI fund began investing in equities at the beginning of April 2017, the return has been 14.4% compared to an upside of 2.4% for the benchmark index.

Overall, the portfolio trades at an estimated 2018 P/E ratio of 10.7x and an ROCE of 28%, with 97% invested in equities. The exposure to Spain and Portugal has remained stable after the reduction in recent quarters of Portuguese shares because of their good stock market performance.

The greatest contribution to the positive returns in the portfolio was generated by Técnicas Reunidas (+1.37%) and Euskaltel S.A. (+1.14%). Contrarily, Bankia (-0.51%) and Telefónica             (-0.35%) have had a substantially negative effect on the performance of the portfolio.

Portfolio rotation was low. The entry of Befesa and Atalaya Mining, which we will discuss further below, is a reason for last quarter’s shift in the prospectus, in which we opened the door to investing up to 10% in companies that, while not listed in Spain or Portugal, nevertheless have core operations on the Iberian peninsula. Additionally, companies with businesses of proven quality have also entered our portfolio: Prosegur Cash and Coca Cola European Partners. During the quarter, we took advantage of Euskaltel’s solid stock market performance to slim down its weight in the portfolio while increasing our position in Bankia and Unicaja as their stock prices fell.

Atalaya Mining

Our current position in the company is 3.97% in Cobas Iberia FI.

Atalaya Mining is a copper mining company with two assets: an open-pit mine in Huelva (Rio Tinto) and mining project in Galicia (Touro). We believe that the share price does not reflect the intrinsic value of the company for several reasons.

Firstly, the company is not well known in the marketplace because, while its assets are in Spain, the company has its headquarters in Cyprus and is traded in London. Moreover, with a market cap of only 360 million euros, the company does not attract many market followers.

Another reason is the company’s administrative body, whom we’ve known for some years now, who will expand the annual production of the Rio Tinto mine, thus increasing the value of the mine with hardly any additional investments. When optimisation occurs, the results will improve and it is therefore reasonable to think that this will affect Atalaya’s listing.

By investing in Atalaya Mining we are investing in copper in a more profitable way. At a global level, we believe that the cooper price has good prospects, since we estimate that the future world copper needs cannot be met with the mines that are currently operating and the available copper stocks. Consequently, we believe that the price of copper should rise to encourage the development of new mines. When it rises, we will benefit from the higher margins of Atalaya.

Large Company Portfolio

During the second quarter of 2018, the large company portfolio posted a negative return of -0.5% versus a 7.2% increase in the benchmark index, MSCI World Net.

Since the Cobas Grandes Compañías FI fund began investing in equities in early April 2017, the return has been -2.0%. The benchmark index was revalued by 5.9%.

The target value for the portfolio is €184.8/share, a long way above its current net asset value, with a potential upside of 89%. Our work is to continue boosting the value of the portfolio over time and we expect that this value will end up reflected in its net asset value.

Overall, the portfolio trades at an estimated 2018 P/E ratio of 8.6x and an ROCE of 26%. The geographic distribution of the portfolio has not changed significantly over the quarter, maintaining a strong exposure to companies outside of Europe and the Eurozone.

The greatest contribution to the positive returns in the portfolio was generated by Teva Pharmaceutical (+2.01%) and Babcock International (+1.55%). Contrarily, Aryzta (-2.49%) and Renault (-1.09%) have had a substantially negative effect on the performance of the portfolio.


Cobas News

We are rolling out our Cobas News section with a view to give you a preview of our projects and initiatives, and share some of the most important milestones reached in the quarter.


Our annual investor conference in Madrid and Barcelona back in April opened the door to over 1,000 direct investors who attended in person and over 6,000 through real-time streaming. Investors who were unable to attend or view the conference in streaming can view the video at the following link: https://www.youtube.com/watch?v=CmThRuTPfNI (Spanish) and https://www.youtube.com/watch?v=cXNG-cZzGTY (English)

As part of our objective of greater transparency in reporting, we have begun a cycle of conferences in several cities throughout Spain with a view to getting closer to our investors and tracking the performance of our funds not only more personally but also more frequently. This cycle entails an open-question format with the Cobas team. We were in La Coruña in June and will announce our visits to other cities before the end of the year.

We have also initiated a cycle of conferences in collaboration with the legal firm Cuatrecasas. Our goal is to address topics that interest investors such as family business taxation, which was the topic with which we opened the cycle back on 14 June. The remaining conferences scheduled in the coming months will address topics such as: effective estate succession planning, questions to consider for decision-making in terms of donation, inheritance and many other topics.

Value Community

We are committed partners with Value School, which aims to provide the support necessary to foster a financial culture for anyone who is interested in entering this world from a neutral and independent perspective. Essentially, Value School seeks to help people learn to make decisions about their savings through conscientious and well-thought-out investments. To achieve this objective, they have continued conducting weekly events that have included renowned asset managers such as Pablo Gonzalez, manager at Abaco Capital. During the quarter, Juan Huerta de Soto, analyst at Cobas AM, presented “Invirtiendo en calidad” (Investing in Quality), the most recent publication in the investment collection that Value School publishes jointly with Deusto.

We joined the “4 ángulos Value” (4 Value Angles) meeting this quarter, organised by Value School in Zaragoza, where Carmen Pérez Baguena participated with three other national asset managers.

Cobas AM’s commitment to the philosophy of investing in value and the value community in Spain and internationally has led to our participation in the first “Nordic Value” conference in Denmark, where Andrés Allende represented our management and analysis team.

We also were fortunate to join our investors at the Berkshire Hathaway Conference in Omaha, where we listened to the perennially interesting reflections of Warren Buffett and Charlie Munger. The trip is an absolute must for all value investors!

Since at Cobas we believe that reading is both a passion and a way to disseminate knowledge and share experiences, we are delighted to have published the English version of Francisco García Parames’ book Investing for the Long Term (Wiley).


In light of the new General Data Protection Regulation (GDPR), which regulates the protection of personal data for all citizens of the European Union and entered into force on 25 May, we now must give our unambiguous consent as service users so that service providers can continue using our data.

Cobas AM has been working for some time already to comply with this regulation so that all our clients have a clear, unequivocal and discernible understanding of what their consent (or non-consent) granted to our company means for processing their data. In this regard, all our new investors will have the request for consent in the contract for signing up to all our investment funds and pension plans. Additionally, all investors who have logged into their private area will have already seen a pop-up screen requesting consent to process their data for the different applications of use thereof.

For all clients who have not logged into their private area since 25 May, we will shortly launch a communications campaign requesting your consent in this regard.

We appreciate the trust that all our investors have placed in us. Our Investor Relations team will remain available to assist you, as they and all the professional teams at Cobas AM work harder every day to provide the best service.



Quarterly comments