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Thesis:
Andritz AG is an undervalued Austrian machinery manufacturer with a strong focus on recurring service earnings from its Pulp & Paper and Energy segments, presenting a compelling investment opportunity with over 50% upside potential.
Source: https://drive.google.com/file/d/1kYbXaQh9fZakk1S0vlGN5oXBMmuvL85N/view?usp=drivesdk
Analysis:
A printer and a coffee machine are alike in many ways. They both see more usage at the Ennismore office than the front door, and a jam in either can ruin your morning – but our preferred similarity is that they are both primitive examples of one of our favourite business models: the ‘installed-base’ model of selling capital equipment at low margin and making the bulk of earnings from add-ons such as spare parts, consumables, and maintenance. In this instance, printers and coffee machines are sold cheaply to generate profitable recurring revenues from the sale of ink cartridges and coffee pods. These are weak examples, since there is little to prevent us from using third-party ink or coffee pods, but the model reprises itself across a wide range of more attractive industries, and often results in a highly robust and predictable earnings base which investors are happy to reward with a premium valuation. We don’t like paying premium valuations (though we love premium businesses!), but luckily for us the market often excessively punishes these types of structures when the capital equipment business suffers from a cyclical downturn – even when the service business, and hence most of the earnings, continues to grow. The following is one such opportunity from our portfolio.
Andritz AG (“Andritz”) is an Austrian conglomerate with a market capitalisation of EUR 6bn that manufactures machinery for niche applications in Pulp & Paper, Energy, Metals, and Hydropower. The four segments total around EUR 8bn revenue and EUR 700m adjusted operating profit between them, the common thread being a keen focus on the aftermarket, with around 40% of sales coming from maintenance of the installed base and the sale of spare parts. Based on peer disclosures, we estimate this to contribute around 70% of earnings today. We believe the market overlooks the quality of Andritz’s installed-base business which, combined with a market downturn in Pulp & Paper, has given us a chance to buy Andritz at an enchantingly low valuation.
Andritz’s crown jewel is its Pulp & Paper segment, contributing a little over half of earnings. This segment has established a dominant position in Pulp & Paper machinery alongside Valmet and Voith, with the three players constituting the majority of the market. We estimate this segment has grow sales organically 4% per year over the last ten years with steady margin improvement and consistent cash generation since it outgrows the equipment base. The service business is of excellent quality – it rarely loses a customer, grows even when the industry shrinks, has no trouble passing on price increases each year, and with machine lifetimes of twenty-five to fifty years, there is excellent long-term visibility on earnings from maintenance and spare parts. We estimate that, as the Pulp & Paper service division has increased prices and taken share from local competitors and in-house teams at Pulp & Paper mills, service sales have grown organically 5-6% over the past decade. We expect similarly impressive results over the next decade.
Any prospective new entrant must overcome technological barriers built from years of cumulative R&D in relatively small niches, and still it would be very hard to get the initial customers without a substantial track record, as customers want to know that their supplier will be around to service the machine decades from now. There is still little incentive to enter even if this were feasible, as it would be near impossible to turn a profit on the equipment sales given the incumbents only make single-digit operating margins when producing at scale, and service sales would take many years to ramp up to profitability.
The Energy segment contributes around 20% of earnings and has similar characteristics and financial profile to the Pulp & Paper business. Metals and Hydro contribute a little under 15% of earnings apiece and have healthy growing service businesses, but their capital businesses have been shrinking, they have a lower proportion of earnings coming from service, and their customer bases are more concentrated. These factors lead to weaker margins than in the Pulp & Paper and Energy divisions. We believe the underlying quality of the Pulp & Paper and Energy divisions has been obscured by the laggards and will bear more weight going forward with around three quarters of earnings today coming from Pulp & Paper and Energy, as opposed to just a third of earnings a decade ago. We believe the Metals division should be able to stabilise profitability at a lower level after six of the worst years in automotive history, and that we are seeing strong signs of a cyclical recovery in Hydro, which has been in a downturn since hydroelectric power capacity was overbuilt in the 2000s.
In terms of capital allocation, Andritz is no stranger to M&A having been built by ex-CEO Wolfgang Leitner, who completed well over fifty acquisitions during his tenure since joining in 1994. Andritz achieves attractive rates of return with post-tax return on capital exceeding 20% today even after increasing goodwill. Though Leitner is no longer part of the management team, he remains chairman of the board and, with a little over thirty percent of shares outstanding tucked under his belt, we think it unlikely that the ship will steer far from his wake. Andritz has a net cash balance of over EUR 400m and pays a healthy four percent dividend yield on top of regular bolt-on M&A, with opportunistic buybacks also becoming a part of their strategy.
The opportunity exists for two reasons. The first is simply widespread underestimation of the quality of the business, perhaps caused by the complexity of the conglomerate structure and the absence of service margin disclosure. For instance, a prominent sell-side analyst applies the valuation of Andritz in its entirety to value the Valmet equipment division alone, whilst applying a higher multiple to Valmet’s service division – overlooking Andritz’s service division entirely. In this instance and in others, Andritz is treated as nothing more than a low-quality capital equipment business, a perception we believe to be unjust.
Secondly, the market is myopic. Despite a steady service business, the highly cyclical equipment division causes earnings to be volatile in the short term, and shifts in large nominal working capital balances make free cash flow performance equally unpredictable. We don’t know whether the next quarter will be above or below the market’s expectations, but we believe the medium term to be considerably more predictable given the steady performance of the service division: the sea level is rising regardless of the tide. In a market full of short-term incentives and therefore thinking (or is it the other way around?), we are pleased to take advantage of such opportunities where our time horizon exceeds that of the market, and welcome short-term share price weakness with open arms – and coffers.
Andritz trades on around ten times enterprise value to our estimate of 2025 post-tax operating profit. Even when ignoring the profitable equipment business entirely, investors in Andritz buy a stream of recurring service earnings that should be able to grow mid-single digits or faster at high rates of return and with low volatility, for less than fifteen times post-tax operating profit. Valuing the whole business in line with historical levels at thirteen times enterprise value to post-tax operating profit, despite the segment and service mix being far better today than in the past, we expect to see more than 50% upside over the next two years.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
ASML is a Dutch company that dominates the lithography machine market, particularly with its exclusive EUV technology essential for advanced semiconductor production, making it a compelling investment despite short-term bearish concerns.
Source: https://drive.google.com/file/d/1LMyAieS-O01KA48sOASWGe6_LIYTmWzS/view?usp=drivesdk
Analysis:
ASML is a Dutch company that develops, assembles and sells photolithography (“litho” or “lithography”) machines that are used to print integrated circuit designs onto silicon wafers during the semiconductor fabrication process. ASML is the sole supplier of Extreme Ultraviolet (EUV) lithography machines that are used by the likes of TSMC and Intel to fabricate the most advanced chips for AI, smartphones and computing. It also has an effective monopoly over Deep Ultraviolet (DUV) machines which are the primary litho workhorses within a fab.
There is plenty of material in the public domain explaining why ASML is a one-of-a-kind business, so we won’t belabour the point here. Instead, we want to focus on why the opportunity to buy this business at a steep discount existed in the first place considering the AI investment boom taking place, and where our views diverged from the market.
Since attaining an all-time high of €1,002 in mid-2024, ASML subsequently experienced a -45% drawdown at the Liberation Day trough and has otherwise trodden water in the ~€700 range. A disastrous Q2 2025 earnings call where CEO Christophe Fouquet volunteered that ASML “cannot confirm” growth in 2026 despite no one asking him about 2026 further amped up the bearish narrative to eleven.
The main arguments for not owning the only monopoly in the semiconductor industry during an AI infrastructure frenzy can be summarised as follows:
1. 2025 orders and 2026 sales of DUV will be weak because of China demand normalisation.
2. 2025 orders and 2026 sales of EUV will be weak because the 2nm Gate-All-Around (GAA) transistor structure transition means no additional EUV layers compared to 3nm – that is, a highly-touted “peak lithography” as a share of wafer fab equipment (WFE) capex.
3. ASML is exposed to a monopsony (TSMC) given the struggles at other key customers Intel and Samsung.
4. China will develop homegrown DUV and EUV tools and ASML will lose the China market.
In our opinion, the bears largely miss the forest for the trees. In principle, we believe these statements to be true:
1. The level of global wafer demand determines the demand for semicap equipment, regardless of production location;
2. ASML is a monopoly and anyone who wants a DUV or EUV tool must order from ASML (though Canon and Nikon also sell a negligible volume of inferior DUV tools);
3. Accordingly, a customer that doesn’t place an order with ASML this quarter must eventually place an order if they want to produce any wafers from their fab.
Now we address each of the bear arguments in turn.
2025 orders and 2026 sales
ASML orders are lumpy. This is to be expected when EUV machines cost over $200 million each, have 12+ month lead times and there are only a handful (5-6) customers. Management consistently reminds the market to not read into quarterly orders as a reflection of the underlying health of the business, but the market consistently ignores this and fixates on near-term orders.
Regarding China DUV demand, sales to China reached as high as 49% of net system sales in H1 2024 and has fallen to 27% as of Q2 2025. Management expects China sales to normalise to 25% of total, in-line with the backlog mix. It is a valid concern that China may have been stockpiling (i.e., overordering) DUV tools over the past two years in response to US export restrictions, but the country is also in a hurry to build out sufficient semiconductor production capacity to meet domestic needs. Chinese foundries (namely SMIC) are also trying to achieve 7nm and even 5nm mass production without EUV, which necessitates multi-patterning using DUV tools at very poor yields. With pressure to ramp up volume production of domestic GPUs, we do not see Chinese demand for DUV tools falling away absent further export restrictions from the Dutch government.
As for the “peak lithography” fear, 2nm GAA is a transistor architecture change (the prior one was FinFET in the early 2010s) rather than the typical litho-driven node shrink. This is an etch- and deposition-led transition, and once the industry progresses beyond 2nm into the Angstrom era, we expect litho shrink to remain the main driver of node progression until the next breakthrough.
Customer struggles and monopsony concerns
Being a monopoly is all well and good, until your customers drop away and you’re left selling into a monopsony customer. This is the main concern when it comes to ASML’s relationship with TSMC, given the struggles that Intel and Samsung have faced at the leading edge. We believe this concern is overblown for several reasons.
Firstly, ASML and TSMC have a symbiotic relationship – they depend on each other for success. TSMC may have the industry’s most efficient EUV lithography processes, but efficiency can only go so far to offset the need for additional wafer capacity. The company has repeatedly said that the N2 family will be its biggest process node yet with more tape-outs than N3 or N5, so we have no concerns that a lot of EUV tools will be required. Furthermore, TSMC’s buildout of leading edge capacity in the US will be less efficient than its operations in Taiwan given the limited opportunity to reuse lithography tools from node to node.
Secondly, we need to recognise that while TSMC is ASML’s largest customer (historically in the 30% range of total revenues), it is by no means the only EUV customer. Challenges at Intel and Samsung foundry have been offset by EUV insertion at the leading nodes by the DRAM vendors. The insatiable demand for high bandwidth memory (HBM), which has a wafer trade ratio of 3- or even 4-to-1 (that is, it takes 4x as many wafers to produce the same number of HBM bits as it does for DRAM), plus the demand for traditional DRAM by emergent agenic AI systems, should provide a healthy tailwind for EUV demand in the DRAM industry.
OpenAI’s recently announced partnerships with Samsung and SK Hynix to procure 900,000 DRAM wafers per month “at an accelerated capacity rollout” represent “doubling (!!!) of the two companies’ existing capacity in 2024. While we ascribe very little weight to Sam Altman’s grandiose proclamations, especially when it comes to OpenAI’s ability to pay, the scale of such partnerships highlight just how much of a bottleneck memory capacity is to the AI industry’s ambitions.
Finally, the uncertainty surrounding the viability of the Intel and Samsung foundries has subsided somewhat with the recent US government and Nvidia investments in Intel, and Samsung’s $16.5 billion multiyear deal to manufacture the AI6 chip for Tesla aims at prompt process. When it comes to Intel in particular, we believe the US government requires an American leader in leading-edge foundry operating in the US for national security purposes. It is also in the interest of all TSMC’s leading edge customers to have an active insurance policy in the US should TSMC’s Taiwan fabs and R&D centres go offline for whatever reason.
China domestic competition
China has committed tens of billions of state funds in pursuit of semiconductor self-sufficiency, from fabrication to wafer fab equipment (WFE). This push has taken on additional urgency since the initial WFE export restrictions from 2022. Given the size and growth of the China WFE market – from c.20% of global WFE demand in 2018 to mid-30% expected over the next several years, China’s self-sufficiency drive is a concern for all Western semicap equipment vendors. Bernstein estimates that in 2024, China had achieved over 20% self-sufficiency in the major segments of etch and deposition, and nearly 40% in less technically demanding process steps such as cleaning.
However, the only process step where China remains at zero self-sufficiency is lithography. China’s lithography champion, Shanghai Micro Electronics Equipment (SMEE), completed development of an ArF immersion tool capable of 28nm process steps in December 2023. As far as we can tell, that tool is not yet commercialised. ASML first introduced an ArF immersion tool in 2003, putting SMEE (and China broadly) two decades behind ASML. Even if China continues to accelerate its domestic development, industry experts generally believe that a competitive homegrown DUV tool is years away and EUV more than a decade away. In any case, ASML has never been permitted to sell its EUV tools to China, and we find it hard to believe that non-Chinese fabs would elect to buy a likely inferior Chinese lithography tool, geopolitical considerations aside.
Ultimately, our decision to establish a position in ASML at the time we did came down to risk/reward and duration. We saw limited downside risk at a sub×25x one year forward P/E ratio, and significant upside since the market looked beyond the H2 2025 orders and 2026 sales uncertainty. The feedback we received from the sellside – as recently as mid-September – was that buyers were waiting to clear the Q3/Q4 order overhang before stepping in. While we are under no illusion as to our skill at timing the bottom, we also know that Mr Market doesn’t ring a bell when the bottom is in. There is absolutely a risk that ASML sells off again on weak near-term orders, but our advantage lies in having the duration that many in the market seemingly do not.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Aumovio is a promising standalone company specializing in auto components and technology systems, poised to capitalize on key automotive megatrends following its spinoff from Continental.
Source: https://drive.google.com/file/d/1C57VMFMTbk1veIYy3T7He8kR0i7-sWPB/view?usp=drivesdk
Analysis:
Aumovio spun out of Continental in September 2025 and now develops, manufactures and distributes auto components and technology systems as a standalone company. Even without the backing of Continental’s tires business, there’s a lot to like about Aumovio. It built up strong positions in structurally attractive markets over the years under Continental. Aumovio operates through several segments that expose it to a compelling range of auto megatrends, like active safety, autonomous driving and software. Those trends have long teased upside, and we believe recent restructuring, portfolio optimization and a focus on returns will help Aumovio realize its potential. CEO Philipp von Hirschheydt and his management team deserve credit for that improved execution, and now that he’s armed with a cash-rich balance sheet following the spinoff, we expect his knack for underpromising and overdelivering to continue. We were excited to open a position in Aumovio at a price we believe is well below its intrinsic value.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Bunzl is a leading distributor of not-for-resale goods with significant scale advantages, positioned for recovery and stable growth despite recent execution challenges in North America.
Source: https://drive.google.com/file/d/1J-uGb0Z6h-PrM3LX7QYXs3uvwLVBiZv_/view?usp=drivesdk
Analysis:
Bunzl is a distributor of not-for-resale goods to the foodservice, grocery, cleaning and hygiene, and safety sectors. The company is the leading player in the space, enjoying significant scale advantages in both procurement and logistics over smaller peers. Bunzl’s end markets are characterized by low growth but are highly defensive, and the company has historically augmented organic growth with a value-accretive M&A program. Market concern around a recent stumble in execution in North America has caused shares to trade near valuation levels not seen for 15 years. However, management is moving quickly to rectify issues while nothing has structurally changed in the industry. In time, we expect Bunzl to return to its historical cadence of stable growth, driving both earnings growth and a multiple re-rating.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Despite extreme investor pessimism, YuHua Education offers massive upside potential as it pivots to vocational training in line with CCP priorities, trades at a distressed valuation, and stands to benefit from easing regulatory risk and recovering profitability.
Source: https://drive.google.com/file/d/1XUYjgl6xzg_bK9v_Qkw5X1LZBpluBK60/view?usp=drivesdk
Analysis:
In the meantime, YuHua ‘successfully’ morphed their K-9 segment into vocational schools, abandoning K-9 education completely. After its transformation, China YuHua Education has become a company with a limited private formal high school education segment (grade 10 to 12) (<5% of revenue), and a substantial university and vocational college education segment (vocational education: schooling aimed at specific occupations such as skilled trades, software developer, accountancy, etc.), operating nine schools in mainland China. They used to own ‘Stamford Thailand University’, but this has been divested since last report. After the 2021 trauma, YuHua Edu has decided strategically focus on vocational teaching, as this aligns best with the CCP’s policy directives.
YuHua Edu’s university and vocational offerings are not top notch, with universities ranking around 500ᵗʰ out of 1500 public & private universities. Fee structure reflect this. Admission rates hover around 40% — mid-tier among Chinese universities — positioning them as an upgrade to public offerings rather than a competition for prestigious universities.
Aside from operation and CCP turmoil, YuHua has had its own specific source of drama: After borrowing overseas, YuHua faced an issue unique to Chinese companies: while having enough cash on hand within China, it was not able to get this money out of China to pay back bond owners. While this is especially problematic for bondholders, it is surprisingly enough both a curse as well as a blessing for companies such as YuHua Edu. In case of YuHua, it was the basis for what can best be described as an evil ploy to force a refinancing under very generous conditions. By threatening bankruptcy proceedings under Chinese law, YuHua was able to force a debt-for-equity swap valuing stocks over 100% above the price it was trading at. Usually, a company constrained by cash will have to agree to egregious conditions from their banks in order to stay afloat. But this is China, and things work differently there...
Currently trading at 5x earnings, this multiple is set to compress to just 2.5 on projected 2025 earnings — reflecting exceptional value potential. With the debt swap behind us, debt levels have also become very manageable.
The biggest question mark is the macro environment. Arguably it is also the only explanation for the cheapness of YuHua Edu. Central to this anxiety is the upcoming ‘Fifth Plenum’ of the CCP: The party runs in cycles of five years, within which there are seven ‘plenums’. By far the most influential one is the Fifth Plenum, in which the party reveals the CCP’s focus and broad strategic direction for the upcoming five years. This is scheduled for the 2ⁿᵈ half of 2025. The biggest fear among education investors is that Xi will announce a new set of reforms beyond the earlier banning of for-profit K-9 schools and tutoring, and also include grades 10-12 and/or vocational education and universities.
Given we chose to invest in the stock, you probably have already guessed we are less convinced Xi is about to widen his net. I’ll share my three reasons for this conviction:
The CCP always seems surprised and somewhat regretful of taking harsh action. They tend to walk back rather than double down on their actions. Their K-9 policy implementation was not without hic-cups, so there’s reason to believe they’ll be reluctant to repeat the same drastic measures.
Taking further action against private teaching doesn’t align well with Xi’s current focus of increasing domestic spending. Aside from the obvious that spending on private education is still [domestic spending], an extended ‘Double Reduction’ policy would be bad for consumption for two other reasons: 1) The first episode reportedly lead to a million layoffs, I’m sure a second episode won’t be a welcome gift to an already sluggish economy either. 2) One of the reported effects of the first episode is that it led to a lot of stress among parents because they were no longer able to improve the chances of their children through spending on tutoring and such. A new episode could exacerbate this stress further, negatively impact consumer sentiment (and henceforth spending). With the economy being at center stage, I believe Xi will be reluctant to rock the boat more than necessary.
The CCP has promoted foreign investment in vocational training centers in the last five-year cycle. Strangling these exact same companies one cycle later would be quite the 180 (though nothing can be ruled out with the CCP). As such, YuHua Edu’s focus on vocational education should provide it some cover.
China YuHua Education’s stock is down over -90% since the ‘Double Reduction’ act, all the while remaining profitable and with profits set to return to pre-2022 levels. Clearly there is an extreme fear for the sector. The complete nationalization of the sector seems all but priced in, leaving extraordinary upside for those who dare to bet on any other outcome. We believe this is another case of ‘Be fearful when others are greedy and be greedy when others are fearful’. Even in most bad scenarios, YuHua Edu might survive with somewhat limited damage. But if we are proven right, the returns will be epic.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Cloudflare Inc (NYSE: NET) is a leading connectivity cloud provider that offers a comprehensive suite of networking and security SaaS products, leveraging a global infrastructure to enhance performance, security, and reliability for over 265,000 paying customers.
Source: https://drive.google.com/file/d/1_YqnwYWS5_dB0JZMdcPrxo0CzDJYoq1r/view?usp=drivesdk
Analysis:
Separately, we added a new position in **Cloudflare Inc (NYSE: NET)** in September (see memo). Cloudflare is the dominant connectivity cloud offering networking and security software as a service (SaaS). Cloudflare offers over 60 products that enable businesses to connect and protect external-facing and internal systems across application services, network services, and zero-trust services, which its customers increasingly want to consolidate. Cloudflare’s reverse proxy service is used by 80% of websites, and 20% of the internet goes through it. Today, more websites are using Cloudflare than all traditional CDNs combined (24.5% for web servers and 14.7% for DNS servers). It is Cloudflare’s reverse proxy that allows it to sit in front of its customers’ web servers, allowing it to provide a wide and growing range of services that increase the security, performance, and reliability of its customers. Cloudflare has over 265k+ paying customers spanning across a wide range of firm sizes from the long tail of SMBs to enterprises. Large customers (>US$100k ARR) have been growing faster and accounted for 71% of Q225 revenues. Customer cohorts are gradually expanding and purchasing more products, with cohorts that have over 10 products accounting for more than 50% of revenue contribution. This trend is expected to continue growing. What is often underappreciated is Cloudflare’s growing single underlying global infrastructure network of partnerships with Internet Service Providers (ISPs), which enables them to place their server equipment directly in their data centers, rather than building and maintaining their own data centers. This significantly reduces bandwidth and co-location expenses, minimizing CAPEX while maximizing geographic reach. This has allowed Cloudflare to establish a global Tier 1 distributed ISP network comprising over 13,000 networks in 330 cities across 125 countries, with a capacity of 405 Tbps and 335 Points of Presence (PoPs). Today, Cloudflare blocks over 190bn cyber threats daily, and ~95% of the world’s internet-connected population is within ~50ms of a NET data center. This complements Cloudflare’s growing network effects, as more customers and internet traffic pass through them, allowing them to identify security threats earlier, quicker, and better. Every threat it blocks makes its entire network smarter. More traffic equals better protection.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Diageo is a leading spirits company facing mixed consumer trends, but its strong premium brand portfolio and growing market opportunities position it well for future growth.
Source: https://drive.google.com/file/d/11F9VTQBmls0pWtVTKii-iM-DYMVS3yTD/view?usp=drivesdk
Analysis:
Thank goodness Guinness is part of Diageo’s brand portfolio; its recent strength has helped offset weakness across Diageo’s spirits collection. That offset was confirmed in Diageo’s full year results, released in August. Its shares bounced in the aftermath, with results being no worse than expected, but have since given back the bounce and are again testing the lows for the year.
A client recently told me he saw Diageo as one of the most contentious stocks in Europe. That may be so, but the bears have been winning the argument of late. The problem is no one can be sure what is causing the undoubted weakness in spirits consumption; with the current slowdown in the US particularly contentious. Is it cyclical (squeezed consumers) or secular (an emerging generation of “sober-curious” teetotalers)? It’s most likely a bit of both; but the crucial question is, in what proportion?
Consider two recent surveys of drinking habits, both reported on over the summer. A Gallup poll revealed the number of Americans who self-report drinking has fallen to 54%, the lowest level in 90 years. On the other hand, an IWSR survey claimed that 70% of US Gen Z respondents (age up to 27), had drunk alcohol over the previous six months, up from 46% two years ago and the biggest increase for any age cohort. The conclusion was that, after a period of sobriety, US Gen Zers were increasing their engagement with alcohol, especially in their mid to late 20s. Interestingly, in the same survey and in the important beverage market of India, Gen Z drinkers were 70%, up from 60% in 2023. Meanwhile, 83% of global Millennials (28-43) have consumed alcohol in the past six months, up from 79% in 2023. There is something for bulls and bears of Diageo in those statistics.
And it is worth reflecting on the narrative Diageo has shared with its shareholders in its Annual Report. The key message is that although moderation and a difficult economy in the US have caused volumes of alcohol consumption to decline there, the value of alcohol sold, in real terms, has held stable or modestly increased. For instance, Diageo notes TBA (total beverage alcohol) was 1.80% of US consumer spend in 2014 and 1.96% in 2024. This is the result of the famous “drinking less, but better” phenomenon. Diageo points out that premium and above-grade spirits have gained share in the spirits category over the last 10 years, from 26% of category value to c.35%. And with over 60% of Diageo’s portfolio made up of premium and super-premium brands, it over-indexes to this favoured category. With an additional 600 million young people reaching legal drinking age over the next decade, making Gen Z the first 2 billion global population cohort in history, Diageo believes it has plenty of opportunity to grow. On the assumption its brands stay or increase in relevance for consumers.
There is an interesting corroboration of Diageo’s views from Fever-Tree, which also recently reported results. The company notes that the long-term trend of consumers drinking less beer and wine and instead turning to “long and light” drinks continues – in other words, diluted spirits (preferably premium spirits mixed with Fever-Tree’s premium mixers). What Fever-Tree highlights is that the big change since the post-Covid boom is that footfall in bars, clubs and pubs in developed markets has fallen by c.10%, pretty much everywhere. In the company’s opinion, that is an economic issue, not a change of behaviour issue and that socialising will rebound with consumer confidence and disposable income.
In the end, though Diageo is by some margin the biggest international spirits company in the world, it only speaks for 4.5% of the value of global TBA. Its brands and its marketing clout – $3.7bn of A&P (advertising and promotional) spend last year – really ought to present an opportunity to grow that 4.5% share, almost whatever is happening with the other 95.5%.
In conclusion, let me return to the slide of Guinness. This is a semi-eternal brand (nothing is truly eternal) and will highly likely still be consumed in 20 years’ time. Diageo owns other brands where an investor can be reasonably confident of their durability – Johnnie Walker, its single-malt brands, Crown Royal, Don Julio, Tanqueray and more. In today’s extraordinary economy and stock markets, where Nvidia’s second quarter sales grew 56% year-on-year to $47bn (just one quarter of sales is equal to 90% of Diageo’s current market capitalisation), great value is being created. But that value may or may not prove ephemeral. We continue to advocate for devoting at least part of an equity portfolio to assets that will endure.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Electrolux Professional is a Swedish industrial company focused on commercial appliances, offering strong margins and cash flow potential, with a favorable valuation relative to peers.
Source: https://drive.google.com/file/d/1qjwtKlmfC1jrF4yrpisHZx255VHE9EeX/view?usp=drivesdk
Analysis:
We have added Electrolux Professional to the portfolio. This is a Swedish industrial focused on commercial appliances within food & beverage, as well as laundry. They operate with double-digit margins in a fragmented market, with a strong balance sheet that supports opportunities for M&A. Margins and cash flow are slightly subdued during 2025 as they prepare for several product releases in 2026, which should help organic growth. It trades at around 12-13x EBIT, which is undemanding relative to other Nordic industrials. The upcoming listing of Allied Laundry, which is expected to be listed at a considerably higher multiple, could put this attractive valuation in the spotlight.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
FEMSA is a well-managed Latin American conglomerate with leading positions in retail and beverages, leveraging strong fundamentals and strategic asset divestments to enhance shareholder value, while currently trading at a discount due to external market concerns.
Source: https://drive.google.com/file/d/1J-uGb0Z6h-PrM3LX7QYXs3uvwLVBiZv_/view?usp=drivesdk
Analysis:
FEMSA is a diversified Latin American conglomerate with leading market share positions in retail and beverages. Its retail operations are anchored by OXXO, Mexico’s largest and most dominant convenience store chain, while its Beverage segment includes a significant stake in Coca-Cola FEMSA, which holds exclusive bottling rights across key markets in Mexico and South America. These scaled businesses have attractive unit economics. We believe that the group is well-positioned to benefit from simultaneous improvements in business quality and capital allocation. FEMSA is actively divesting non-core assets and redeploying the proceeds into substantial share buybacks and dividends, enhancing shareholder value. Despite strong fundamentals, the stock trades at a discount to our estimate of intrinsic value due tariff concerns and broader volatility in Mexican equities. This created a unique opportunity to initiate a position in a well-managed, stable company with strong returns and a favorable risk/reward skew, in our view.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Fiserv is a leading American financial technology provider with robust growth potential, strong market positioning, and a focus on digital payment solutions, despite recent share price fluctuations.
Source: https://drive.google.com/file/d/1Jz5OaC-wBfwf8xvL4K2--lur4_pxWsN2/view?usp=drivesdk
Analysis:
Fiserv is an American company. It is one of the world’s largest providers of financial technology infrastructure and is a constituent of the S&P 500 index. The company operates in more than 100 countries, and its services are used by banks, credit unions, fintech companies, merchants, and government institutions. The main pillar of its business is the processing of payment transactions and card operations, complemented by a wide range of services for merchants, including payment acceptance, point-of-sale terminals, and e-commerce integrations. Significant growth came with the acquisition of First Data in 2019, which strengthened the merchant acceptance segment and gave rise to the Clover platform, now one of the fastest-growing POS platforms for small and medium-sized businesses. In addition, Fiserv provides banks with comprehensive technology solutions for digital transformation, from core banking systems and online banking to tools for risk management and compliance. Another area is specialized payment services, such as ACH (automated clearing house) payments, real-time transfers, and card issuing services.
Fiserv’s business model is attractive because of how it combines scale, diversification, and high barriers to customer turnover. The company serves thousands of financial institutions and millions of merchants with long-term contracts. This makes switching to another provider difficult and ensures a stable revenue base. Annual revenues exceed USD 20 billion, and the fastest-growing segment is merchant acceptance, where the fee model benefits from the ever-increasing volume of digital payments. Thanks to the strong scalability of its infrastructure and robust free cash flow generation, Fiserv has sufficient resources for both acquisitions and share buybacks.
It faces competition from companies such as Global Payments, Adyen, and PayPal, but Fiserv’s advantage lies in its combination of extensive banking infrastructure and solutions for end merchants. Its strategic focus is on developing instant payments, expanding the Clover platform, utilizing AI and analytics for risk management and services personalization, and pursuing further acquisition opportunities. It is also preparing to launch its own stablecoin. Fiserv is thus a strong player at the center of global payment digitization, with a stable foundation and significant growth potential.
Fiserv’s share price has weakened significantly since February, despite solid results. This was mainly due to overly high expectations at the time in the key merchant payments segment and for the Clover platform, where volume growth slowed below its previous pace. In addition, the company cut its organic revenue growth outlook to the lower end of its original range, and investors reacted sensitively to signals that expansion in the merchant business would not be as rapid as hoped. High valuations, which reflected very optimistic assumptions in the share price, meant that even a relatively small disappointment led to a sharper correction. Another growth trap snapping shut. The share price at the time of our purchases was about 40% lower than at the beginning of this year. In our opinion, the long-term growth trend in the company’s profitability has not been disrupted significantly. At 13 times this year’s expected earnings, our calculations show a large difference between the price and the intrinsic value.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Flagstar Financial is a well-capitalized regional bank under a strong new management team, addressing past balance sheet issues and poised for significant growth while trading at a conservative valuation.
Source: Link
Analysis:
Flagstar Financial (FLG) is the former New York Community Bank (a mashup of Flagstar Bank, New York Community Bank and assets from Signature Bank). Like our SHORT investments in Silicon Valley Bank and First Republic, FLG had a hole in their balance sheet (from soured multifamily and office real estate vs. long-duration securities). That is where the similarities end.
FLG raised over $1BB in additional capital, led by former Treasury Secretary Steven Mnuchin. They revamped the management team and brought in a superstar CEO in Joseph Otting. They have reviewed nearly all the loans on the books, sold off non-core assets, raising additional capital and are focused on delivering a narrowly focused, well-capitalized boring regional bank. In this case boring is good. Importantly, they have taken a conservative view of their loan book and a large credit reserve. This contrasts with several bank/private credit lenders we are short who have taken minimal reserves.
Flagstar continued making progress in their turnaround in the 2nd quarter. Their losses are shrinking, and the balance sheet is getting more stabilized. They have been deliberately reducing their exposure to the riskier segments of the commercial real estate market.
At quarter-end the bank was trading at ~65% of a conservatively marked balance sheet. This is in contrast with similar banks (who are NOT conservatively marked) trading at 140-160% of their tangible book value. FLG should complete working thru the bulk of their issues by the end of 2025 and approach “normal” during 2026. Given the conservative nature of the management team, I wouldn’t be surprised if it happened sooner. At these prices the downside seems minimal and could see this business up 50-150% over the next 1-3 years as it is more appropriately valued.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Genus Plc is a compelling investment opportunity due to its strong market position in pig genetics, predictable revenue growth from a royalty model, and significant upside potential from exclusive gene-editing technology.
Source: https://drive.google.com/file/d/16QWvMMwF66cEoBZ3kS3K2o56SWi1_2RI/view?usp=drivesdk
Analysis:
Genus Plc, with a market capitalisation of £1.6bn, operates in a niche segment of animal genetics, providing “Semen as a Service” to farmers. Its strength lies in its unique business model and robust economic characteristics that offer a predictable growth trajectory. The company focuses on selective breeding to enhance livestock traits over generations, leading to significant efficiency gains for farmers. In the pig genetics sector, Genus employs a royalty model that provides high margins on sales, capturing substantial customer retention. The recent investments in China and the evolution of the gene-editing program point towards improved profitability and stronger cash flows ahead. Competitive advantages like high switching costs and substantial entry barriers protect Genus from new entrants. Moreover, Genus is uniquely positioned to leverage growth opportunities in global markets, particularly as the Chinese market matures. Finally, the company’s gene-editing innovation could unlock immense value in the coming years, making Genus a compelling investment for long-term growth.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Getinge is poised for significant growth as its investments in quality assurance begin to pay off, potentially doubling its stock value over two years without drastic changes.
Source: https://drive.google.com/file/d/1qjwtKlmfC1jrF4yrpisHZx255VHE9EeX/view?usp=drivesdk
Analysis:
Getinge is one of our bigger positions (about 3.5%). We have in earlier letters argued the company is on a long and winding road towards improving both its operations and the perception of the company. Both these things take time, and there are numerous investors out there who both frown and clench when Getinge is mentioned. This is due to the well-known and amply analyzed operational shortcomings over the past decade.
Our thesis has been that the significant sums invested in quality assurance and remediations will eventually garner results. Reading company communications has so far strengthened our thesis. Exactly a year ago, in Q3 2024, the “elevated quality cost levels” were expected to continue, but already in Q4 management stated that “the quality cost peaked in 2024”. Come Q2 2025 the rhetoric has evolved significantly: “no significant scrapping cost, from field actions or corrections”. In the quarter, R&D costs shrunk y/y thanks to lower cost for quality-related corrections. It is not too farfetched to believe years of remediation is starting to bear fruit.
A recent note from SEB analyst Mathias Vadsten details Getinge’s adverse events and product problems as recorded in the FDA MAUDE database. The chart below is specific for the ECMO franchise, where the FDA eventually saw fit to issue a loosely worded warning letter to users. Of course, it coincided with issues peaking.
There’s no hiding there have been problems at Getinge (although it should be noted all MedTech companies have them, since all types of issues, from very serious to a dented package, are recorded) but it is also obvious they have peaked. As per the chart below, recalls are now back to a more “normalized” level. The data supports management’s claim.
ACT is a resilient business.
Getinge’s Acute Care Therapies business is a collection of highly specialized and often market leading surgical knick-knacks. Given the long list of regulatory and operational problems the division has had over the past year (the list is too long to reproduce), the remarkable thing is ACT has still generated 3%+ organic growth and defended a 20%+ EBITA-margin during the period.
If that’s not a testament to the market position and stickiness of the product suite and strength of customer relationships, I don’t know what it is.
Assuming Getinge manages its number one job from here (for the avoidance of doubt, it is: not screw up), there is ample upside in the valuation of ACT. Well over 70% of the revenues are recurring, and gross margins are north of 60%. It is likely that margins will continue up, as quality costs have been 3-4%-points of sales in recent years, and higher-margin businesses like the recent impressive acquisition Paragonix outgrow the rest of the division.
Simply assuming mid-single-digit revenue growth and a slight EBITA margin expansion to 23%, would mean ACT makes roughly 5bn SEK EBITA in 2028.
What multiple do you want to put on the ACT knick-knacks that grow MSD at 20%+ EBITA despite a ton of problems? Right now, assuming we value Life Science and Surgical Workflow profits at 20x and 13x, respectively, the market is implicitly valuing ACT at 10x EBITA.
Multiples are powerful things.
And they’re a consequence of perception, expectations and willingness to believe. When the market starts to recognize that it’s not only management talk, but that the improvements are visible in the actual data - both via lower costs and fewer quality issues – that implicit 10x could easily expand to a more reasonable 18x.
In which case the fair value of the ACT division on 2028 earnings would be north of 320 SEK. The stock today trades at 200 SEK. And has two additional divisions earning >2bn in EBITA worth anywhere between 80 to 140 SEK per share. But that’s just gravy.
That’s how you get a stock to double over two years by doing nothing in particular. And that’s also why it’s a big position for us.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Howden Joinery is a leading UK kitchen supplier with a robust business model and significant market share growth, poised for continued expansion despite current market challenges.
Source: https://drive.google.com/file/d/1u1u6IJcqizVp468lm380wCGVEEHl8BF5/view?usp=drivesdk
Analysis:
Howden Joinery – UK kitchen supplier (0.6% of NAV)
Since we wrote about Howden Joinery (“Howden”) in 2011, its market share of UK kitchen volumes has risen from a fifth to a third - and we don’t think it will stop there. Howden’s model is robust and self-reinforcing: its dominant scale in the production of kitchens drives cost advantages which are passed on to kitchen installers and customers through lower prices, which itself drives volumes. This advantage is especially powerful in downturns, where Howden consistently takes share from weak competitors. Howden has taken so much share over the last few years that one can hardly tell that end markets are weak: over the last five years, the volume of kitchens installed in the UK has fallen more than twenty percent, while Howden has increased sales by close to fifty percent. At today’s market capitalisation of GBP 4.5bn and enterprise value of GBP 4.1bn, investors can buy a high-quality business that perpetually takes market share, trading in line with historical valuation at seventeen times enterprise value to run-rate operating profit after tax of circa GBP 240m, despite significant optionality on volume and margin recovery.
Howden’s competitive edge originates from its cost advantage. At two-and-a-half times the size of its closest competitor, Howden wields significant bargaining power over its suppliers, exchanging guarantees of volumes for lower prices per item. Additionally, Howden has selectively brought around a third of manufacturing in-house, capturing scale-related manufacturing efficiencies and procurement advantages that would otherwise be fragmented if sourcing from several suppliers (e.g. chipboard purchasing). Furthermore, while competitors such as Wren and Magnet operate under a consumer-facing model requiring large showrooms, Howden’s offering is geared towards the kitchen installer - stores are small, unimpressive, and often hidden away on industrial estates, keeping overheads low. On top of this, Howden operates a world-class logistics network, capitalising on its greater density of stores to deliver stock faster, with fewer faults, and at a lower cost than competitors.
The feather in Howden’s cap is not the cost advantage itself, but how it is shared with each part of the value chain to incentivise the sale of Howden kitchens. Howden’s store managers are given local P&L ownership and generous profit sharing, and the superior store economics compared to peers results in store managers making more money at Howden than elsewhere - meaning they naturally amass the best talent in the industry. Kitchen installers make more money selling Howden than any other brand: Howden kitchens are priced cheaper than peers for an equivalent product and operate under a confidential pricing model, meaning installers can mark up the sale and capture most of that pricing differential for themselves. Additionally, the in-stock model means that the majority of stock is available immediately or the next day and, combined with market-leading store proximity (nearly ninety percent of UK customers live within five miles of a Howden store), installers are able to turn over projects faster. Finally, the price to the end customer is typically lower than an equivalent kitchen from a competitor, as it is in the installers’ interests to pass on enough of the economics to incentivise the end customers to choose Howden.
The competition continues to weaken. Competitors such as Magnet and Wren are ceding share to Howden as the trade channel slowly suffocates the consumer-oriented channel. Benchmark, Travis Perkins’ homebrew answer to Howden, has been closing stores having never achieved sufficient scale to compete effectively. Homebase and B&Q have both closed their trade businesses, and Ikea, though taking share, remains small and competes only within flat-pack. Thirty to forty percent of the market is still made up of specialist independents, and Howden is coming for them too. This industry is a cage fight between a gorilla and a chihuahua - and we know who we’re betting on.
UK kitchen volumes remain below the trough of the financial crisis in 2010-11, and more than twenty percent below what we consider normalised levels. Consumer confidence is low, pandemic-driven renovation has cooled, and higher interest rates have slowed down housing transactions – the main driver of replacement demand. The sell side models around one percent volume growth in the medium-term. We would be surprised if Howden did not outperform this even in a flat market, given incessant market share gains and maturation of the store base. In a modest recovery scenario, we believe Howden could see three to five percent volume growth annually over the next four years, driving high-single-digit sales growth after accounting for circa two percent price increases and two to three percent store count growth. Any outperformance of volumes will drop through at very attractive margins. Today, Howden’s operating margin is around thirteen percent (adjusted for IFRS interest expense) compared to an average of around seventeen percent over 2015-19, and we think in the medium term margins will likely recover to, if not exceed, prior levels.
CEO Andrew Livingston’s incentives are well-aligned with shareholders given that he is one, with GBP 4.5m of stock to his name. Our downside is protected by the position in the cycle, the robustness of the business model with sustainable return on capital of around thirty percent (will be higher on normalised volumes), and a healthy net cash position of a little over GBP 300m.
There are two main risks to the investment. Firstly, from their current UK store base of around 870 stores, Howden is expected to reach their stated limit of 1000 stores within the next five years. We don’t necessarily believe that this is the ceiling: when we invested in 2011 we were told by management that the upper limit of Howden’s presence in the UK was 650 stores! In the face of competitors closing stores, the latest target could again turn out to be arbitrary. Regardless, our thesis does not rely on this. Stores take seven years or more to reach full maturity, as the store manager and staff build relationships with local installers, and mature stores can reach contribution margins exceeding twenty percent. As a result, when Howden stops opening new stores, it will still continue taking share and growing same-store sales at three to five percent, with expanding margins - we believe terminal operating margins of Howden with a mature estate will be closer to twenty percent than current thirteen percent. On top of this, there are other avenues of growth. The one we are most optimistic for is Howden’s expansion upmarket, representing a significant opportunity to gain share from independents. We see no reason why Howden’s value-for-money advantage would not translate into the higher price ranges. Additionally, Howden is experimenting with fitted bedroom joinery, a category often served by the same installer as kitchen cabinets, representing a straight-forward opportunity to expand wallet share among their existing customers.
Secondly, Howden’s haphazard international expansion has been relatively unsuccessful and widely viewed as a waste of capital. Fortunately, roll-out has now slowed to a standstill and management are aiming to improve profitability and expand more gradually. Though the economics will never rival those of the UK, we see no reason that the France and Ireland businesses cannot be reasonably attractive enterprises, especially given the ability to utilise the UK manufacturing infrastructure. With the majority of free cash flow being returned to the shareholders through a dividend yield of around 3% with buybacks on top, we are comfortable with the capital allocation, though we intend to monitor the GBP 5m per year being spent on international capital expenditure closely and with a higher level of scrutiny.
With the benefit of hindsight, we closed our initial position in Howden early – had we held it from 2011 until today we would have achieved an enviable annualised return well into the high-teens. On a more positive note, we believe our latest purchase has the potential to meet or even exceed this in the medium to long term. In the meantime, should the market show early signs of volume recovery, we expect Howden to be swiftly reappraised given how low we perceive medium-term market expectations to be today.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Integral KK offers rare exposure to Japan’s transforming private equity landscape through a highly incentivized, transparent management team with explosive AUM growth, conservative valuations, and a near-term IPO catalyst that could unlock significant upside.
Source: https://drive.google.com/file/d/14KZAue4FkT-yUXmJsY_UF0k3Bra_FQF2/view?usp=drivesdk
Analysis:
For many years we have tried to find an investment in Japan that matches our investment criteria. Japan is home to many high-quality companies, but the hurdle to investing has always been to find a management team that is fully incentivized to make money for its shareholders. In recent years, the Tokyo Stock Exchange has effectuated massive changes in Japanese corporate governance. Any company that did not comply with their requirements on setting financial targets or the elimination of financial cross holdings was ‘named and shamed’ until they reformed. In other words, things in Japan are changing and we want to benefit from this change.
In Q3 we initiated a position in a company called Integral KK (5842 JP) that we are very excited about. Integral is a manager of private equity funds. This business model is similar to that of Blackstone or KKR. Integral raises money with which they acquire Japanese companies. They subsequently improve the acquired companies before eventually exiting. They charge the classic 2%/20% in fees, which after paying for personnel expenses, accrues to Integral’s shareholders. Historically it’s been a lot more lucrative to own PE managers, as opposed to investing in PE funds directly.
In early 2025, Integral launched their 5ᵗʰ flagship fund for which they raised roughly twice as much capital as for their previous fund. Overnight, their Assets under Management grew by 135%. This level of growth is unprecedented and had a material impact on profitability. Integral President Mr. Yamamoto believes they can raise a 6ᵗʰ flagship fund at double the size of fund 5 in 2 years. In addition, once a PE firm has built a solid track record, this can often be leveraged to launch a real estate, private credit, infrastructure or VC fund, providing further growth opportunities.
Japanese Private Equity has many advantages over the US and Europe. Acquisition multiples are lower. The ability to improve operations by introducing a proper incentive structure for management, or by selling unproductive assets such as real estate, is larger. Debt is cheap. Integral is the only Japanese Private Equity managers with a track record that allows them to raise ¥250b JPY at a time. Foreign PE funds might have easier access to capital, but a traditional, family-owned Japanese company is less likely to sell out to a foreign company with a reputation for cutting headcount. Despite this, Japanese pension funds only allocate 1% of their capital to PE, versus 10–30% in the US.
Integral generally coinvests in every fund as well as in some portfolio holdings. Roughly half of Integral’s current market cap is covered by the value of those investments. Based on the IPO prospectus, we have the impression that Integral is very conservative in the valuation of those investments, with an average EBITDA multiple in the 5–6x range. However, the exact multiple is not disclosed and we believe Integral would do the market a favor by clearly showing how conservative this valuation really is. Management of Integral is accessible and is clearly trying to set a new standard in their transparency to investors. They are also large shareholders themselves and at the time of the IPO they have given themselves a 5-year lockup — a move that we consider unusually shareholder friendly. We believe that if this management team gets a little push in the right direction, and increases the disclosure around the valuation of their investment, Integral would trade at a much higher multiple.
While we are positive about Integral’s long-term growth, we also see a near-term catalyst. A company called Teksced Photomask is currently rumored to pursue an IPO in Q4 2025 at a $300b valuation. Integral is a 50% shareholder of Teksced Photomask through its Fund IV. Our estimate is that they acquired their stake which is potentially worth $150b, at a cost of 10–20b JPY in 2022. If correct, this IPO creates a windfall for Integral’s LPs and generates a significant performance fee for Integral. Customers are also quite likely to reinvest in a future fund if they get large sums of money returned from previous deals.
Over the years, we have invested in many private equity managers in the US, as well as in Europe (EQT, Partners Group) and have done quite well as more money was allocated to this asset class. As explained, there are reasons to be even more excited about the growth opportunities at Integral.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
International Flavors and Fragrances is repositioning for stronger growth and margin expansion through divestitures, R&D investment, and disciplined capital allocation, presenting a compelling value opportunity ahead of expected improvements in innovation and returns on capital.
Source: https://drive.google.com/file/d/1tinUdbm725SN_epQ_vih9-l9hrb9oKo_/view?usp=drivesdk
Analysis:
International Flavors and Fragrances (IFF) is a leading creator and manufacturer of food, beverage, health and biosciences, scent and complementary adjacent products including natural health ingredients which are used in a wide variety of consumer products. The business is geographically diverse, with the US representing 28% of sales in 2024 and no other country representing more than 10% of sales. Under the leadership of J. Erik Fyrwald, CEO since February 2024, the company has taken significant steps to reduce leverage and focus the business on differentiated products with opportunity for innovation to enhance margins. This includes cutting the dividend per share by 50% to $0.40 per quarter in the second quarter of 2024, sale of the Pharma Solutions business for an enterprise value of $2.85 billion and other smaller divestitures. At the same time, management has decided to increase capex to around 6% of sales (vs 4% previously), with around half targeted at maintenance and the rest split between deferred investment catch up and growth investments. A renewed focus on innovation is seeing more investment into R&D that is expected to accelerate growth in the next couple of years. With leverage below the targeted 3x Net debt / EBDITA at the end of Q22025, management has communicated a willingness to restart share repurchases beginning with the fourth quarter of 2025. At a minimum, this program is designed to offset annual dilution from equity compensation (around $75 million to $100 million per year), with the flexibility to increase repurchases as free cash flow generation increases and when IFF shares are trading below intrinsic value. We believe the shares offer attractive value at current levels as the market is yet to price in an improving return on capital outlook driven by a focus on core competence and differentiated, high margin products with above average growth outlook.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Intertek is a leading global TIC services company well-positioned for growth due to favorable market trends and a strong balance sheet, despite trading at decade-low multiples.
Source: https://drive.google.com/file/d/1J-uGb0Z6h-PrM3LX7QYXs3uvwLVBiZv_/view?usp=drivesdk
Analysis:
Intertek is the number three global testing, inspection and certification (TIC) services company behind SGS and BVI. We view these companies as high quality businesses, as evinced by an asset-light business model, high customer retention, healthy profit growth and strong cash generation. Compared to its pre-COVID history, we expect the industry’s growth rate to accelerate thanks to lower oil & gas industry headwinds, stronger pricing, global sustainability requirements, and a greater corporate focus on supply chain resilience. We believe Intertek is well-positioned to capitalize on these tailwinds and additionally benefits from a more favorable geographic mix towards faster growth markets in the Americas and APAC as well as a strong position in the fast-growing assurance business. The business also has an under-levered balance sheet that we believe should enable it to either accelerate growth through bolt-on acquisitions or to return a material amount of the market cap to shareholders over our investment time horizon. Despite these positives, Intertek trades at near decade-low multiples due to concerns over tariffs and a lighter regulatory environment, the risks of which we believe are overstated.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Japan Exchange is an attractive investment due to renewed interest in Japanese capital markets, driven by shareholder-friendly initiatives, increased market activity, and favorable long-term outlooks.
Source: https://drive.google.com/file/d/1B_JGGQ32nKCy2_k5Mnp7MD0wmSkUH_3O/view?usp=drivesdk
Analysis:
Additionally, the portfolio initiated a position in Japan Exchange, the holding company encompassing the Osaka Securities Exchange, Tokyo Stock Exchange, and Japan’s central clearing house. Renewed interest in Japanese capital markets has been fuelled by the Tokyo Stock Exchange’s initiatives to encourage more shareholder-friendly behaviour from listed companies. This shift is drawing capital back into the market and increasing activity through the clearing house, which is also benefiting from rising interest income on overnight margin funds. The stock is thinly covered by the sell-side and conservative management guidance has driven the price down to attractive levels when one considers that guidance was predicated on volume numbers, which they are clearly exceeding at present. Combined with the view that the company stands to prosper from an improved long-term outlook for Japanese capital markets and additional tailwinds from both stronger equity returns and the interest rates, we view the investment case as attractive.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
JEOL is a company that manufactures scientific instruments and mask writing equipment, benefiting from high entry barriers and recurring revenue streams, while aiming to improve profitability in its primary business segments.
Source: https://drive.google.com/file/d/1C57VMFMTbk1veIYy3T7He8kR0i7-sWPB/view?usp=drivesdk
Analysis:
JEOL manufactures, develops, and sells a range of scientific and industrial equipment. JEOL’s roots lie in its scientific instruments business, which sells tools like electron microscopes to academic institutions and food, chemical, and semiconductor customers, among others. Building and servicing this equipment requires significant scientific know-how, resulting in high barriers to entry and thus oligopolistic market structures. JEOL subsequently leveraged its electron beam technology to manufacture mask writing equipment, which fulfills an integral step in chip manufacturing that tethers the company to the world’s leading-edge foundries. JEOL services mask writers for years after selling them, creating a recurring revenue stream that helps smooth out the volatility of equipment sales. Additionally, management has intensified its focus on improving profitability in the scientific instruments business, where margins meaningfully lag global peers. In sum, we believe we are buying two good franchises – scientific instruments and mask writers – for the price of one.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Lanxess is a German specialty chemicals company transitioning to lower capital-intensive sectors, reducing debt while improving cash flow and anticipating significant value from a joint venture’s cash inflow.
Source: https://drive.google.com/file/d/12fmTBoH2iRLQg9aO_7OMCTnO0ADGKKtC/view?usp=drivesdk
Analysis:
Lanxess (LXS.DE) is a German specialty chemicals company that was originally spun off from Bayer 20 years ago. The management team has been focused on selling more cyclical and capital-intensive businesses and building out stickier/lower capital-intensive businesses. For example, “Mobility” (cyclical auto/tires) was ~40% of their business in 2016 and today is ~15%. Additionally, they’ve focused on growing their business in the US. For example, US business was ~15% of sales in 2016 and is approaching ~30% today. Over the last 3 years leverage reached ~5x debt/EBITDA. As they’ve sold off some of the cyclical businesses, they’ve reduced debt to ~3.4x as of now. This is still too high for this kind of business and management targets ~2.5x leverage and an investment grade credit rating. The core business should be able to generate ~200-250mm in free-cash flow in a more normalized environment which equates to an 11-14% free-cashflow yield. They’re currently experiencing weak end-market use and generating 130-160mm in cash, which equals a 7-9% yield. This leaves out a large source of value. LXS has a JV with a put right to their partner. This has 1BB Euro value to LXS (equity value + debt owed to LXS). They exercised their put right and are now waiting for their JV partner to respond with their intentions (there are limited abilities of the partner to delay the closing). In any event LXS will be receiving somewhere between 500mm-1bb euros. If we conservatively assume 500mm of a cash-inflow the business is currently generating a 10-12% yield and will generate 15-20% mid-cycle yield. Once the company delevers I anticipate they will buy in a lot of stock at these levels.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Linde is the world’s largest manufacturer of industrial gases, benefiting from long-term supply contracts, high switching costs, and local monopolies that ensure stable, recurring cash flows.
Source: https://drive.google.com/file/d/1HmmO2XjxlhbJVF9nXyhHp8L_shb8Sxjv/view?usp=drivesdk
Analysis:
Linde is the world’s largest manufacturer of industrial gases and plant construction. The manufacture of industrial gases is a lucrative business, as gases are required by virtually all industries. Added to the above are the high costs associated with switching to other suppliers, as well as the local monopolies that are created with the expensive pipeline infrastructure. “On-site” facilities, on the other hand, generate long-term supply contracts (10-20 years) with stable, inflation-protected prices - similar to the utility business with high barriers to entry and recurring cash flows.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
LKQ Corporation is the largest distributor of aftermarket and recycled auto parts in the U.S. and Europe, known for its extensive distribution network and resilience in recessionary markets despite recent challenges related to declining repairable claims.
Source: https://drive.google.com/file/d/1lbEq9WcMziTAtxXog9j9qY2fuHx8dJfZ/view?usp=drivesdk
Analysis:
LKQ Corporation is the largest distributor of aftermarket and recycled auto parts in the United States and Europe. It’s a roll-up success story. In the U.S., the company focuses on collision products (e.g., headlights, fenders, bumpers, paints). In Europe, LKQ’s parts offering is mostly mechanical in nature (e.g., engines, brakes, suspension). Unlike other major auto parts distributors, LKQ sources a significant percentage of its parts by recycling old vehicles purchased from auctions and stored at the firm’s junkyards. Selling auto parts for damaged vehicles has generally been a recession resistant business. Demand is driven by several factors including the number of repairable auto insurance claims, parts inflation and complexity, the aging and size of the car parc, the willingness of insurers to utilize non-OEM parts, and structural trends such as accident avoidance technology and the shift to electronic vehicles. LKQ’s stock has fallen as declines in repairable claims have negatively impacted the company’s results. Management attributes the trends to a weak economy, high auto insurance rates, and elevated repair costs, which are causing vehicle owners to defer and ignore repairs. These are cyclical factors. LKQ has long outperformed industry auto claims through high service levels and share gains. The company’s key competitive advantage is its extensive distribution network that results in fill rates substantially higher and faster than most competitors. Additionally, LKQ offers repair shops several options for parts, ranging from OEM to new aftermarket to recycled. While LKQ currently has 2.5x leverage, the company generates prodigious free cash flow and can delever quickly. The stock recently touched a five-year low and is trading for 10x earnings, 8.5x EBITA, and provides a 3.9% dividend yield.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
MercadoLibre is well-positioned for long-term growth and profitability in South America’s burgeoning eCommerce market, benefiting from strong sales increases and successful expansion into advertising.
Source: https://drive.google.com/file/d/1HmmO2XjxlhbJVF9nXyhHp8L_shb8Sxjv/view?usp=drivesdk
Analysis:
MercadoLibre: With an eCommerce penetration of less than 15 percent, South America remains one of the most exciting growth areas worldwide. On that continent, MercadoLibre is the market leader and uses its strong position to further expand revenues and profitability. In the second quarter of 2025, sales revenues increased by 27 percent, supported by investments to expand the Brazilian logistics network. Growth in the high-margin advertising business is particularly good (+28%); this segment now contributes 2.2 percent of the gross merchandise volume. It also means that MercadoLibre is expanding the monetization of its platform beyond the pure merchandise business. Together with the structural growth drivers in the region, the company is in an excellent position to generate higher-than-average returns over the long term.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Mortgage Advice Bureau (Holdings) plc is a UK market leader in mortgage and protection advice with strong growth potential and a resilient capital-light business model, currently offering an attractive entry point for investment amid short-term volatility.
Source: https://drive.google.com/file/d/1UfmBYLOs9h5NTDsXqgab3d3kiNlOEuTA/view?usp=drivesdk
Analysis:
Mortgage Advice Bureau (Holdings) plc (MAB1; UK: -1.74% contribution) provides mortgage and protection advice in the United Kingdom through its appointed representative firms. The company offers services across property purchases, remortgaging, buy-to-let products, and insurance, while also supporting partner firms with platform services such as lead generation, software, compliance, and training. Led by founder and main shareholder Peter Brodnicki, management has demonstrated strong value creation historically. Its model benefits from a high degree of recurring revenues, particularly from remortgaging and protection products. As the market leader in the UK, MAB1 has meaningful organic growth potential, emerging verticals, and scope for selective add-on acquisitions. Operational leverage is expected to materialise further from 2026 onwards, with scalable structures now being finalized. The capital-light nature of the business suggests that earnings growth should translate efficiently into free cash flow. Management is currently introducing AI-driven efficiencies to enhance productivity across the adviser network. We initiated our position post-UK mini-budget crisis at an average entry price of GBP 5.86 per share and have since received GBP 0.56 in dividends. Shares peaked at approximately GBP 9.30 in July last year. Regulatory concerns around protection products introduced volatility, which we used to add to our position, confident that the risks were overstated. While shares recovered following regulatory clarification, they declined again due to unrelated concerns around auto loans. More recently, uncertainties surrounding the UK budget and fiscal outlook have weighed on investor sentiment. With these issues potentially resolving in Q4, I see significant medium- to long-term upside from the current share price of around GBP 7.15. As described, I have selectively been adding to the position to take advantage of the short-term volatility.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Radiant Logistics is an undervalued non-asset based 3PL company with a strong acquisition strategy and a robust growth potential, currently trading at a significant discount to larger peers.
Source: https://drive.google.com/file/d/1qXbAeHPp4-FyBQBC1V32jAREoWBh2Ufe/view?usp=drivesdk
Analysis:
RLGT is an underfollowed non-asset based third-party (3PL) multinational logistics company at just 7x trailing and 5x normalized EBITDA, which is a low absolute multiple and a significant discount to larger peers. The company was founded in 2005 by CEO Bohn Crain, who grew it through a series of acquisitions and who still holds a 22% stake. RLGT provides transportation and value-added services to customers needing to make large shipments. It does so by operating an agency network in the US and Canada, which includes ~30 company-owned and ~70 independent agent (strategic partners) locations that operate exclusively on its behalf. These agencies arrange the shipment of products, materials or equipment when they are larger than those handled by integrated global carriers like FedEx or UPS. As a 3PL, RLGT relies on its vast network of asset-heavy carrier partners, including truck operators, railroads, airlines and ocean lines. As a complement to its transportation offerings, RLGT provides customers with other value-added services including materials management and distribution, customs brokerage and global trade management services. This model shields the company from the large fixed-cost and utilization risk faced by traditional carriers during cyclical downturns, providing significant flexibility and allowing it to adapt quickly to volume shifts while avoiding the heavy capital expenditure associated with asset ownership. Capital allocation is a core differentiator for RLGT. The company acquires agencies (from within its own network) and other greenfield operations at mid-single-digit EBITDA multiples. From 2006 to today, revenues grew 35 times to over $900 million, while the share count rose only ~40% and the balance sheet remained pristine, being net cash as of its most recent quarter and fiscal-year end. Currently, we are three years into a steep freight recession. RLGT has capitalized on this slowdown by accelerating its pace of acquisitions while reducing its share count. The current pipeline remains robust and management is actively pursuing additional acquisition opportunities, positioning the company to emerge significantly larger and stronger when volumes recover. As you know, I like to invest in companies that can play offense when others are playing defense. And while I am not expecting RLGT to be sold anytime soon, I could see a larger logistics company buy it for a big multiple at some point over the next decade. In the meantime, the company will continue to generate cash and deploy it intelligently while we wait for earnings power to normalize and shine through.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Robert Half is a profitable staffing and consulting firm that, despite facing industry challenges, remains cash-generative with zero debt and a strong dividend yield, driven by its successful Protiviti segment.
Source: https://drive.google.com/file/d/1lbEq9WcMziTAtxXog9j9qY2fuHx8dJfZ/view?usp=drivesdk
Analysis:
Robert Half provides staffing and consulting services through the Robert Half and Protiviti brands. The firm specializes in finance and accounting placements and also provides labor for technology and office roles. Results have been pressured by weakness in the staffing industry, which has disconnected from the greater labor market due to unique features of the post-COVID economy. Additionally, some investors have concerns about the ongoing demand for finance staffing if AI displaces certain jobs.
While Robert Half’s staffing trends have mimicked the industry, overall performance has been supported by strong trends for the Protiviti consulting segment, which has effectively leveraged Robert Half’s resources into winning share against Big Four competitors. Although trailing results for the entire company are below normal, Robert Half remains profitable and cash generative. It has zero debt and offers a 7% dividend yield, which is supported by cash flow. The company’s target white collar market could experience a delayed demand trough versus blue collar temporary labor, but we are confident Robert Half will be an industry survivor.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Robertet is a leading global producer of flavors and fragrances, specializing in natural ingredients for luxury brands, with a strong potential for value creation despite current market undervaluation.
Source: https://drive.google.com/file/d/1C57VMFMTbk1veIYy3T7He8kR0i7-sWPB/view?usp=drivesdk
Analysis:
Robertet is a global leader in the production of flavors and fragrances and a near pure-play on the natural ingredients sub-segment. The company supplies premium components to high-end luxury brands such as Hermès, Chanel, and Aesop. Although these inputs represent a small portion of end products’ cost of goods sold, they are critical to the consumer experience, defining the signature scent or taste and enabling Robertet to command premium pricing. Many of these scents and flavors underpin popular heritage products, leading to long-lived, recurring revenues. Despite its strong positioning, the stock trades at a discount to our estimate of intrinsic value due to cyclical headwinds and lingering investor overhang, which we believe are temporary. We appreciate Robertet’s shareholder-aligned management team and believe their renewed efforts to expand, internationalize, and modernize the business will lead to significant value creation over the long term.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Salesforce is a leading technology company undergoing a transformation towards greater profitability and shareholder focus, with improving margins and ongoing fundamental performance despite a recent stock price decline.
Source: https://drive.google.com/file/d/1rUWDLB-_V7GqUY0y5TCInUKSQlQHeJ8k/view?usp=drivesdk
Analysis:
Salesforce is a leading technology company that offers a collection of software products aimed at providing businesses with a full front office productivity suite. We believe Salesforce is a wonderful business going through a transformation into a more profitable, shareholder-focused enterprise. Since management announced their renewed focus on operating discipline a couple years ago, Salesforce’s margins have increased substantially. In our view, there is further room to improve as the company leverages its unique position to help businesses deploy AI and continues to restructure its sales organization. Since exiting our position in Salesforce in December, the stock price has declined by over 30% despite continuing to report fundamental results that are in line with our expectations.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Swatch is an undervalued luxury brand with strong marketing and design skills, presenting a compelling investment opportunity driven by potential capital management, improved outlook in Greater China, brand revitalization, and favorable changes in the US tariff environment.
Source: https://drive.google.com/file/d/1jkLujl18OZdhZagApRH5YcWNXYOVXFF7/view?usp=drivesdk
Analysis:
Swatch is unique. The company has amazing brands, some not properly utilised at all, and current management has evidenced adroit marketing skills. The amazing 2022 launch of “Moonswatch” which sold 1 million pieces in its first year at US$260 a piece, whilst arguably a short-lived sugar hit, does have some medium-term benefits in opening younger markets to a wider product set, and paved the way for other multi-brand collaborations not available to other makers. It suggests there continues to be genuine marketing savvy within the company, allied to ongoing phenomenal design and technology skills.
Insofar as these skills and brands are intangible, investors are not paying for them. The unique nature of Swatch shares, as a luxury participant trading at a 32% discount to NTA of CHF221/share is compelling. But how is that gap closed up?
We see four factors that could make a serious difference:
some form of capital management;
improvement in the Greater China outlook;
a selected brand revitalization or even divestment;
A change in US tariff environment for Switzerland
In the absence of a “moonshot” takeover offer which entices the Hayeks to sell (remembering that whatever the emotion, it’s “only” a single generation legacy dating back to the early-mid 1980’s) which in prevailing circumstances could not come from other wider-industry players. The desire of the Hayeks to have management control, in our opinion, dictates against a private equity partnership to remove the group from public quotation, and the controllers will not countenance a leveraged buyout or other debt driven transaction.
However, there is still scope for shareholder friendly action, potentially to free up funds from the investment properties; it is questionable what role they play, as opposed to exclusive buildings carrying Swatch Group product.
At these share prices, the company should be retiring equity. In theory, there is scope to buy up to ~12.67 million shares if the Hayek’s do not change their last known holdings, since cancellation of the securities would take the Hayek pool to just under 49% voting control, above which a takeover would be required.
Any buy back would have to be a combination of bearer and registered shares, since it would represent 44% of the bearer shares issued. A buyback is not unheard of. Nicholas Hayek bought back stock relatively aggressively from 2004 through to 2008, disbursing CHF1.52 billion in equity retirement proceeds. Even Nick Hayek bought back CHF977 million worth of stock between 2015-2019 at prices multiples of those prevailing now. To test the capacity for appropriate divestment of the Old Bond Street and Zurich properties in exchange for a far more attractive investment – Swatch shares – unless the group will utilize either property is a business school no-brainer.
There is one other area of underutilized invested capital: certain of the group’s most prestige brands. The Blancpain brand has been used in the “scuba Fifty Fathoms” Swatch collaboration but Breguet has only two monobrand outlets in the USA. Whilst both have a long history, they have only been in the Swatch stable since the 1990’s.
The reinvention of Breitling with the initial capital backing of CVC in 2017 supplanted by Partners Group in 2022- at a valuation **which is equivalent to 55% of Swatch Group at prevailing prices** – is cited by many.
Hence, we view swatch more as a **free option** on a cyclical pick-up in the Chinese consumer, capital management and brand revitalisation from a team well capable of its execution. Near-term earnings prospects look dull, but we have seen in the past how quickly that can change. Given the shares trade at only ~6x EV/2023 EBIT, that’s hardly priced in.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Synopsys Inc is a leading electronic design automation software vendor that presents a compelling investment opportunity after a recent stock decline, despite temporary headwinds in its chip design IP segment due to US export restrictions and challenges with Intel.
Source: https://drive.google.com/file/d/1LMyAieS-O01KA48sOASWGe6_LIYTmWzS/view?usp=drivesdk
Analysis:
Synopsys (SNPS) is the leading vendor of electronic design automation (EDA) software tools used for integrated circuit design, and the #2 licensor of chip design IP. EDA tools are mission critical for anyone who wants to design chips – from Nvidia and Analog Devices to Apple and Alibaba. The EDA market is a stable oligopoly between market leaders Synopsys and Cadence Design Systems, with Siemens (formerly Mentor Graphics) a distant third place.
As a “picks and shovels” vendor of chip design tools and IP, Synopsys benefits from an increasing number of design starts especially at the leading edge (note our comment above regarding record TSMC N2 tape-outs), and is a second order beneficiary of all the hyperscalers pursuing custom ASICs to reduce their dependence on Nvidia GPUs.
We have followed Synopsys for several years but never found the valuation to be compelling enough for the earnings growth on offer. However, an opportunity arose following the company’s FQ3 2025 results when the stock collapsed -36% because of a miss and guide-down in the IP segment. The IP segment is c.30% of total revenue and has historically generated lower operating margins than the core EDA segment due to the high fixed cost of R&D to design the IP. The IP weakness was attributed to the temporary US EDA export restrictions placed on China in late May and subsequently lifted in early July, plus ongoing challenges at Intel’s foundry business which Synopsys supports via IP for Intel 18A (Intel is a common source of headaches for its suppliers…).
While the six-week export restriction only temporarily disrupted design starts in China, it has had a longer-lasting impact on customer decision-making. Considering the cost to design and tape out a leading edge chip design, Chinese customers have been left questioning whether continuing to work with Synopsys is worth the risk of future export controls. Synopsys has more exposure to China compared to Cadence and Siemens, and that revenue mix is heavily weighted to IP which has high operating (de)leverage. We think that this disruption is more likely temporal than structural – notwithstanding the risk of further export controls, the China domestic EDA market lacks both the full flow tools and comprehensive IP portfolio that Synopsys offers.
The weakness associated with Intel stemmed from Synopsys’s significant R&D investments to support the Intel 18A process with IP, and the latter subsequently failing to secure any external customers for 18A. The impact is twofold – not only is there a direct earnings headwind due to the expected revenues not materialising, but there is also the opportunity cost that Synopsys incurred by allocating scarce R&D resources to Intel rather than other IP opportunities. On the earnings call, management indicated that the IP organisation is now pivoting towards opportunities within data centre AI and greater IP support for other foundries. We see this Intel-related headwind also as temporal rather than structural – not because we think Intel will successfully commercialise 18A (or even 14A for that matter) with external customers, but because the customised AI-related IP opportunity that Synopsys is pivoting towards should be more valuable than standard off-the-shelf IP.
We estimate that the above two headwinds impact FY25 and FY26 earnings by mid-teens percentage points, compared to the -36% stock price reaction. So, it appeared to us that the market significantly overreacted to the IP segment downgrade and offered a compelling and fleeting (for now) opportunity to buy a defensive, mission critical and AI-disruption insulated software business with a wide margin of safety.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Targa Resources is a leading midstream natural gas and NGL company with significant competitive advantages and stable earnings from long-term contracts, well-positioned for growth despite recent market uncertainties.
Source: https://drive.google.com/file/d/1oRrx7RwXch76pw-ViFaaQhLqgz_CC2CG/view?usp=drivesdk
Analysis:
Targa Resources is a leading midstream natural gas and natural gas liquids (NGL) company. Targa is a part of a group that controls 90% of the fractionation capacity in the largest hub for NGLs in the world, known as Mont Belvieu. Thanks to the region’s unique topography and proximity to the Gulf Coast, Targa benefits from meaningful cost advantages and significant barriers to entry. We like that Targa generates approximately 90% of its earnings through multi-year fee-based arrangements with its customer base, which provides protection against oversupply or re-contracting. Uncertainty around Permian oil production growth has recently weighed on the share price. However, in our view, Targa remains well-positioned to grow, even if the Permian slows dramatically. We were happy to purchase shares at a discount to peers based on normalized earnings power and our estimate of intrinsic value.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Tencent is a powerful blend of Meta and Microsoft, leveraging its WeChat ecosystem and AI capabilities to drive sustainable revenue and earnings growth in various markets.
Source: https://drive.google.com/file/d/142eD700R7u7_qWzvMtkxRiZySGKyiLzm/view?usp=drivesdk
Analysis:
Tencent is almost like a mix of Meta and Microsoft. It owns a wide range of complementary and highly privileged consumer and business-facing platforms. Tencent’s consumer-facing crown jewel is its Weixin (or WeChat) mobile app, which boasts more than 1.4 billion monthly active users (covering almost the entire Chinese population). Chinese people live their personal and professional lives through the app. Unlike Western apps, WeChat has millions of internal ‘mini programs’ (sub-applications) developed by third parties. These mini programs provide users with services ranging from e-commerce, gaming, entertainment, to public services, transportation and payments. The flywheel dynamic here is fairly obvious: the more users that engage with the platform, the greater the opportunity for third-party mini programs to monetize services to WeChat’s huge audience. Tencent provides marketing, advertising, commerce — and increasingly AI services — to these mini-programs, so the symbiotic relationship between opportunity and growth is clear. On the business-facing side, Tencent — as owner of some of the most privileged datasets in China — is a leader in Chinese AI and a major player in cloud computing. This, too, has a flywheel dynamic. Like the western hyperscalers, the more businesses use Tencent’s cloud computing, the greater Tencent’s scale and the lower its fixed costs — including in RGD — become as a percentage of revenue.
AI strengthens flywheels. Over recent years, Tencent has started to strengthen its flywheels by deploying AI within its core businesses. Like Meta, Tencent has used AI to successfully improve several areas: content recommendations and search capabilities — both of which increase user engagement and ad inventory; its ad targeting and closed-loop measurement within the Weixin ecosystem, which drives fantastic returns for marketers; ad creation, placement, and performance analysis, which boosts click-through conversion rates; and Tencent’s gaming businesses is also benefiting from AI through improved coaching of new players as well as accelerating game-creation productivity. Perhaps the most underappreciated aspect of Tencent’s strengthening flywheel is Weixin’s privileged ecosystem data and the extreme value this has in the age of AI. For example, Tencent will soon launch a new agentic AI that has unique access to WeChat’s 1.4 billion users. It can communicate across the entire ecosystem and can transact within the millions of mini programs on the platform. Without access to the internal data (which Tencent keeps private), a competitor simply could not replicate anything like it.
Sustainable revenue growth. Tencent’s flywheels strengthen its competitive advantages over time and enable it to sustainably grow into (and expand) several large markets in China, including digital marketing, e-commerce, search, gaming, cloud computing, AI, and even financial services. While these markets are at different stages of development, revenue growth in each contributes to an aggregate annual revenue growth in the double digits. And, as you can see from the chart above, over the last year, growth has accelerated. New and emerging revenue streams are growing much faster than the company average: international gaming is growing at +35% per annum; video accounts marketing revenue is growing at +50% per annum; and cloud computing revenue is growing in the teens percentage per annum, despite being capacity constrained on AI chips. Tencent remains in the early days of chasing some very large markets in China and has a long runway ahead. Tencent also has other levers to pull to drive greater revenue growth. For example, its ad load within short videos is a mere fraction of competitors and can be gradually ratcheted up over time. Overall, this gives us confidence that Tencent will generate solid growth over a much longer time horizon than many expect.
Turbocharged earnings growth. In addition to revenue growth, Tencent’s future earnings power is also materially underestimated. Over the last three years, Tencent’s operating profits have more than doubled. This was partially driven by revenues (which increased by approximately 40%), but mostly by profit margin expansion (which increased from 22.5% to 35.5%, as shown in the chart below). Hidden in these numbers is a vital insight: the operating profit margin on the incremental revenue growth over the last three years has been more than 60%! That’s because most of the incremental revenues have been built on top of the existing (mostly fixed cost) technology platform. So the incremental variable costs required to earn these new revenues are much lower. To the extent this incremental profit margin holds, the overall company operating profit margin will gradually approach this level. The incremental margin works like a ‘magnet’ that slowly attracts the average margin towards it over time. The combination of strong revenue growth and expanding margins gives rise to turbocharged earnings growth for Tencent.
Still undervalued. But the equity market is failing to appreciate this earnings power. Despite Tencent’s stock price increasing by 3x over the last three years, Montaka estimates the ratio of Tencent’s operating enterprise to operating earnings to be just 17x.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Teradyne is an attractive investment opportunity due to its strong market position in automated test equipment for advanced semiconductors and its growth potential in the robotics sector.
Source: https://drive.google.com/file/d/1B_JGGQ32nKCy2_k5Mnp7MD0wmSkUH_3O/view?usp=drivesdk
Analysis:
Our investment team continued to identify attractive opportunities for capital deployment during July, establishing several new positions. One addition was Teradyne, a leading designer and manufacturer of automated test equipment (ATE) and robotics products. The company’s core business involves providing critical testing solutions for a wide range of electronic components, including semiconductors, where it forms part of a significant duopoly alongside Advantest. This market position is strengthened by the high cost and complexity of switching testing platforms, which fosters a “sticky” customer base and a strong competitive moat. We believe Teradyne presents an attractive investment opportunity due to several key factors. The ongoing demand for advanced semiconductors, particularly those used in artificial intelligence (AI) and high-performance computing, is driving a new cycle of growth in the testing market. Teradyne is strategically positioned to benefit from this trend, as the complexity of these new chips requires more rigorous and sophisticated testing. Furthermore, its robotics division, which includes collaborative robots (Cobots) from Universal Robots, is a key growth driver as industries increasingly automate manufacturing and logistics processes. These factors, combined with the company’s strong financial health and strategic capital allocation, position Teradyne to capitalise on long-term technological trends. The company’s valuation is also very attractive, both on a historical basis and relative to Advantest and the broader market.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
The Travelers Companies, Inc. is a leading provider of property and casualty insurance in the U.S., leveraging its extensive data, disciplined underwriting, and a strong distribution network to maintain a competitive edge across its Business, Bond & Specialty, and Personal Insurance segments.
Source: https://drive.google.com/file/d/1XXgxRunCs2LK6lPhFTh5cdT1aibWAtf6/view?usp=drivesdk
Analysis:
The Travelers Companies, Inc. is a leading provider of property and casualty (P&C) insurance for auto, home, and business. With a history stretching back over 160 years, the company has established itself as one of the largest and most respected commercial P&C insurers in the United States. Operating under its iconic red umbrella symbol, Travelers has built a durable franchise based on disciplined underwriting, extensive data advantages, and an unparalleled distribution network. The company’s operations are organized into three primary segments: Business Insurance, Bond & Specialty Insurance, and Personal Insurance.
Business Insurance is the company’s largest segment, offering a comprehensive suite of P&C insurance products and services to businesses of all sizes, from small enterprises to large corporations. Its core offerings include workers’ compensation, commercial automobile, commercial property, and general liability insurance. The cornerstone of this segment’s success is its deep, long-standing relationships with a vast network of independent agents and brokers across the country. This distribution system provides a significant competitive advantage, creating a wide moat that is difficult for competitors to replicate. Agents act as trusted advisors to their clients, and their preference for Travelers is built on the company’s reliable service, financial strength, and claims-handling expertise.
The Bond & Specialty Insurance segment is a high-margin business where Travelers holds a commanding market-leading position. This segment provides surety bonds, which guarantee the performance of contractual obligations, as well as fidelity, management liability, and professional liability insurance. The surety business, in particular, requires specialized underwriting expertise and a fortress-like balance sheet, as it often involves guaranteeing large-scale, multi-year construction and commercial projects. The company’s reputation and financial stability are paramount, making its brand a critical asset. This segment is less commoditized than other insurance lines and benefits from the deep industry knowledge and risk-assessment capabilities that Travelers has cultivated over many decades.
The Personal Insurance segment provides homeowners and automobile insurance to individuals. This division leverages sophisticated pricing models and a multi-channel distribution strategy that includes independent agents as well as direct-to-consumer options. While operating in a highly competitive market, Travelers focuses on attracting and retaining responsible customers by offering tailored products and excellent claims service.
The enduring competitive advantages of Travelers are rooted in its scale and data. As one of the nation’s largest insurers, the company possesses an enormous reserve of historical claims data. This information provides an analytical edge, allowing its underwriters to more accurately price risk and adapt to changing market conditions. This discipline is the foundation of long-term profitability in the insurance industry. The company’s financial strength allows it to manage the inherent risks of the P&C industry, including exposure to catastrophic events and the cyclical nature of insurance pricing. Management has consistently demonstrated a commitment to shareholder value through prudent capital management while maintaining a strong balance sheet capable of meeting its promises to policyholders.
Check here for the latest results, quarterly call and analysts’ estimates.
Thesis:
Union Pacific is a highly profitable railroad with a strong long-term outlook, currently undervalued due to recent underperformance and merger uncertainty, presenting an attractive investment opportunity.
Source: https://drive.google.com/file/d/1IeIIAYIzAs-gItzanyYC5MPmYdvc7_iM/view?usp=drivesdk
Analysis:
Union Pacific is the largest and most profitable Class I railroad in the U.S. We see freight rail as an attractive industry, underpinned by irreplaceable infrastructure, strong pricing power, and minimal risk of technological disruption. The company is led by an exceptional CEO, Jim Vena, who has driven significant cultural and operational improvements. Despite these improvements, the stock has significantly underperformed the market in recent years as macro headwinds and uncertainty related to the proposed merger with Norfolk Southern have distracted investors from an improving long-term outlook. This provided us with the opportunity to purchase UNP at a meaningful discount to our estimate of intrinsic value. We believe the stock is undervalued on a standalone basis, with further potential upside should the merger be approved, as we find the strategic and financial logic of the deal compelling.
Check here for the latest results, quarterly call and analysts' estimates.
Everything you read here is for information purposes only and is not an investment recommendation.
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