Aubrey European Conviction Strategy: Reflections on Q1 Company Reporting

by | May 22, 2023

‘Fascinating’ aptly describes the market’s immediate reaction to our portfolio companies’ quarterly earnings updates. This is illustrated by two companies whose results triggered contrasting share price movements, neither reaction being particularly predictable or comprehensible.

Company ‘A’ generates most of its revenue from electronic shelf labelling, which is primarily used in supermarkets. The company has a 50% share of the existing electronic labels market, with €620m in 2022 sales, and is well placed to benefit from the longer-term transition from paper labelling.

The share price increased by 45% after the company announced a 31% rise in Q1 sales and a partnership with a leading U.S. supermarket chain. This opportunity is expected to result in the deployment of ~500m electronic labels over the next couple of years. After speaking with management back in January 2023, we understood the scale of the potential opportunity in the US, which formed a large part of our investment case, so we were satisfied but somewhat surprised at the market reaction, as this was a matter of public knowledge.

Company ‘B’ is a leading fibre optic technology manufacturing and solutions company. We first spoke with management in January 2022, and were interested to discover that fibre optic penetration in the UK, Germany, and the U.S. is very low in comparison with the company’s domestic market. As such, the company was optimistic about the potential for geographic expansion and continuing demand for its products and systems.

In Q1 2023, the company’s sales increased by +52% YoY, EBITA margin expanded to 17.2%, previously 13.3%, and earnings per share (EPS) increased by 83%. This followed strong results in 2022. The company is growing faster than its peers and is trading at a price-to-earnings (PE) multiple of 15x, a 50% discount to its five-year historic average. Yet despite all the above the share price fell 10%.

In contrast, and to put these growth and valuation anomalies into a broader context, the MSCI Europe index is trading on a PE of 13x, however, it is expected to deliver negative growth 12 months forward of -2.1%. It cannot even be valued on PEG, because there is no growth! This suggests to us that the market is increasingly irrational and is being driven more by fear than fundamentals, which opens a window of opportunity for growth- focused long-term investors like Aubrey.

So far, we have seen sixteen of our holdings report, with an average sales growth of +23% and average EPS growth of +44%. We are even more pleased to see that, on average, the operating margin of the companies has expanded by 70bps. We believe the current valuation of the portfolio PE of 22x with a 2-year average expected EPS growth of 22% (PEG 1.0x) is an attractive entry point, as we expect there to be some upward revisions in earnings in the near term.

During these times of uncertainty, finding a growth manager with long-term outperformance is important. While some will try to position their portfolios with short-term tactical allocation bets, sustainable long term earnings growth is the safest path. Valuations will eventually catch-up.

Since inception to 30th April 2023, the Aubrey European Conviction Strategy has delivered 179.4% return which represents an outperformance of 65.5% relative to the MSCI Europe Net Daily TR Index.

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