Conviction, Eclectic, Concentration, Patience
We seek to be different by buying and holding a small number of large cap stocks, which represent good value to us.
We aim to beat our benchmarks each year by deviating from the norm and taking contrarian bets in order to achieve returns well ahead of our benchmarks.
We aim to buy undervalued companies and short overvalued companies to generate absolute returns.
British American Tobacco is a core holding for us, given its strong cash flow generation and cheap valuations.
Despite the noise around the share price and the sector, the company continues to grow free cash flow at c.7% CAGR (’19-’22) and is on a forward (’24) dividend yield and FCF yield of over 9% (on both metrics).
Net debt/ equity has fallen nicely to c.0.5x end ’22, and further debt repayment in ’23 gives management the option to pursue meaningful share buybacks in ’24.
Put it all together – we have a low beta stock with high FCF and dividend yields trading at mid-single digit P/E. In the market context of a higher cost of capital and slower economic growth, this stock holds significant appeal for us (source: Bloomberg).
Shell is a long term holding for us. We expect oil prices to be elevated, with a floor range of around US$70-80 / barrel in the medium due to financial discipline and limited capex by the oil majors.
Shell has been steadily repaying debt. Net debt / equity is down to 20% at end 1H’23, which is encouraging.
Simultaneously, cash return is improving through a combination of dividends (c.4%) and buybacks (c.7% yield) – supported by a c.13% FCF yield on CY24 consensus estimates (source: Bloomberg).
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