We have just come to the end of reporting season across the portfolio and as we did in the August monthly report, we have asked our fund managers for an update on how some of our key positions are performing.
Overall, it was a good reporting period for the portfolio with some good moves to the upside.
Amazon
Amazon reported strong growth in e-commerce and a stabilisation of growth at Amazon Web Services (AWS), which was one of the most important things to see in the reported result. Management’s revenue guide continues to show strong retail growth in the first quarter of 2024, and importantly both the quantitative guidance and qualitative earnings call commentary suggests that AWS growth should continue to re-accelerate starting Q1 2024. The most impressive part of the result was the operating margins that are now approaching double digits.
Over time, Core Fund Manager, Munro Partners believes there is significant margin expansion to come for Amazon, creating a long earnings runway. One of the drivers of the margin is Amazon’s advertising business, which is growing strongly but also, at a significantly higher margin (Munro estimate approximately 40% operating margin).
This has created a positive mix effect on the core e-commerce business profitability. Over time, Munro Partners believe Amazon has one of the strongest earnings growth opportunities in their portfolio holdings, given the sheer scale of margin expansion they think the company can deliver. Munro Partners believe this will turn into very strong free cashflow generation leading to further returns for shareholders over the medium term.
BHP
BHP reported an in-line operating result accompanied by solid free cash flow and strong cost control with average unit costs only increasing marginally despite the broader inflationary environment. The company indicated that Copper production at Escondida is expected to decline more than expected while in contrast, their South Australian Copper production expectations are improving.
Their iron ore operation continues to perform strongly retaining its position at the bottom of the cost curve. This more than offset challenges in their (much smaller) nickel and met coal operations. The company continues to represent good value with high single digit free cash flow yields, solid production growth, low gearing and a suite of attractive assets towards the bottom of the cost curve.
Brookfield
Brookfield reported growth in its net asset value of 18% for 2023. The performance was led by the recently listed asset management arm whose shares increased 40%. As a leader in high demand areas of credit, infrastructure, and renewables the outlook for 2024 is for double digit revenue growth at the asset manager.
Brookfield’s stake in its listed entities (asset management, infrastructure, renewables, private equity) roughly equates to the current market capitalisation. The property on their balance sheet of $22bn is not being valued by the market. Interest rates stabilising and a recovery in capital market activity will help bring confidence to these values and assets. All the while Brookfield’s continues to grow its operations and intrinsic value.
Eurofins
Despite the market’s slightly negative response to this set of numbers, Core Fund Manager, Cooper Investors think it was a promising result. There was a small cut to the dividend which seems to be the main cause of the reaction as the board set the pay-out ratio back to pre-covid levels. The offset to this is the company continues to buy back shares. Free cashflow was a tad light on some working cap moves. These results were the first reported positive revenue and EBITDA growth numbers since the COVID period. This is a major inflection point. Reported EBITDA increased 5% and margins expanded 120bps.
Ex COVID the business continues to grow at around 6% organically, and as the first full year ex COVID the 2024 outlook is for 15% EPS growth. The business is now trading on ~17x this number which is well below historical averages. Eurofins 2027 targets call for $2.4bn of EBITDA which should deliver more than $1bn of free cashflow. On any reasonable multiple we see significant upside over this 3-year period.
Formula One
Formula One continues to fire on all cylinders, with revenue and adjusted EBITDA growing more than 20% in 2023. Importantly, momentum is widespread across the business, with double-digit growth in each business segment.
With compelling top of funnel metrics, including a global audience of 1.5bn people (+4% yoy), growing race attendance (+5% yoy in 2023), faster social media growth than any other major sport globally, and attractive growth in the important under-35 and female demographics; we believe Formula One is still in the early innings of monetising its enormous global fanbase. As such, financial metrics should accelerate in 2024 (more than 40% adjusted EBITDA growth) and compound for years to come. Important catalysts like a new US media rights contract and improved profitability for the self-promoted Las Vegas grand prix present positive tailwinds over the next 12 months.
With a very capital light operating model, this profitability inflection will translate to healthy cash flow conversion, creating meaningful shareholder return and/or accretive M&A optionality.
Intercontinental Exchange
ICE is a leading global operator of regulated exchanges and clearing houses for financial and commodity markets and the dominant technology provider to the US Mortgage market. The company reported strong derivative volumes in the final quarter of 2023 reflecting elevated volatility in underlying energy and interest rate markets. In addition, lower long-term US interest rates over the quarter were supportive of an improvement in the outlook for the US Mortgage market benefiting ICE’s Mortgage Technology segment.
Just Eat
The Global Food Delivery Industry continues to shift to profitability and Just Eat Takeaway was no exception. Group adjusted EBITDA for 2023 was €324m, up from €19m in 2022. This compares to the original company issued guidance of approximately €225m provided at the start of 2023. Most notably, delivery costs per order improved in the UK by 12% in 2023.
Importantly, the group was free cash flow positive (excluding changes in working capital) in 2H23 and will be free cash flow positive in 2024 and thereafter. The group expects profitability to continue to improve in 2024 and has guided to 2024 adjusted EBITDA of approximately €450m. On the capital management front, share buy backs are ongoing with 7.3% of issued shares bought back since April 2023.
Mastercard
Mastercard delivered another quarterly earnings beat at its full year result. Mastercard continues to demonstrate sustainable revenue growth given its diversified exposure to consumer spending and cash digitisation across regions. The strength in Mastercard's network was clear in the result, with value added services growing at multiples of the core consumer payments business.
In more recent news (20 February), Capital One (a card issuer) announced the desire to acquire Discover, which is the 4th largest credit network in the US. Whilst this deal is likely to face some regulatory scrutiny, Core Fund Manager, Magellan do not think this merger will diminish Mastercard's ability to continue to protect and grow its earnings. Mastercard and Visa are the only true global networks, with Discover only at scale in the US. Ubiquitous global payments are key to consumer usage, and achieving this globally will come at a significant cost with respect to both time and money.
https://www.mastercard.com/global/en.html
Microsoft
Microsoft’s ability to capitalise on the artificial intelligence market opportunity and continue to deliver profit margin expansion were the highlights of its December quarter result. The Azure cloud business grew 28%, with increasing customer AI spend contributing to this growth.
Encouragingly, industry IT spending headwinds abated as customers resume project investments. The Office 365 business demonstrated continued strength and there is a positive opportunity ahead with the launch of Copilot. Microsoft closed its acquisition of Activision-Blizzard, which will provide further opportunities for its gaming franchises. Overall, Microsoft delivered a strong result that was consistent with Magellan’s investment thesis.
Nvidia
Nvidia reported earnings with revenues up 22% over the quarter, and 265% year-on-year. Operating leverage was even more impressive, with EPS up 487%. Gross margin came in at 74%. Despite the exceptional performance of the stock since it was acquired, the earnings multiple is a lot lower today. It is currently trading at 31x forward after-tax multiple.
Nvidia is now annualising revenues at $100bn run rate based on the next quarter’s forecast. The company is still capacity constrained and there is clearly a lot of confidence in the coming quarters. Further growth is expected as supply comes online. Nvidia is the hardware and software solution for the artificial intelligence boom that we are seeing. Encouragingly, 40% of datacentre revenue is already coming from something called inference which will help to steady concerns that Nvidia will lose out as compute shifts from training models to actually using them.
This AI boom is just getting started and Nvidia has a huge lead. We think that there will be a lift in sovereign demand in the near and mid-term. Every major government is going to need to train their own models on their own data which must be kept secure. This is a huge opportunity for Nvidia.
Taiwan Semiconductor (TSMC)
TSMC reiterated its guidance for revenue to grow over 20% in 2024. This was also reinforced by the general health of the industry best seen by ASML reporting 9bn EUR of orders received during the quarter. Investors were paying close attention to this number provided by the company as a gauge of industry growth in 2024.
The company reiterated previous guidance which sent a signal to the market that growth in the semiconductor industry is expected to be strong ahead. TSMC also increased the percentage of revenues coming from AI related workflows to high teens as a percentage of revenue. Munro Partners’ believe TSMC earnings can double over the next 5 years and believe the stock is still attractively valued at approximately 17x blended forward earnings.
