2 weeks Ago
Orientfootage Dear Partners and Friends, Our partnership recorded a gain of +2.2% net of all fees, expenses, and allocations for the quarter ending September 30, 2024. Over the same period, the S&P 500 ( SP500 , SPX ) recorded a gain of +5.
9% including dividends. Period 1 Partnership Returns 1,2 S&P 500 Returns 1,3 Q3 2021 9.5% (0.
9%) Q4 2021 13.7% 11.0% 2021 24.
5% 10.0% Q1 2022 (1.3%) (4.
6%) Q2 2022 (18.9%) (16.1%) Q3 2022 (12.
8%) (4.9%) Q4 2022 18.8% 7.
6% 2022 (17.0% ) (18.1% ) Q1 2023 7.
8% 7.5% Q2 2023 17.1% 8.
7% Q3 2023 27.0% (3.3%) Q4 2023 13.
5% 11.7% 2023 82.0% 26.
3% Q1 2024 (1.3%) 10.6% Q2 2024 (3.
8%) 4.3% Q3 2024 2.2% 5.
9% 2024 (3.0% ) 22.1% Annualized Return Since Inception 20.
7% 10.8% Cumulative Return Since Inception 82.6% 38.
9% Click to enlarge The below table highlights the partnership's key portfolio composition metrics as of September 30, 2024: Key Portfolio Composition Metrics 4 Number of Holdings: 15 Average Market Cap 5 : $377MM Top 5 Holdings Concentration: 53.4% Investments Non-U.S.
6 : 84.5% Please see important footnotes to the above tables under the "Disclaimer" section at the end of this letter. Click to enlarge Our partnership recorded a modest gain in the third quarter.
Over the past several months, we took opportunities to add to several of our core positions in Mader Group ( OTCPK:MADGF ), Auto Partner, and Dino Polska ( OTCPK:DNOPY ), as their share prices reached what we found to be attractive levels. Below, we will outline recent developments regarding these businesses, as well as for a couple of others. We have also been evaluating a number of prospective investments in recent months, some of which have become new portfolio holdings.
The U.S. market indices appear poised to deliver another strong year.
As discussed in our previous letter, it has been a challenging environment for many investment managers, especially for us, to match the S&P 500's pace this year without meaningful exposure to U.S. large caps or to specific segments, such as businesses involved with artificial intelligence, that have performed exceptionally well.
If anything, this year has strengthened our resolve and our appreciation for the patience necessary to realize the rewards of long-term investing, including a greater appreciation for the non-linear relationship between stock prices and profits per share. Our portfolio companies continue to deliver what we see as great results and steps in the right direction. As the aggregate intrinsic value of our portfolio continues to increase, we are confident that our long-term returns will align with the sustained growth of our businesses.
7 This is largely what we will remain focused on and, over much shorter periods, allow the chips to fall where they may with conviction that our investments will pay off in future periods. We look forward to uncovering additional hidden gems across the global developed investible universe in our constant effort to improve the quality of our portfolio. As always, I would like to extend a thank you to all of our outstanding limited partners, including those of you who have recently joined our partnership, for your steadfast commitment and trust.
It is the outstanding quality of our limited partners, a total count which is now almost 50, that allows our partnership to maintain its long-term orientation over its investments, withstand volatility, and ultimately realize as best as possible our goal of compounding our capital at the highest rate of return that we responsibly can. Portfolio Updates This letter, I thought it would be a most relevant discussion to share my thoughts behind our decision to add to several of our positions: Mader Group, Auto Partner, and Dino Polska. I've also added a few thoughts regarding Kitwave Group and Duratec, both of which have shared material updates in recent weeks.
In August, Mader Group reported earnings for its fiscal year 2024 ending June 30. The company achieved its guided revenue and net income figures, though its forward-looking guidance for FY25 of +14% YoY growth in net income fell short of lofty sell-side expectations. As a result, shares declined in the following days and weeks by as much as -27%.
We used this sell-off as an opportunity to accumulate more shares in Mader Group. We think the market was wrong to take this forward-guidance, and any extrapolated reduction in long-term growth prospects, at face value. We believe instead that Mader Group's management chose to be conservative in setting its FY25 guidance, and that the company's long-term growth opportunity remains more than abundant.
Embedded in management's FY25 guidance were YoY revenue growth assumptions for Australia of +10% and North America of +25%. 8 Last year, these segments grew at respective rates of +25% and +34%, notwithstanding a difficult second-half for U.S.
operations due to a slowdown within coal to which the CEO commented, "not in a million years did we see the USA going backwards half on half." 8 Based on our research, these geographies appear to be performing well, especially Canada, and we see growth rates across the board as likely to outperform guidance set by management. 7,8 Additionally, management has a demonstrated history of setting conservative guidance.
For instance, for FY22, management initially guided to revenue growth of +18% and ultimately delivered growth of +32%. 8 For FY23, management initially guided to revenue growth of +26% and ultimately delivered growth of +51%. 8 Talk about a practice of under-promise and over-deliver! We expect the company to earn AUD $0.
29/share for FY25 which implied a P/E multiple of 16-17x at recent prices. We viewed this as an attractive price for an excellent business that we expect to compound its free cash flow per share at a CAGR of +15-20% or greater over the next five years. Auto Partner saw its share price decline because of what we suspect is disappointment over the company's reported earnings growth during this year's first and second quarters.
We think the market may be underappreciating the fact that Auto Partner had over-earned during years FY20 through FY22, and that FY23 and FY24 have been what we see as adjustment periods, where operating margin is finally settling back within its normalized range. As a result, despite a LTM revenue CAGR of +24% over the past six quarters, EPS growth has been more or less flat over that period as margin compression offset sales growth. The good news is, with margins finally normalized, top-line growth from here should once again translate well to bottom-line growth.
7 Auto Partner grew sales in H1 2024 by +16% YoY in spite of a disinflationary and deflationary environment for Polish auto parts. In addition, Auto Partner expects to open a new major distribution center ( DC ) in southeast Poland in January 2026. 9 This new DC, located near the German border, will allow Auto Partner to reduce delivery time of export sales to Western European countries by three hours, which the company believes will provide a significant boost to export sales.
9 Furthermore, management also recently expressed that following the opening of this DC, it is exploring the opening of another major DC located in Western Europe. 9 This would allow Auto Partner to be far closer to many of its current and prospective export customers than they are today. Given the tremendous increase in value proposition this action could provide in such a large addressable market, we see this development as a potential watershed moment for the company.
7 All of this is to say that we are quite enthusiastic about Auto Partner's future growth prospects. Our expectation is for the company to grow its earnings per share at a CAGR of +15-20% over the next several years with the potential to surprise to the upside depending on how the new January 2026 DC bolsters export sales. We expect the company to earn approximately PLN 1.
61/share for FY24 which implied a P/E multiple of 13-14x at recent prices, and which we viewed as an attractive price to add more shares. Dino Polska , our other Poland-based holding, also saw its share price decline this past quarter, to the extent that the company reached its lowest-ever valuation levels since its 2017 IPO. In August, Dino reported Q2 earnings including like-for-like sales growth of an underwhelming +6.
4% YoY and a decline in YoY profits as a result of industry headwinds. 10 Jerónimo Martins, the parent company of Dino's biggest competitor Biedronka, also saw similar price declines and valuation troughs. The industry headwinds affecting Dino and its competitors, which we are convinced will be short-lived and the source of our variant view based on prevailing sentiment, as we see it are threefold: Minimum wage increase of approximately +20%.
In 2024, Poland's federal government enacted two separate minimum wage increases of +18% and +2%. This in turn increased the grocers' operating expenses. Grocery price deflation (yes, deflation).
Year-to-date, grocery prices in Poland have experienced varying degrees of below-average inflation and, for a time, deflation. This has had the effect of decreasing grocers' gross margins to below-average levels. Financially-stretched consumer.
With Poland recovering from a challenging inflation cycle that saw YoY CPI changes reach as high as +18%, consumers are currently more cost-conscious than usual as they rebuild their savings. 7,10 Together, these three forces have squeezed grocers from just about every direction. In response to tight margins and a weakened consumer, Dino's two largest discounter competitors Biedronka and Lidl have been attempting to make up for the lost profit-dollars with increased volume.
7 To do this, Lidl and Biedronka have been engaging in unusually high promotion activity for their goods (e.g., milk is on sale for -50% off this week only) in order to drive more consumers into their stores.
7 Dino's price match policy does not include matching discounters' promotions, though in order to keep pace, Dino has had to engage in above-average promotion activity as well. 10 While promotions have helped, sales and profit figures for all players have disappointed this year. However, we think the situation will improve in the coming quarters.
We see items (2) and (3) above as temporary macroeconomic-driven outcomes which will eventually normalize, and item (1) as a policy change which has so far yielded only the negative outcome of increased costs, without the potential for a positive outcome of increased consumer spending. We see a positive outlook for Dino for several reasons: Promotion activity should end. It seems clear to us that, eventually, macroeconomic trends in Poland will stabilize, at which point inflation and consumer spending levels will stabilize, too.
7 At that point, it would appear irrational to us for Lidl, Biedronka, and others to continue with their current "price war" and permanently handicap their already-thin profit margins when their consumers would be willing to bear normal prices. Double-digit increase in real wages. The +20% minimum wage increase represents a double-digit increase in the real wages of consumers.
Although Poland retail sales have yet to reflect this increase in consumer spending power, with various explanations offered, we think it is likely that eventually these wage increases will translate into increased consumer spending. Dino new stores expected to accelerate. Dino expects to open approximately 270 stores in 2024, approximately 350 stores in 2025, and an increase in new store count the following year.
10 These openings should contribute +10-12% annually to top-line growth over the next several years in addition to the chain's like-for-like sales growth. We expect Dino to grow its EPS at a CAGR of +20% over the next several years through double-digit top line growth and margin expansion. Our estimate of PLN 14.
74/share for FY24 EPS implies a P/E multiple of 21-22x this year's earnings at recent prices. We think 2025 will be a strong year for Dino and its competitors, and look forward to monitoring the progress. In September, Kitwave Group continued its roll-up strategy within U.
K. foodservice wholesale with its acquisition of Creed Catering Supplies, Kitwave's largest acquisition yet. Creed is a family-run food distributor which, based on our channel checks, appears to be a well-run, growing company with a strong emphasis on culture.
7 Creed's strong business is evidenced by its high after-tax ROIC in FY23. 11 Kitwave acquired Creed for 6.4x EV/EBITDA net of cash before synergies and 5.
8x after estimated synergies. 11 Although we weren't thrilled with Kitwave's equity issuance to partially finance this transaction, we understand that U.K.
markets, unlike U.S. markets, are generally hesitant to tolerate net debt to EBITDA ratios above 2.
5x (or even 2.0x), even for a sticky, recession-resilient business model like Kitwave's. This acquisition creates economic value for Kitwave, represents 20% of Kitwave's existing sales suggesting a manageable degree of risk, and marks a significant step in Kitwave's evolution as a U.
K. foodservice wholesaler. According to one former Creed employee we spoke with, this acquisition makes Kitwave "a serious player in foodservice now.
" We expect Kitwave to earn £0.32/share in FY25 or currently trading at a price of just under 10x next year's earnings. Lastly, Duratec Limited saw a handful of large contract awards over the past couple of months.
In our Q1 letter earlier this year, we laid out our thoughts as to why we believed Duratec was misunderstood by the market. Our reasoning included a lack of appreciation for Duratec's record tender activity. Sure enough, we are now seeing many of these tenders convert to Duratec's order book across multiple sectors including mining, energy, and defense.
This should all translate positively to Duratec's profits. 7 Most notably, earlier this month, Duratec and its JV partner Ertech won two early contractor involvement (ECI) awards at Diamantina HMAS Stirling, a defense base in Perth. These are near-certain to convert into contract awards yielding a total of $225 million in revenue for Duratec, its largest award since inception.
12 Furthermore, these wins coincided with the announcement of an agreement between the Western Australia government and federal government to spend $12 to $20 billion in future defense maintenance spend at the Perth-based Henderson shipyard. 7 These governments intend to turn the Henderson shipyard into the largest naval maintenance hub in the entire southern hemisphere. 7 This is a big deal! It will be several years before the spend for these future projects begins, and should span over quite some time.
Based on our review, the types of projects and skill sets for these projects at Henderson should fit Duratec's capabilities quite well. 7 Henderson shipyard is also located directly across the bay from HMAS Stirling, where Duratec has already been one of the defense base's top two partners for remediation work. Before taking into account the total defense sector addressable market across the rest of Australia, these two bases alone suggest to us a strong long-term pipeline for Duratec's defense segment.
7 We remain positive about Duratec's long-term growth prospects. Administrative In our last letter, I had discussed how we have been working with our firm's legal counsel to create a "Liquidating Agent Agreement" between the General Partner and a designated Liquidating Agent. The purpose of this agreement is to pre-arrange instructions to be carried out by our Liquidating Agent and our service providers in the unfortunate event that something should happen to me, leaving me unable to continue carrying out my duties as the Principal of the General Partner of Sohra Peak Capital Partners.
I am happy to report that this process has now been completed. It is in my best interest, of course, to see that these circumstances never come about! Though, just in case they do, you can rest assured, as you deserve, that you will be in good hands with our partnership's designated Liquidating Agent and service providers as they orderly dissolve the partnership. We were surprised to learn during this process that not many other partnerships like ours seem to have similar contingency plans in place.
Given the trust you have placed in us, we felt strongly that working with our service providers to create a plan was both the prudent thing to do, and the right thing to do. Closing Thoughts Thank you for taking an interest in our latest letter. I am excited about our partnership's future.
I remain confident that our partnership's north star will always be to compound our capital at the highest rate of return responsibly possible. In some respects, this approach may render our partnership uninvestible by many institutional investors. That is perfectly fine by me.
We will continue to accept as partners only those who understand, and who are aligned with, our objective. If you wish to learn more about the partnership, please feel free to reach out to me directly. Our partnership currently welcomes introductions to new investors who are aligned with our philosophy and our long-term approach.
Accredited Investors interested in receiving future letters can also register on our website at www.sohrapeakcapital.com.
I value the trust you have placed in me to invest your hard-earned capital, as the substantial majority of my own wealth is presently invested alongside yours. I look forward to writing to you again next quarter. Most Sincerely, Jonathan A.
Cukierwar, CFA | Manager of Sohra Peak Partnership LLC, the General Partner of Sohra Peak Capital Partners LP Disclaimer This report is based on the views and opinions of Jonathan A. Cukierwar, which are subject to change at any time without notice. The information contained in this report is intended for informational purposes only and is qualified in its entirety by the more detailed information contained in the Sohra Peak Capital Partners LP offering memorandum (the "Offering Memorandum").
This report is not an offer to sell or a solicitation of an offer to purchase any investment product, which can only be made by the Offering Memorandum. An investment in the Partnership involves significant investment considerations and risks which are described in the Offering Memorandum. The material presented herein, which is provided for the exclusive use of the person who has been authorized to receive it, is for your private information and shall not be used by the recipient except in connection with its investment in the Partnership.
Sohra Peak Partnership LLC is soliciting no action based upon it. It is based upon information which we consider reliable, but neither Sohra Peak Partnership LLC nor any of its managers or employees represents that it is accurate or complete, and it should not be relied upon as such. Performance information presented herein is historic and should not be taken as any indication of future performance.
Among other things, growth of assets under management of Sohra Peak Capital Partners LP may adversely affect its investment performance. Also, future investments will be made under different economic conditions and may be made in different securities using different investment strategies. The comparison of the Partnership's performance to a single market index is imperfect because the Partnership's portfolio may include the use of margin trading and other leverage and is not as diversified as the Standard and Poor's 500 Index or other indices.
Due to the differences between the Partnership's investment strategy and the methodology used to compute most indices, we caution potential investors that no indices are directly comparable to the results of the Partnership. Statements made herein that are not attributed to a third-party source reflect the views, beliefs and opinions of Sohra Peak Partnership LLC and should not be taken as factual statements. Sohra Peak Capital Partners LP launched July 22, 2021; results for the Partnership and S&P 500 Index for Q3 2021 are presented from that date forth.
Returns are presented on an unaudited basis for a theoretical Limited Partner net of expenses, 1% management fee, and 15% performance allocation. S&P 500 Index returns include dividends reinvested. Please refer to the disclaimer at the end of this letter regarding comparison to indices.
Metrics reported in this table exclude: short and derivative positions held by the fund intended as market or position-specific hedges; holdings intended as cash-equivalent positions (e.g., money market or exchange-traded fund seeking to track the investment results of an index composed of U.
S. treasury bills with 0-3 month maturity). Calculated as the median market capitalization in USD among our portfolio holdings.
Excludes cash. Measured as the percentage of portfolio assets, excluding cash, invested in companies with primary operations conducted outside of the U.S.
Estimates, thoughts, opinions, and research of Sohra Peak Partnership LLC. Estimates, thoughts, opinions, and publicly available materials of Mader Group Limited. Estimates, thoughts, opinions, and publicly available materials of Auto Partner S.
A. Estimates, thoughts, opinions, and publicly available materials of Dino Polska S.A.
Estimates, thoughts, opinions, and publicly available materials of Kitwave Group plc and Creed Foodservice Limited. Estimates, thoughts, opinions, and publicly available materials of Duratec Limited. Click to enlarge Original Post Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange.
Please be aware of the risks associated with these stocks..
