Equity markets continue to show strength with several indices closing near record highs. In July, stock markets experienced a degree of volatility due to concerns about the COVID-19 Delta variant and the impact of regulatory tightening in China. Indices in both North America and Europe closed positively, while the Spanish Ibex 35 corrected slightly. Emerging markets also suffered corrections, weighed down by the interventionism of Chinese authorities.
In recent weeks we have seen a spike in the number of infections caused by the Delta variant, which is spreading rapidly worldwide. However, investors appear unconcerned about the efficacy of vaccines and most countries, especially those in developed markets, maintain very high vaccination rates.
The International Monetary Fund (IMF) kept its 2021 global growth forecast unchanged at 6%, upgrading the outlook for the main developed markets, while downgrading it for emerging markets. This is primarily due to better access to vaccines and greater fiscal support in developed economies.
Europe is seeing an acceleration of economic growth, owing to the recovery of services and the stabilisation of manufacturing indicators. Given the absence of inflationary pressure in Europe, we expect inflation to remain below 2%. The central bank, meanwhile, maintains its dovish approach, continuing its accommodative monetary policy.
The IMF’s forecast for Spanish economic growth remains the highest in the Eurozone (+6.2% in 2021 and improved to +5.8% for 2022). The latest data show record job creation—to pre-pandemic levels—as well as a declining unemployment rate. Despite the emergence of the Delta variant, mobility has not been affected. Moreover, recent data suggest both industrial and service activity remain at peak levels. Household confidence continues to be very healthy, savings levels are high, and a sharp recovery in spending persists.
The portfolio companies’ first semester results were exemplary, with 30% of firms increasing their 2021 guidelines, including Rovi, Logista, Repsol, and Fluidra. Several did not, but we believe they will easily exceed guidelines and/or market expectations for the year (Befesa, CIE Automotive, Acerinox).
Rovi once again delivered a positive surprise to the market, reporting exceptional figures. In Q2 2021, sales increased 77%, EBITDA rose 74%, and net profit grew 73% (all well above consensus). Compared to Q2 2019, sales increased 67% (supported by the manufacture of Moderna’s COVID-19 vaccine). The company reported strong cash generation and approved a dividend increase. Rovi raised its sales growth guidance for the year from 20%-30% to 35%-40%.
Gestamp and Cie Automotive also performed well despite a drop in vehicle production during Q2 due to semiconductor supply issues in the automotive industry. Both companies gained market share. For its part, Gestamp issued a slight upward revision in its guidelines for the year. While Cie Automotive did not alter its guidelines, we expect it will exceed them.
Logista again published outstanding results, maintaining the positive trend of the previous quarters. Sales revenue rose 9% in the quarter, propelled by strong growth in all geographic areas, particularly the Iberian Peninsula (Transport and Pharma). Net profit climbed 32%. The company raised its 2021 guidelines for a third time to reflect current expectations of double-digit EBIT growth.
Cellnex, meanwhile, presented strong results with organic growth of +7.5% in Points of Presence, owing to new tenants installations in existing antennas and an acceleration in the installation of new antennas. Recurring cash generation increased +47% and the company slightly raised its guidelines upon finalising the purchase of Polkomtel earlier than expected.
Acerinox published very good results, obtaining its second highest EBITDA ever in the quarter and exceeding market estimates. Acerinox is the most recent addition to EDM Inversión due to a significant improvement in demand from the US and Europe, as well as favourable price trends. We expect the Biden Infrastructure Plan and the Next Generation EU package (in Europe) will further boost demand in 2022-23.
Lastly, Fluidra also presented outstanding figures, owing to its very strong business fundamentals. It expects 2021 profit to grow between 80%-90%, maintaining 15% annual growth in the subsequent years.
EDM Inversión is not invested in any of the companies that suffered major corrections due to profit warnings (Siemens Gamesa and Técnicas Reunidas), asset impairment (Almirall), or litigation (Ence).
The EDM Inversión fund currently consists of 24 companies, the majority of which are leading multinationals in their respective sectors with highly diversified revenue streams. In YTD terms, the fund (L Class) has yielded +14.48%, relative to the +9.16% obtained by the Ibex 35 NR.
The portfolio trades at very attractive multiples (2022e P/E ratio of 13.1x), below its historical average, and we expect annual profit growth will exceed 13% in the next five years. In fact, if we calculate the internal rate of return (IRR) for each of the companies in the portfolio, we estimate an average annual portfolio return of 15%, meaning the fund could double its value in that period.
Ignacio Ortiz de Mendivil,
co-manager of the EDM Inversión fund
