Kernow Asset Management's commentary for the month ended December 31, 2023.
The strategy gained 5.0% in the December Santa Rally.
Hollywood Bowl Group PLC (LON:BOWL) delivered a good set of numbers and continues to benefit from its dominant UK market leadership position. It increased aspirations for steady growth in Canada over the next five years and announced a £10m share buyback. The company’s stock price also benefited from Trive Capital’s announced takeover of the only other UK-listed competitor, Ten Entertainment, for a 33% premium over its share price.
Q4 2023 hedge fund letters, conferences and more
In late December, Harbour Energy PLC (LON:HBR) launched a bold US$11.5bn reverse takeover of Wintershall Dea, with the equity stake in Harbour assigned a 60% premium to its share price on the day of the announcement. The seller is addressing a Russian shareholder issue, hence the low price. To be clear, Harbour is not acquiring Wintershall Dea’s Russian assets. Instead, the deal concerns superior assets in locations such as Norway, Germany, Denmark, Argentina, Mexico, Egypt, Libya and Algeria. The deal rationale cites improved scale and lower funding costs.
However, the deal is complex, and historically, Harbour has not been well-run. Our catalyst for this trade is for the company to return the inefficient parts of the balance sheet to shareholders or deploy it into productive assets with a resulting market re-rating. This has now happened. The share price is still c.20% below the new 360p issue price, reflecting execution risk, with the deal expected to close in Q4 2024. At that point, a 46.5% shareholder, BASF, will be a perceived overhang seller, which may suppress the share price. We have already sold down most of our position and expect to sell the rest before BASF becomes a shareholder.
On the other side of our book, we closed our short position in Trainline PLC (LON:TRN). You may recall that this ticketing app was in danger of losing the operating license for 90% of its income when, in 2021, the UK government announced its intention to centralise the sale of train tickets. At the time, the company had lost its CEO, was in debt and loss-making, and faced many competitors. We expected it to win the new government contract but at a vastly reduced fee.
After three years of dithering, the government changed its mind, so we closed our position for a small loss. This goes into our case study notes as an example of a trade with a good investment process but a poor outcome. We would do it again.
Since its inception in November 2019, the Kernow strategy is up 32%, compared with the prevailing UK equity market, which has increased 21% over the same period. The collective upside in the portfolio is worth more than 239%.
- Book of the month: Values: An Economist’s Guide To Everything That Matters by Mark Carney
- Good month for: Petrofac up 119.9% after contract wins
- Bad month for: Anglo American -14.7% after a downgrade in production expectations
We hope you all had a great festive break with friends and family, and thanks for all the messages about the Kernow Calendars. It is great to see so many of them up on the walls around the world!
Kind regards
Alyx Wood
Chief Investment Officer
Kernow Asset Management
