Brennan Asset Management was founded by Patrick Brennan in 2015. The fund’s cornerstone strategy is value investing, with a focus on acquiring companies at a discount to the identified intrinsic value.
Patrick Brennan has a rich past experience with previous stints at William Blair & Company, Boyar Asset Management, and Hutchinson Capital Management.
In the latest letter, Brennan had his take on rates remaining higher-for-longer, his approach to risk/reward positioning, and a couple of portfolio updates.
Interest Rates Cuts In 2024: Investors Remained Relaxed
At the end of 2023, it was expected that the Fed would cut rates five or six times. Now, it is more likely that there will be one or two cuts during the year. If this was predicted in late 2023 market strategists would sharply correct their estimations at the beginning of 2024.
Now we are seeing that the broad market is rallying and that it is pushed by the AI boom through 2024. The wide implementation of AI can result in a major boost in productivity which would reflect on the whole economy. At present it is still difficult to assess the real potential of AI.
Other potential large-scale issues are tensions in the Middle East and the upcoming elections in the United States.
The opinion of Brennan Asset Management is that interest rate levels and starting valuations will have an impact on the longer-term returns. Now, a higher-for-longer environment and cyclically adjusted CAPE ratio of 34x seems less promising.
What they found disappointing is that some sectors and smaller companies are left behind in the overall market rally. They were left at depressed valuation levels, and in some cases undeservedly.
However, massive selling of the undervalued assets would be a mistake, and at the present conditions, it would be wise to maintain or increase positions in which risk/reward outcome seems promising.
Portfolio Updates
PTSB (Permanent TSB): Undervalued Giant
Permanent TSB was rebranded in October 2023 to the current form of PTSB, after acquiring a large portion of Ulster Bank. Brennan Asset Management met with their management in February to discuss the current situation and further outlook.
PTSB's weaker YTD results do not come so much from last year's results but from a reduced mid-term valuation. PTSB 2026 earnings per share have been reduced from 0.40 euros to 0.30 euros.
PTSB reported higher expenses than Brennan Asset Management was expecting which is one of the reasons for value reduction. PTSB has a more conservative view on deposit growth which is another attributing factor to the equation.
PTSB is currently reasonably undervalued at a 5x earnings forecast and at a mere 0.4x book value. This valuation can only come from two directions, that the debt investors are not doing their job properly, or that the equity investors are overly pessimistic.
Another major issue that PTSB is currently going through is its illiquidity, which is drawing its valuation down. Only about 10%-20% of their shares are freely tradable. While Brennan sees the interest for PTSB from the investors from the United States they are still reluctant to invest.
While the government and NatWest are the biggest stakeholders they are still not ready to sell. NatWest rightfully thinks that PTSB stocks are cheap, and that is the reason why they are still holding them.
However, Brennan is convinced that NatWest will exit from PTSB and that the government will follow. After that PTSB will be a great long-term opportunity for investors that are ready to take some risks.
Chartered Communications: An Outright Looser
Intensified competition has been pushing Chartered Communications (CHTR) into the red for some time. CHTR did increase its effort to branch out into the rural market but with no visible benefits.
The major issues are fixed wireless offerings and new fiber infrastructure that has been taking out their customer base. Another problem is that the Affordable Connectivity Program has not been renewed, which will cause some of the customers to cut off from the network.
While Brennan Asset Management did exit from most of the CHTR holding in 2021 and 2022 they rebought after announced investments into the network.
The smart move would be to exit from the holding altogether, but at this point that would bring no positives. The stock is at a multi-year low, and waiting for the investments to bear fruit until 2026/2027 is a wiser choice.
Investments In The Latin America Cable Companies: Pass And Hit
Brennan Asset Management owns a holding in three major Latin America cable companies, Mexican Megacable, Luxembourg-based Millicom Tigo, and Liberty Latin America.
Millicom Tigo is the biggest winner of the three which improved its estimated free cash flow to $550 million. This came as a result of the improvements in the Guatemalan sector, and reductions in operational costs.
Megacable has been working on branching out its fiber network and is poised to beat its goals set in 2021. The company did experience slower EBITDA growth recently, with the trend shifting in the last two quarters generating 12%-13% growth.
Liberty Latin America (LILAK) is struggling with higher-than-anticipated debt refinancing costs. They are eating solid chunks of several synergy deals the company has made. LILAK executives projected that the company will reach $1 billion in free cash flow in the next three years.
Brennan believes that LILAK management must allocate their capital either to repurchasing stock or to sell their existing assets and intensify their investment plans.
CAB Payments: Three Months After Going IPO, Stock Value Plummet By 74%
CAB's full-year results first came in January, but in the updated report they were improved. Due to the recent weakness of the Nigerian naira currency, CAB projected a 4% EBITDA growth. Brennan finds these projections conservative and thinks that naira revenue could bounce back more than expected during 2024.
Recently CAB got a Dutch regulatory license which allows them to make outbound calls to European countries. CAB believes that it will provide a massive boost to its sales efforts. This would come in handy after their shares plummeted over 70% in October 2023.
CAB has a lot of room on the market to grow while it has several advantages to the competition. The initial expectation of a growth of 35%-40% at the time of its IPO in 2023 even a half increase would bring a solid upside.
