Kernow Asset Management tear sheet for the month ended February 28, 2025.
Dear Investor,
The strategy declined 3.85% in February.
New Position: Kistos Holdings Plc (LON:KIST)
Last month, we built a small position in Kistos. It is an oil and gas company with a clear edge. It extracts value from overlooked assets more efficiently than almost anyone else. Its model is straightforward. Buy unloved assets and use smart, incremental improvements to drive significant returns. Small, disciplined moves compounded over time create radical outcomes. For this team, that has meant everything from optimising technology and seismic data to managing pensions and cleanup liabilities more effectively than the competition.
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The setup is compelling. The company’s intrinsic value is £350m, yet the market capitalisation sits at just £100m. Production is set to nearly double this year from 8,000 to 15,000 barrels of oil equivalent per day. Following a crushing UK tax blindside a few years ago, the market is ignoring this growth potential. The cashflows in 2025, 2026 and 2027 are expected to be approximately US$100m, US$85m and US$60m. On top of this, our catalyst is the 2C to 2P conversion on its Balder (in Norway) asset in the next 18 months. This could double the cash returns to 2030.
Execution comes down to management, and they have a track record. They own c.20% of the business and have done this before. Their last venture, RockRose Energy, delivered a 42x return.
From a portfolio perspective, the correlation with our book is low, which is a positive. We keep it simple. We model using constant oil prices and judge management purely on costs and output. Then we scenario plan. We are actually net short oil, with many of our stocks moving inversely to oil prices, so this position also provides a free hedge. At US$300 oil in the next decade, this trade could return 30x our investment.
Competition Kills
Last month, the best performer was one of our single-product shorts. A much stronger competitor in the industry launched a faster and cheaper product. Increased competition will squeeze margins. The myth of a high barrier to entry has been shattered, and the stock has taken a significant hit.
This company has about two years of cash burn left and won’t reach profitability in time. It will need to raise capital and, on top of that, contend with the new competitor. This means it will have to spend heavily on unforeseen R&D and marketing, making its investment case much weaker.
Struggling to Stay Afloat: Short a Sinking Business
A loss-making logistics company we are short of is also beginning to tread water. Although it has £800m of cash, it needs to give most of that away to cover £700m of old debt due to be paid in the next 24 months. In the meantime, the business is losing £200m a year, and its negative margin business model has no plans to be corrected.
As such, our model says the distressed debt market will want more equity to do a viable refinancing deal. This has been a big successful short for us already, and with no action, it is set for a 90% equity wipeout. The only fly in the ointment is it is now a popular idea. So, we have let the position shrink rather than going into attack mode.
A Big Long is Getting Ready to Shine
Hiscox delivered record results with a return on equity of 19%. We are pleased with the quality, operating performance and its solid profit growth since our investment. We have almost doubled our money from its Covid-19 low. Something still does not add up. This trade should have been more profitable by now.
The stock remains stuck at a 65% discount to its pre-Covid multiple, with no sign of that gap closing. Management is just as frustrated as we are. To force the issue, they have increased the dividend by 20% and announced a US$175m buyback. On top of that, they are hosting a Capital Markets Day in May. If done right, these actions can be catnip to new investors.
Metro: High Returns, Low Price
Metro hit the top end of its net interest margin guidance and posted strong exit figures for 2024. The bank is generating solid earnings and is set up for significant profit growth through 2027. PwC’s decision to add back all tax losses in one year speaks to that confidence. At the current trajectory, the return on tangible equity will hit 15% by 2027, the best of any UK bank. Yet the stock remains deeply undervalued and still on the naughty step in investors’ minds.
Since its inception in November 2019, the Kernow strategy is up 55%, compared with the UK equity market, which has increased 42% over the same period. The collective upside in the portfolio is worth more than 237%.
- Book of the month: Accounting for Growth: Stripping the Camouflage from Company Accounts by Terry Smith 1992. (Window dressing today is worse)
- Good month for: Wizz Air Holdings +30% on Ukraine peace hopes.
- Bad month for: John Wood Group -49% on debt struggles.
Attending the PLC Awards
This month, we attended the 40th anniversary of the PLC Awards, a great evening to reconnect with familiar faces and meet new ones. Events like these are not just about networking; they are also a useful gauge of market sentiment. Often, the most celebrated stocks at these gatherings signal peaks, sometimes making them prime short candidates.
The Father of Contrarian Investing
Nicolai Tangen of Norges Bank Investment Management recently interviewed Anthony Bolton in a discussion packed with sharp insights. Bolton’s deep research and willingness to go against the herd offer invaluable lessons for investors seeking outsized returns. A must-listen for serious market participants.
All the best
Alyx Wood
Chief Investment Officer
Kernow Asset Management
M: +44 (0)75 5458 3030
Email: [email protected]
See the full factsheet here.
