Sohn London Conference 2013: Buy Jaguar Get Tatas For Free

From Market Folly:

The 2013 Sohn London Conference just took place and MarketFolly has notes below.  The event featured hedge fund managers presenting their latest investment ideas benefiting paediatric cancer and childhood disease research.

Sohn London Conference Notes 2013

Chris Hohn – The Children’s Investment Fund  

Following on from last week’s disclosure that TCI had bought a large part of the UK’s privatised post office, Royal Mail, in the secondary market, Hohn pitched two more privatisation ideas. He said that governments are the worst manager and that there are huge efficiency savings to be made in the aftermath of a privatisation.

Idea 1: Aurizon (Australia)  - Aurizon, formerly QR National, is a publically listed rail company in Australia. According to Hohn, Aurizon’s CEO, Lance Hockridge is a winner. Recent returns have been about 10% per year with 6% volume growth per year. The cost cutting potential is huge. Large scale redundancies are already underway. Aurizon was privatised with no debt, which Hohn said was ridiculous. Hohn implied that he has been pressing the company to re-lever and that he had had some success. Aurizon can have a double digit dividend within a couple of years. The company is a play on the Austrailian commodities market and the Chinese and Indian economic growth.

Idea 2: Long EADS  - Hohn noted that the company has had a bad record with investors – no one has made money for 30 years. Sometimes it pays to study the history of a company. He believes that the EADS will double and then triple profits in the coming years. Airbus is now competing well with Boeing. There is no chance of new competitors breaking into the market as safety concerns keep new entrants out. Pricing is increasing. Costs are falling as suppliers are squeezed for the first time. EADS is committed to 3.75bn euro of stock buybacks over the next 18 months. EADS 10x multiple can close the gap on Boeing’s 15 x multiple.

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Julian Sinclair – Talisman Global Asset Management

Idea 1: Long Tata Motors -  Sinclair valued Jaguar and Land Rover at around $17bn, the same as Tata’s market cap. Jaguar and Land Rover make up about 80% of Tata’s net worth so you get the other 20% for free. Jaguar and Land Rover are quintessential British brands. They are now competing well with the big German luxury brands in terms of quality and reliability. Tata is producing more reliable cars than it used to and that has been backed up by recent JD Power surveys. Tata is trading at 6x earnings. Sales are expected to expand by 20% during the next five years. There is potential for the share price to double Tata can even attain the double digit margins that Porsche has achieved. Tata is growing top line and bottom line simultaneously. Tata is also has potential as an emerging market recovery play.

Idea 2: Shared Appreciation Mortgages (SAMs)  SAMs are a form of mortgage backed security created in the late 1990s by banks like Barclays and Royal Bank of Scotland in the UK. Sinclair sees SAMs as the last great post-crisis credit trade. If house prices go up by 2-3% they will pay out 11% and if prices go up by more they will pay out even more. SAMs have a defensive quality too. If house prices were to fall by 5% SAMs would still pay out a similar return to Gilts (UK government bonds)....

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