The Intellectual Investor: Income Strategy Weekly Updates

March 19, 2018

Income Strategy Update for Week Ended 3/16/18

Seaspan Advances on Acquisition While National CineMedia Falls on Earnings Report

Last week, the Income Strategy declined -0.35%, underperforming the Merrill Lynch U.S. High Yield Master II Index’s -0.20% fall, but outperforming the S&P 500’s -1.20% loss (Exhibit 1). The strategy ended the week up 1.18% YTD, or 181 basis points ahead of the high yield index and 220 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 3/16/181

Time Period Income Strategy ML HY II S&P 500
Last Week (3/9 – 3/16) -0.35% -0.20% -1.20%
MTD 1.78% -0.35% 1.52%
QTD 1.18% -0.63% 3.38%
YTD 1.18% -0.63% 3.38%
Inception (annualized since 4/2/2009) 14.99% 11.79% 16.57%

Source: Bloomberg, Miller Value Partners

Four equities and a preferred comprised last week’s top five contributors (Exhibit 2). Seaspan (SSW) moved above closely watched technical levels after announcing it acquired the remaining 89% of Greater China Intermodal Investments for an implied enterprise value of $1.6B. The deal is being financed from an additional $250M investment in Seaspan debentures and warrants from Fairfax Financial Holdings Limited (FRFHF), a $100M secured credit facility from Citigroup (C), and an equity investment from the Washington family. The deal is expected to increase 2019 EBITDA from $185M to $200M and is forecasted to add strong contracted cash flows. Maiden Holdings (MHLD) formed a golden cross as the stock’s 50-day moving average moved above the 100-day moving average. AmTrust Financial Services (AFSI) filed their 10-K, which reassured preferred holders that the shares will remain outstanding and continue to be listed on the New York Stock Exchange. There was no price-changing news on New Media Investment Group (NEWM).

Exhibit 2: Significant Contributors to Performance, 3/9/18 – 3/16/18

Name Type Return
 Seaspan Corp Equity 19.5%
 Maiden Holdings Equity 4.7%
 AmTrust Financial Services 6.95% Preferred 2.6%
 New Media Investment Group Equity 3.8%

Source: Miller Value Partners

Five equities comprised last week’s top five detractors (Exhibit 3). National CineMedia (NCMI) reported Q4 EPS of $0.27, surpassing analyst expectations of $0.21, but missed on revenues of $140.7M versus consensus $144.5M. The company cut their dividend -22.7% from $0.22/share to $0.17/share (11.7% annualized yield), which will allow for ongoing reinvestment, specifically in the company’s network and its integrated digital products. Management guided 2018 revenue of $425-$445M (flat to +4.5%) versus estimates of $440M and OIBDA of $200M-$215M (-2.5% to +4.8%) versus consensus $213M. Apollo Global Management (APO) and Carlyle Group (CG) fell over the week, despite both being upgraded at Citigroup. The analyst is overweight the sector on Ares Management (ARES) conversion from a publicly traded partnership to a C-Corp, which he believes is a net positive for alternative managers as the Ares valuation provides a relative floor for the group on higher structural fee-related earnings multiples. Apollo was upgraded from “Neutral” to “Buy” with a slightly lower price target of $40, implied upside of 25%, not including the dividend. The analyst believes that Apollo’s Fund VIII monetization cycle and higher fee-related earnings should drive strong distributable earning visibility moving forward. Carlyle was upgraded from “Neutral” to “Buy” with a price target of $28.50, 28.4% upside excluding the dividend. Fee-related earnings are likely to move higher in 2019 amidst a strong capital raising cycle. Washington Prime Group (WPG) announced it has signed a definitive agreement to acquire four Sears department stores and four adjacent Sears Auto Centers through a sale-leaseback transaction for $28.5M. The deal is expected to close in Q2 of this year and Washington Prime will have control of the properties for future redevelopment.

Exhibit 3: Significant Detractors from Performance, 3/9/18 – 3/16/18

Name Type Return
 National CineMedia Equity -17.5%
 Apollo Global Management LLC Equity -4.5%
 Carlyle Group LP Equity -2.6%
 CenturyLink Inc Equity -4.5%
 Washington Prime Group Equity -5.5%

Source: Miller Value Partners

Did you know that we write this piece for Opportunity Equity as well? Check it out.

1The performance figures reflect the deduction of a model investment management fee of 1% (the highest fee for separate accounts under our fee schedule) and certain other expenses. For important additional information about Income Strategy performance, please click on the Income Strategy Composite Performance Disclosure. The performance returns shown in this report are preliminary and are subject to revision. Past performance is no guarantee of future results.

Significant Contributors and Significant Detractors are the Strategy holdings that had the greatest effect on Strategy performance for the week. Holdings that have been in the Strategy since the end of the most recent calendar quarter are identified by name. For information on how Contributor/Detractor data were calculated and a list showing the contribution to the Strategy’s weekly performance of each investment held at such quarter end, contact us.

Any views expressed are subject to change at any time, and Miller Value Partners disclaims any responsibility to update such views. The information presented should not be considered a recommendation to purchase or sell any security and should not be relied upon as investment advice. It should not be assumed that any purchase or sale decisions will be profitable or will equal the performance of any security mentioned. Past performance is no guarantee of future results, and there is no guarantee dividends will be paid or continued.

©2018 Miller Value Partners, LLC

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