February 10, 2020

Income Strategy Update for Week Ended 2/7/20

Sculptor Capital Surges on Strong Performance, AUM While Energy Continues to Slide on Demand Fears

Last week, the Income Strategy advanced 1.35%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.63% gain but underperforming the S&P 500’s 3.21% rise. (Exhibit 1). The strategy ended the week down -0.84% YTD, or 147 basis points behind the high yield index and 401 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 2/7/201

Time Period Income Strategy ML HY II S&P 500
Last Week (1/31 – 2/7) 1.35% 0.63% 3.21%
MTD 1.35% 0.63% 3.21%
QTD -0.84% 0.63% 3.17%
YTD -0.84% 0.63% 3.17%
Inception (annualized since 4/2/2009) 13.68% 11.01% 16.46%

Source: Bloomberg, Miller Value Partners

Equities and a bond comprised last week’s top five contributors (Exhibit 2). Sculptor Capital (SCU) reported US Master Fund performance of +2.6% in January and total AUM of $34.5B, +1.5% M/M and +8% Y/Y. Debt of Diebold Nixdorf (DBD) gained as JP Morgan sees the company posting solid Q4 results, where they are above consensus on EPS of $0.55 (vs $0.50) and in-line on EBITDA of $135M. Further, the analyst expects a strong 1Q20 guide driven by further Win10 upgrades and stabilization in European markets. Danske Bank (DANSKE DC) reported Q4 revenues of Dkr 11.4B, 4.5% above consensus driven by strong trading in the fixed income segment, as well as better-than-expected net interest income on strong loan volume expansion. Management sees FY20 net income of Dkr 8B-10B with a ROE of 5%-6%. The company maintained their dividend of Dkr 8.5/share (7.1% annualized yield). Quad Graphics (QUAD) and Alrosa (ALRS RX) moved above closely watched technical levels.

Exhibit 2: Significant Contributors to Performance, 1/31/20 – 2/7/20

Name Type Return
Quad Graphics Equity 14.8%
Sculptor Capital Management Equity 14.6%
Alrosa PJSC Equity 5.2%
Diebold Nixdorf 8.5 4/24 Bond 1.4%
Danske Bank A/S Equity 2.7%

Source: Miller Value Partners

Three equities and two bonds comprised last week’s top five detractors (Exhibit 3). Debt of energy-related securities Chaparral Energy (CHAP) and Ultra Petroleum (UPLC) fell in conjunction with oil prices as the Coronavirus continued to raise concerns of slowing oil demand. BGC Partners (BGCP) reported Q4 EPS of $0.12, beating consensus by a penny but missing the $0.14/share quarterly dividend (10.5% annualized yield). Revenues of $487.2M (+4.5% Y/Y) also topped estimates of $475.5M, driven by +5% growth in Fenics. Management sees Q1 revenues of $540M-$580M, bracketing consensus of $562M with pre-tax adjusted earnings of $90M-$106M. The company also noted their proposal to convert from a partnership to C-corp, which if approved is expected to occur by year-end. Morgan Stanley maintained their “Equal-Weight” rating on William Hill (WMH LN) with a 235p price target, 32% implied upside excluding the 5.8% dividend yield. FinansInvest downgraded Erdemir (EREGL TI) to “Neutral” from “Outperform” with a TRY 10.60 price target, 17% implied upside excluding the 15.2% dividend yield.

Exhibit 3: Significant Detractors from Performance, 1/31/20 – 2/7/20

Name Type Return
BGC Partners Equity -7.1%
Chaparral Energy 8.75 7/23 Bond -11.8%
William Hill plc Equity -2.3%
Ultra Petroleum 7.125 04/25 Bond -6.9%
Erdemir Equity -1.5%

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 results of a representative account net of management fees 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. Content may not be reprinted, republished or used in any manner without written consent from Miller Value Partners.

©2019 Miller Value Partners, LLC

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