January 22, 2019

Income Strategy Update for Week Ended 1/18/19

Alternative Asset Managers Rise While Energy Transfer Falls Despite Credit Suisse Optimism

Last week, the Income Strategy advanced 2.29%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.70% rise but underperforming the S&P 500’s 2.90% gain. (Exhibit 1). The strategy ended the week up 11.96% YTD, or 804 basis points ahead of the high yield index and 533 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 1/18/191

Time Period Income Strategy ML HY II S&P 500
Last Week (1/11 – 1/18) 2.29% 0.70% 2.90%
MTD 11.96% 3.92% 6.63%
QTD 11.96% 3.92% 6.63%
YTD 11.96% 3.92% 6.63%
Inception (annualized since 4/2/2009-12/31/18) 12.83% 10.73% 14.84%

Source: Bloomberg, Miller Value Partners

Equities comprised last week’s top five contributors (Exhibit 2). Alternative Asset Managers Carlyle Group (CG) and Apollo Global Management (APO) advanced with the broad equity market and moved above closely watched technical levels. Further on Carlyle, Citigroup added the stock to its thirty-day positive catalyst watchlist as they expect management to increase fee-related earnings guidance to reflect robust fundraising. The analyst maintained a Buy rating on the stock with a $33 price-target, 80% implied upside excluding the 9.2% dividend yield. Citigroup also maintained their Buy rating on Apollo with a $36 price target, 32% implied upside excluding the 6.7% dividend yield. Sberbank (SBER LI) advanced after reporting preliminary results for December where net income came in at RUB 52B, implying a record profit of RUB 811B for FY18 (+24% Y/Y) with a 22.6% ROE. Fee income was strong into year-end, growing 5% sequentially in Q4 and 10% Y/Y, while retail deposit inflows grew 4.5% on a monthly basis. NGL Energy Partners (NGL) moved above its 200-day moving average. There was no price-changing news on Greenhill & Co (GHL).

Exhibit 2: Significant Contributors to Performance, 1/11/19 – 1/18/19

Name Type Return
Carlyle Group LP Equity 9.9%
Apollo Global Management LLC Equity 8.3%
Sberbank Equity 8.9%
Greenhill & Co Equity 8.5%
NGL Energy Partners LP Equity 7.4%

Source: Miller Value Partners

A bond and four equities comprised last week’s top five detractors (Exhibit 3). Energy Transfer (ET) fell despite Credit Suisse maintaining their “Outperform” rating and $23 price target (11.5x FY19 EBITDA), 61% implied upside excluding the 8.5% dividend yield. The analyst expects a ramp in Rebel II, Arrowhead II, PE 3, and Rover to drive higher sequential results. Goldman Sachs lowered their price target on CenturyLink (CTL) from $20 to $16, 4.5% above current levels and cited lower long-term estimates for consumer broadband subscribers and revenues. Further pressure was driven by holder Aranda Investments unwinding 16M shares. Seaspan (SSW) announced the closing of its second $500M investment from Fairfax Financial Holdings (FRFHF), consisting of $250M in 5.5% senior notes due 2026 and $250M in warrants that will be exercised immediately at $6.50. Danske Bank (DANSKE DC) fell as JP Morgan cut Nordic Banks’ EPS estimates by ~3%, citing weaker fees and trading income, as well as exposure to Danish mortgage and rates trading. However, the analyst remains bullish with an “Overweight” rating on the stock and a DKR 170 price target, 35% implied upside and believes the company will continue its turnaround to deliver strong capital returns and positive surprises on asset quality.

Exhibit 3: Significant Detractors from Performance, 1/11/2019 – 1/18/19

Name Type Return
Energy Transfer LP Equity -3.1%
CenturyLink Inc Equity -2.7%
Seaspan Corp Equity -1.6%
Danske Bank Equity -3.2%

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 fee 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.

©2018 Miller Value Partners, LLC

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