April 8, 2019

Income Strategy Update for Week Ended 4/5/19

Endo Debt Rises on Tender Offer Results While Blackstone Falls Despite Higher Price Target at JMP Group

Last week, the Income Strategy advanced 2.18%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.52% gain and the S&P 500’s 2.09% rise. (Exhibit 1). The strategy ended the week up 13.02% YTD, or 506 basis points ahead of the high yield index and 300 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 4/5/191

Time Period Income Strategy ML HY II S&P 500
Last Week (3/29 – 4/5) 2.18% 0.52% 2.09%
MTD 2.18% 0.52% 2.09%
QTD 2.18% 0.52% 2.09%
YTD 13.02% 7.96% 16.02%
Inception (annualized since 4/2/2009) 13.85% 11.28% 16.13%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Debt of Endo Pharmaceuticals (ENDP) rose in conjunction with the company’s cash tender offer results, where they paid down $1.5B of outstanding principal. In addition, the bonds reacted positively to a favorable peer ruling where the state of Oklahoma dismissed all but one claim against opioid manufacturers, including Teva (TEVA) and Johnson & Johnson (JNJ). B Riley maintained their “Buy” rating and $9.75 price target for National CineMedia (NCMI), 29% implied upside excluding the 9.0% dividend yield. Improved business trends into 2020 and management’s expectation that capex spend could decline from $7-$8M in 2018-2019 to $2-$3M in 2020 should generate meaningful free cash flow and enhance the company’s ability to boost capital returns. UBS maintained their “Buy” rating on Sberbank (SBER LI) and increased their price target to RUB 295 (from RUB 276), 27% implied upside. The analyst cited stronger than expected loan growth and attractive valuation at 5x forward earnings and 1.1x P/B with a 23% ROE, and expectations for the dividend yield to rise from a forecast of 9.5% in 2019 to 15% by 2022. Separately, Sberbank announced revised terms for its sale of Denizbank to Emirates for TRY 15.48B, coming in higher than the TRY 14.6B agreed upon last year. The announced price implies a P/B of 1.0x for Denizbank and is expected to contribute more than 100bps to Sberbank’s Tier 1 Capital Ratio. Seaspan (SSW) announced a LNG investment framework agreement with COSCO Shipping Energy (1919 HK) in which both companies will commit to strengthening the exchange and collaboration on LNG investments. Seaspan shares closed the week above their 50-day moving average. There was no price changing news on BGC Partners (BGCP).

Exhibit 2: Significant Contributors to Performance, 3/29/19 – 4/5/19

Name Type Return
Endo International PLC 6.0% 7/23 Bond 9.3%
National CineMedia Equity 6.7%
Sberbank Equity 6.6%
BGC Partners Equity 7.2%
Seaspan Corp Equity 7.6%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors (Exhibit 3). Blackstone Group (BX) fell despite JMP Group reiterating their “Market Outperform” rating and raising their price target from $39 to $41 (17x 2019e distributable earnings), 19% implied upside excluding the 6.7% dividend yield. Expectations for fee-related earnings growth on the backs of robust fundraising, successful deployment of capital, and strong realization activity should position the company well for long-term growth. Cedar Fair (FUN) fell below its 200-day moving average. There was no price-changing news on Washington Prime Group (WPG).

Exhibit 3: Significant Detractors from Performance, 3/29/2019 – 4/5/19

Name Type Return
*Recently Added Security* Equity -2.2%
*Recently Added Security* Bond -1.2%
Washington Prime Group Equity -2.1%
Blackstone Group LP Equity -0.5%
Cedar Fair Equity -1.0%

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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