May 20, 2019

Income Strategy Update for Week Ended 5/17/19

NGL Energy Partners Advances on Water Disposal Acquisition While Just Energy Falls on EBITDA Miss

Last week, the Income Strategy declined -1.25%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.06% fall and the S&P 500’s -0.69% loss. (Exhibit 1). The strategy ended the week up 12.02% YTD, or 377 basis points ahead of the high yield index and 296 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 5/17/191

Time Period Income Strategy ML HY II S&P 500
Last Week (5/10 – 5/17) -1.25% -0.06% -0.69%
MTD -1.74% -0.60% -2.76%
QTD 1.28% 0.79% 1.17%
YTD 12.02% 8.25% 14.98%
Inception (annualized since 4/2/2009) 13.58% 11.18% 15.84%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). NGL Energy Partners (NGL) announced the acquisition of Mesquite Disposals Unlimited for $890M, nearly doubling the size of NGL’s key growth business and making them the biggest water transporter in the Permian’s Delaware Basin. Management expects the deal to be leverage neutral and significantly accretive to distributable cash flow per unit in fiscal 2020 and beyond. Seaspan (SSW) announced the refinancing of $1B of debt with a new credit facility, providing modest annual interest savings of ~$5M, as well as a more flexible source of financing. Diebold Nixdorf (DBD) announced the completion of the squeeze-out of its German Public unit after acquiring the remaining minority shares of Diebold Nixdorf AG. Carlyle Group (CG) formed a golden cross as its 50-day moving average moved above its 200-day moving average. There was no price-changing news on Blackstone Group (BX).

Exhibit 2: Significant Contributors to Performance, 5/10/19 – 5/17/19

Name Type Return
NGL Energy Partners LP Equity 7.0%
Seaspan Corp Equity 4.3%
Diebold Nixdorf 8.5 4/24 Bond 1.7%
Blackstone Group LP Equity 2.1%
Carlyle Group LP Equity 1.5%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors (Exhibit 3). Just Energy Group (JE CN) reported fiscal Q4 EBITDA of C$69M, falling short of consensus of C$75M, driven by lower-than-expected gross margin of C$198M. Gross margins per residential customer ticked higher to C$386 (+11% sequentially) as the company continues to execute on its strategy of adding higher margin customers. Management initiated fiscal 2020 EBITDA guidance of C$220M-C$240M (+13% year-over-year at the midpoint) and free cash flow guidance of C$90M-C$100M with potential upside from working capital improvements. Morningstar lowered its price target for Greenhill (GHL) from $23.50 to $23, 35% implied upside. National CineMedia (NCMI) fell below its 200-day moving average. Alrosa (ALRS RX) reported Q1 EBITDA of RUB 31.1B, topping consensus of $30.6B, while free cash flow of RUB 28.9B was in-line and provides a nice foundation for 1H19 dividends. Management remains optimistic on the stabilization and continued growth of the diamond market after weak pricing to start the year.

Exhibit 3: Significant Detractors from Performance, 5/10/2019 – 5/17/19

Name Type Return
Just Energy Group Inc Equity -15.1%
Greenhill & Co Equity -10.9%
National CineMedia Equity -3.8%
Alrosa Equity -3.3%

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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