May 6, 2019

Income Strategy Update for Week Ended 5/3/19

Macquarie Infrastructure Rises on Earnings Beat While Greenhill Falls on Weaker-Than-Expected Advisory Revenues

Last week, the Income Strategy advanced 0.25%, outperforming both the Merrill Lynch U.S. High Yield Master II Index’s 0.14% rise and the S&P 500’s 0.22% gain. (Exhibit 1). The strategy ended the week up 14.86% YTD, or 596 basis points ahead of the high yield index and 340 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 5/3/191

Time Period Income Strategy ML HY II S&P 500
Last Week (4/26 – 5/3) 0.25% 0.14% 0.22%
MTD 0.75% 0.00% 0.01%
QTD 3.85% 1.40% 4.06%
YTD 14.86% 8.90% 18.26%
Inception (annualized since 4/2/2009) 13.93% 11.29% 16.22%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Macquarie Infrastructure (MIC) reported Q1 EBITDA of $203M, beating consensus estimates of $184.9M by 10%, driven by better-than-expected results in their Hawaii Gas and Atlantic Aviation segments. The company generated adjusted free cash flow of $165M, providing dividend coverage of 1.92x on their $1.00/share quarterly distribution (9.36% annualized yield). Management reaffirmed 2019 guidance for EBITDA of $610M-$635M and free cash flow of $400M-$445M. Further, the company expects to end 2019 at the low end of their previous guidance range for leverage of 4.0x-4.25x, reflecting higher-than-expected proceeds from the sale of renewable assets. Sberbank (SBER LI) reported Q1 net income of RUB 226B, coming in 7% above consensus expectations and implying a 23% return on equity. Net interest margins declined 40bps quarter-over-quarter, but management noted they should start recovering in Q2 and are past their trough.  Management maintained full year guidance, including +5.5% net interest margins and fee growth in the mid-teens. Just Energy Group (JE CN) formed a golden cross, as the company’s 50-day moving average moved above its 100-day moving average. Debt of Weight Watchers (WW) advanced on strong quarterly results, where EBITDA of $33.3M and EPS of $(0.16) both topped estimates of $24.3M and $(0.26), respectively, while gross margins expanded 130bps to 55.4%. Management maintained 2019 revenue guidance of $1.4B, increased EBITDA guidance to $350M (from $345M), and raised EPS guidance to $1.35-$1.55 (from $1.25-$1.50). B Riley reiterated their “Buy” rating on National CineMedia (NCMI) with a $9.75 price target, 30% implied upside excluding the 9.3% dividend yield, citing expectations for upside to Q1 results on box office timing. Longer-term, the analyst sees positive momentum in the company’s digital offering, which should drive better relationships with advertising customers and boost cash flows.

Exhibit 2: Significant Contributors to Performance, 4/26/19 – 5/3/19

Name Type Return
Macquarie Infrastructure Co Equity 5.5%
Sberbank Equity 4.4%
Just Energy Group Equity 3.0%
Weight Watchers 8.625% 12/25 Bond 10.1%
National CineMedia Equity 3.1%

Source: Miller Value Partners

Four equities and a bond comprised last week’s top five detractors (Exhibit 3).  Investment Bank Greenhill (GHL) reported a wider than expected Q1 loss of $(0.64) versus estimates of $(0.11), driven by weaker-than-estimated advisory fees of $51M. The company repurchased $24M of shares over the quarter, leaving $75M on its authorization after refinancing and upsizing its term loan facility to $375M. Management remains constructive on the M&A market for the balance of the year, noting they have seen a rebound in recent deal activity, driven by equity markets returning to all-time highs and financing markets reopening. Danske Bank (DANSKE DC) reported Q1 net income of DKK 2.8B, coming in 14% below consensus. Lower lending margins and higher funding costs drove weaker-than-expected net interest income. Management reiterated 2019 profit guidance of DKK 14-16B, but lowered guidance for net interest income and now expects it to be lower than 2018 as higher funding costs and margin pressure offset volume growth. Quad Graphics (QUAD) fell despite posting solid Q1 results where revenues of $1.0B topped estimates of $980M and EBITDA of $70M was in-line. The company maintained their $0.30/share dividend (10.76% annualized yield). Debt of Diebold Nixford (DBD) also fell on solid results, where revenues of $1.03B just missed consensus of $1.04B and EBITDA of $65M beat estimates of $59M. Management reiterated full year guidance and expects EBITDA of $380M-$420M on revenues of $4.4B-$4.5B. There was no price-changing news on NGL Energy Partners (NGL).

Exhibit 3: Significant Detractors from Performance, 4/26/2019 – 5/3/19

Name Type Return
Greenhill & Co Equity -14.1%
NGL Energy Partners LP Equity -4.3%
Danske Bank Equity -9.4%
Quad Graphics Equity -7.3%
Diebold Nixdorf 8.5% 4/24 Bond -2.0%

Source: Miller Value Partners

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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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