June 24, 2019

Income Strategy Update for Week Ended 6/21/19

Alternative Asset Managers Rise on Oppenheimer Upgrade while NGL Energy Partners Falls Despite Stifel Raising Price Target

Last week, the Income Strategy advanced 1.16%, outperforming the Merrill Lynch U.S. High Yield Master II Index’s 1.08% gain but underperforming the S&P 500’s 2.22% rise. (Exhibit 1). The strategy ended the week up 11.60% YTD, or 146 basis points ahead of the high yield index and 727 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 6/21/191

Time Period Income Strategy ML HY II S&P 500
Last Week (6/14 -6/21) 1.16% 1.08% 2.22%
MTD 4.38% 2.43% 7.34%
QTD 0.90% 2.55% 4.59%
YTD 11.60% 10.14% 18.87%
Inception (annualized since 4/2/2009) 13.41% 11.26% 16.05%

Source: Bloomberg, Miller Value Partners

Four equities and a bond comprised last week’s top five contributors (Exhibit 2). Alternative asset managers Carlyle Group (CG) and Apollo Global Management (APO) rose with the broad equity market and in conjunction with Oppenheimer’s bullish note on the group, where they relaunched coverage with an “Outperform” rating, citing strong secular growth and attractive valuation. The analyst has price targets of $33 and $43 on Carlyle and Apollo, upside of 50% and 29%, respectively. Alrosa PJSC (ALRS RX) gained as UBS issued an optimistic note on the diamond market, where they see supply falling, demand growing, with midstream inventories lower and realized pricing bottoming out. Further, May trade data shows polished exports of $1.9B were up 14% month-over-month while gross cutting margin rose 26% to $638/carat, driven by rising polished price. Wedbush upgraded National CineMedia (NCMI) from “Neutral” to “Outperform” with an $8 price target, 25% upside excluding the 10.6% dividend yield. The analyst is now less concerned with reserved seating driving later arrivals as the company has shown it can recoup ad dollars elsewhere, such as in-lobby and by expanding digital packages for national advertising. There was no price-changing news on the debt of CenturyLink (CTL).

Exhibit 2: Significant Contributors to Performance, 6/14/19 – 6/21/19

Name Type Return
Alrosa PJSC Equity 8.3%
CenturyLink 7.6% 9/39 Bond 4.0%
Carlyle Group LP Equity 2.3%
National CineMedia Bond 4.0%
Apollo Global Management Equity 2.0%

Source: Miller Value Partners

Four equities and a term loan comprised last week’s top five detractors (Exhibit 3). NGL Energy Partners (NGL) moved below its 50-day moving average despite Stifel raising their price target from $13 to $16, 14% implied upside excluding the 11.2% dividend yield. The analyst expects NGL to exit its Refined Products business this year, eliminating $600M of working-capital debt, reducing leverage by 1.0x, and increasing distribution coverage by 0.7x. Debt of Ascena Retail Group (ASNA) fell after its long-term rating was downgraded by S&P to CCC+ from B- with a negative outlook. Danske Bank (DANSKE DC) declined after the Danish Economic Council lowered Denmark’s 2019 and 2020 GDP forecast to 2% and 1.7%, respectively versus prior estimates of 2.4% and 2.1%, driven by ongoing trade tensions US and China and the risk of a disorderly Brexit. Morgan Stanley downgraded British American Tobacco (BATS LN) from “Equal-weight” to “Underweight” with a GBP 2,600 price-target, 6.5% implied downside more than offset by its 7.3% dividend yield, citing underappreciated risk stemming from the impact of a maximum nicotine policy on the US Tobacco Industry. Macquarie Infrastructure (MIC) fell below its 100-day moving average.

Exhibit 3: Significant Detractors from Performance, 6/14/19 – 6/21/19

Name Type Return
NGL Energy Partners LP Equity -1.8%
Ascena Retail Group TL B 1L 8/22 Term Loan -2.8%
Danske Bank A/S Equity -3.8%
British American Tobacco Equity -1.8%
Macquarie Infrastructure Co Equity -0.7%

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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