August 6, 2018

Income Strategy Update for Week Ended 8/3/18

Energy Transfer Partners Advances on Acquisition Roll-Up While Hi-Crush Falls Despite Strong Earnings Report

Last week, the Income Strategy advanced 0.22% underperforming the Merrill Lynch U.S. High Yield Master II Index’s 0.34% gain and the S&P 500’s 0.80% rise (Exhibit 1). The strategy ended the week up 13.64% YTD, or 1,226 basis points ahead of the high yield index and 623 basis points ahead of the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 8/3/181

Time Period Income Strategy ML HY II S&P 500
Last Week (7/27-8/3) 0.22% 0.34% 0.80%
MTD -0.96% 0.18% 0.88%
QTD 2.55% 1.30% 4.63%
YTD 13.64% 1.38% 7.40%
Inception (annualized since 4/2/2009-6/30/18) 15.88% 11.62% 16.60%

Source: Bloomberg, Miller Value Partners

Five equities comprised last week’s top five contributors (Exhibit 2). Energy Transfer Equity (ETE) announced a definitive agreement to acquire its underlying MLP Energy Transfer Partners (ETP) in an all-stock transaction with a 1.28 exchange ratio, implying an 11.2% valuation premium (9-10x post-GP 2019-2020 EV/EBITDA multiple). Energy Transfer expects the transaction to be accretive and the combined entity should maintain 1.6x distribution coverage, though partnership holders are hit with a 31% distribution cut. Triangle Capital Corp (TCAP) completed the previously announced asset sale and externalization agreement with new advisor, Barings, and has changed their name to Barings BDC (BBDC). The company announced a modified Dutch Auction tender offer of up to $50M beginning August 7th, which will be followed by a $50M share tender. NGL Energy Partners (NGL) moved above its 50 and 200-day moving averages, as well as formed a golden cross. Seaspan (SSW) announced Q2 EPS of $0.23, in-line with consensus estimates and well covering the $0.125/share dividend (5.7% annualized yield), while EBITDA of $178.6M (+32% sequentially) topped expectations of $177.9M. The company seamlessly integrated the GCI merger, posted a 98.6% utilization rate, and ramped up FCF to $113M (+82% Y/Y). Tupperware Brands (TUP) bounced back nicely last week, despite being downgraded to “Sell” from “Hold” at Argus.

Exhibit 2: Significant Contributors to Performance, 7/27/18 – 8/3/18

Name Type Return
Energy Transfer Partners LP Equity 20.8%
Barings BDC Inc Equity 3.2%
NGL Energy Partners LP Equity 6.3%
Seaspan Corp Equity 4.1%
Tupperware Brands Corp Equity 4.6%

Source: Miller Value Partners

Five equities comprised last week’s top five detractors (Exhibit 3). Hi-Crush Partners (HCLP) declined despite posting Q2 results in-line with their pre-release, where adjusted EBITDA of $81.3M (preliminary $80M-$82.5M) came in above consensus of $80.3M, and revenues of $248.5M (preliminary $247M-$249.5M) vs estimates of $245M. Management discussed a potential C-Corp conversion, which would expose it to a broader group of capital for buybacks and growth initiatives, but did note they expect frac sand price growth to slow as more supply comes online. New Media Investment Group (NEWM) declined after reporting Q2 EPS of $0.20, falling short of consensus of $0.25, but maintained their $0.37/share dividend (9.2% annualized yield). Revenues of $388.8M came in ahead of expectations of $368M, but margins lagged due to tariffs, which increased paper costs by 30%. Management announced the closing of four acquisitions over the period for $100M which were financed through an equity offering and reaffirmed strong dividend coverage and FCF ($1.48/share annual distribution vs $2.40/share FCF). RR Donnelley (RRD) fell on a Q2 EPS loss of $(0.09), wider than estimates of $(0.04), and announced a -78.5% dividend cut to $0.03/share (2.6% annualized yield). The cut was attributed to enhancing management’s ability to make “strategic investments”, a vague explanation that was not well received by the market given current fundamentals. There was no price-changing news on Sberbank (SBER LI) or Maiden Holdings (MHLD).

Exhibit 3: Significant Detractors from Performance, 7/27/2018 – 8/3/18

Name Type Return
Hi-Crush Partners LP Equity -8.5%
New Media Investment Group Equity -8.9%
RR Donnelley & Sons Equity -8.5%
Sberbank Equity -5.0%
Maiden Holdings Ltd Equity -2.3%

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 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.

©2018 Miller Value Partners, LLC

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