August 12, 2019

Income Strategy Update for Week Ended 8/9/19

Apollo Global Advances on Barclays Bullish Initiation While New Media Falls on Earnings, Gannett Acquisition

Last week, the Income Strategy declined -1.04%, underperforming both the Merrill Lynch U.S. High Yield Master II Index’s -0.34% fall and the S&P 500’s -0.40% loss. (Exhibit 1). The strategy ended the week up 10.50% YTD, or 57 basis points ahead of the high yield index and 734 basis points behind the S&P 500.

Exhibit 1: Preliminary Performance of Income Strategy Versus High Yield, Equity Indices, Through 8/9/191

Time Period Income Strategy ML HY II S&P 500
Last Week (8/2 – 8/9) -1.04% -0.34% -0.40%
MTD -3.05% -0.71% -2.00%
QTD -0.65% -0.20% -0.59%
YTD 10.50% 9.93% 17.84%
Inception (annualized since 4/2/2009) 13.12% 11.08% 15.73%

Source: Bloomberg, Miller Value Partners

Equities comprised last week’s top five contributors (Exhibit 2). Barclays initiated Apollo Global (APO) with an “Overweight” rating and $45 price target, 39% implied upside excluding the 6.2% dividend yield, stating the company’s earnings are stickier than peers on stable and growing fee-related earnings with upside from robust fundraising and strong realization activity. Seaspan (SSW) reported EBITIDA of $173.8M, topping estimates of $166M on in-line revenues while core EPS of $0.18 beat consensus of $0.15 and covered the dividend of $0.125/share (4.9% annualized yield). The company continues to strengthen its balance sheet, having paid down $1.2B of debt since 2Q18 while also reducing vessel operating expenses. Cedar Fair (FUN) advanced after reporting strong results, where EBITDA of $163M beat consensus of $144M by 13% driven by a 5.5% top-line beat, 400bps of margin expansion, and attendance growth of 10%. EPS of $1.14 was well ahead of street estimates of $0.86 and covered the dividend of $0.925/share (7.0% annualized yield). There was no price-changing news on Chico’s (CHS).

Exhibit 2: Significant Contributors to Performance, 8/2/19 – 8/9/19

Name Type Return
Apollo Global Management LLC Equity 4.2%
Seaspan Corp Equity 5.1%
Cedar Fair LP Equity 4.1%
Chico’s FAS, Inc. Equity 5.5%

Source: Miller Value Partners

Equities and a bond comprised last week’s top five detractors (Exhibit 3). Quad Graphics (QUAD) fell as Board Member John Fowler sold 7,900 shares for $87,690. New Media (NEWM) reported EPS of $0.11, topping estimates of $0.07 while revenues of $404M grew 4% year-over-year. The company announced the acquisition of Gannett (GCI) for $12.06/share ($6.25 in cash and 0.5427 shares of NEWM) which will be financed with a $1.8B loan from Apollo. Management stated the new dividend will be $0.76/share (9.5% annualized yield), down 50% from the prior level of $1.52/share; though management expects the dividend to grow as the company realizes synergies (projected at $275M-$300M) and deleverages. Debt of Chaparral Energy (CHAP) fell despite strong results with total production of 28.3 Mboe/d, beating consensus of 27.5 Mboe/d and guidance of 26.0-27.5 Mboe/d. EBITDA of $43.7M (+54% sequentially and +62% year-over-year) topped estimates of $42.5M. Management maintained FY19 production guidance of 25.0-27.0 Mboe/d, lowered capex guidance to $260M-$285M (from $275M-$300M), announced a G&A cost reduction initiative of 20%-25%, and noted they are on track to free-cash-flow neutrality by the back half of 2020. NGL Energy Partners (NGL) reported EBITDA of $86.8M, missing consensus of $99.3M driven by a larger-than-expected loss in the refined products business while distributable cash flow of $32.4M drove a $0.39/share quarterly dividend (11.3% annualized yield). Management reaffirmed FY19 EBITDA guidance of $600M and announced the sale of its southeast refined product assets for $300M with the proceeds going towards debt reduction. Just Energy (JE CN) announced the departure of CEO Patrick McCullough and has named director R. Scott Gahn as President and CEO. The company stated their strategic review is ongoing.

Exhibit 3: Significant Detractors from Performance, 8/2/19 – 8/9/19

Name Type Return
Quad Graphics Equity -9.2%
New Media Invt Group Inc. Equity -24.5%
Chaparral Energy 8.75 7/23 Bond -7.0%
NGL Energy Partners LP Equity -4.9%
Just Energy Group Inc. Equity -6.8%

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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