Fund Insights: 3 Stocks That Meet The Value Test | Mackenzie Investments

Fund Insights: 3 Stocks That Meet The Value Test


The Mackenzie Cundill Team focuses on finding unrecognized, misunderstood or undervalued stocks anywhere in the world. Their portfolios concentrate on stocks with high-conviction investment positions across a range of value drivers. The Team seeks out companies trading at substantial discounts to their estimated underling value. It is not enough to buy cheap stocks, they must have catalysts that can close the valuation gap over a three-to five-year period. The managers carefully establish and monitor milestones for each investment to ensure that the buy rationale is intact. If a change occurs, they consider reducing or eliminating the position.

Below, you’ll learn about three great value stocks and the Cundill Team’s rationale for investing in them.

Finding value in real estate, media and technology

Hang Lung Properties, Ltd. (Hang Lung)1

Hang Lung is one of Hong Kong’s largest property developers that builds, manages and owns commercial complexes, including upscale shopping malls, in China. Its commercial assets are in prime areas and offer a wide selection of international retail brands catering to high-end clientele. The company’s landmark properties in Shanghai, Plaza 66 and Grand Gateway 66, generated the highest tax revenues among all commercial properties in the city, making it more resilient than the general economy.

Source: Bloomberg, December 7, 2017 - March 11, 2019

Opportunity to buy

Cundill initiated a new position in Hang Lung in the second half of 2018, as shares were depressed due to headline concerns regarding China.

Investment Drivers

Despite the negative headlines about trade war and macro-economic concerns around China, Hang Lung is bucking the trend and showing good growth. High-end luxury brands continue to do well in China and Hang Lung’s malls continue to benefit. Its Hong Kong rental and operating income reported steady growth in the most recent quarter. In the China mainland malls, tenant retail sales continue to trend positively. The company’s flagship high-end malls continue to show positive progress from their management’s turnaround efforts. We believe 2019 will be a busy year for the company, as both new and renovated assets are set to enter their operations. Cundill will continue to monitor key milestones, such as new property openings and completion of renovations, which should add to Hang Lung’s revenue and earnings base.

Discovery, Inc. (Discovery)2

Discovery is a global media company that provides content across multiple distribution platforms, including digital distribution arrangements, throughout the world. They own various networks, such as Discovery Channel, TLC, Animal Planet, Investigation Discovery and the Science Channel.

Source: Bloomberg, December 9, 2016 - March 11, 2019

Opportunity to buy

We accumulated shares in Discovery between the third quarter of 2017 and the first quarter of 2018. At that time, the media and broadcasting sector was very much out of favour as the market focused on the growth of Netflix. However, we saw compelling value and catalysts for Discovery.

Investment Drivers

In March 2018, Discovery closed their acquisition of American mass media company, Scripps Networks Interactive, creating a powerhouse in non-scripted entertainment content. The merger creates significant cost and revenue synergies for the combined company. Discovery shareholders are poised to benefit from these synergies and the significant free cash flow that will be deployed to pay down acquisition debt. In our opinion, our thesis on Discovery was further reinforced when management raised their cost synergy estimates from $350 million to “at least” $600 million in the first quarter results.

Renesas Electronics (Renesas)3

Renesas, based in Japan, is one of the world’s largest automotive semiconductor companies. It is best known for its microcontroller units. The company also has leading market share in electric power meters, factory automation, and home appliances.

Source: Bloomberg, December 9, 2016 - March 11, 2019

Opportunity to buy

The team initiated a new position in Renesas in the fourth quarter of 2018. The opportunity came after shares fell due to a series of events, including damaged factories from an earthquake in 2016, supply chain disruptions, customer over-reactions and inventory adjustments, providing the team with an opportunity to invest at a substantial discount.

Investment Drivers

Industrial demand for more powerful microcontrollers and microprocessors continues to grow. In terms of design, Renesas is up to two years ahead of its competition. Through their recent acquisition of American semiconductor solutions company, Integrated Device Technology, Inc., Renesas added connectivity and sensor technology to their product suite, making it the second largest semiconductor company in the auto industry. Post-acquisition, its management plans to reduce debt on their balance sheet. Sales growth is currently depressed due to higher inventory levels in the supply chain and softening demand. However, we expect the supply chain inventories to normalize over the next two quarters. Management cut production aggressively in the second half of 2018. The third quarter of 2018 showed the first drop in inventories at both the sales channel and Renesas. We expect inventories to continue to drop in the near term, and to reach normalized levels by mid-2019. At which time, sales are expected to return to secular growth; which is driven by increased semiconductor content per vehicle. Overall, the team expects the valuation of Renesas to rerate higher, driven by the combination of its leading market position, its exposure to secular growth markets, and higher free cash flow generation in 2019.

To learn more about Cundill’s value opportunities, please contact your financial advisor.

1 Hang Lung Properties, Ltd. is one of the portfolio holdings by Mackenzie Cundill Canadian Balanced Fund, Mackenzie Cundill Canadian Security Fund, Mackenzie Cundill Canadian Security Class, Mackenzie Cundill Value Fund and Mackenzie Cundill Value Class

2 Discovery, Inc. is one of the portfolio holdings by Mackenzie Cundill Canadian Balanced Fund, Mackenzie Cundill Canadian Security Fund, Mackenzie Cundill Canadian Security Class, Mackenzie Cundill Value Fund and Mackenzie Cundill Value Class

3 Renesas Electronics is one of the portfolio holdings by Mackenzie Cundill Value Fund and Mackenzie Cundill Value Class

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The content of this document (including facts, views, opinions, recommendations, and descriptions of or references to products or securities) is not to be used or construed as investment advice, as an offer to sell or the solicitation of an offer to buy, or an endorsement, recommendation or sponsorship of any entity or security cited. Although we endeavour to ensure its accuracy and completeness, we assume no responsibility for any reliance upon it. This document may contain forward-looking information which reflect our or third party current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein. These risks, uncertainties and assumptions include, without limitation, general economic, political and market factors, interest and foreign exchange rates, the volatility of equity and capital markets, business competition, technological change, changes in government regulations, changes in tax laws, unexpected judicial or regulatory proceedings and catastrophic events. Please consider these and other factors carefully and not place undue reliance on forward-looking information. The forward-looking information contained herein is current only as of March 11, 2019. There should be no expectation that such information will in all circumstances be updated, supplemented or revised whether as a result of new information, changing circumstances, future events or otherwise.