Florian Weidinger, CEO of Santa Lucia Asset Management (SLAM)
Finding value stocks with supporting cash flow can be a planetary wide search for portfolio managers.
Florian Weidinger has been the CEO of Santa Lucia Asset Management (SLAM), a Singapore-based investment firm since 2021 and is a specialist when it comes to discovering value stocks.
Previously, he was the founder of Hansabay in 2011, which merged its business with SLAM in 2021. Before that, Mr. Weidinger was a vice-president at Lehman Brothers where he last worked for the insolvency administration, after several years with the risk arbitrage, principal investing and investment banking divisions.
He has held multiple board directorships across sectors. Mr. Weidinger holds a B.Sc. degree from City University of London, an MBA from the Stanford Graduate School of Business, and an M.S. degree in environment and resources from Stanford University’s School of Earth Sciences.
“We also like a bank in Papua New Guinea listed in Australia, Kina Securities (ASX:KSL), a rather interesting case. So this is Australian listed, but is the second-largest foreign bank in Papua New Guinea.
Papua New Guinea is about a $23 billion economy that is experiencing a significant uptick in foreign direct investment as a result of rising commodity prices. The nice thing about these types of money, foreign direct investment — contrary to hot money from investors behind Bloomberg terminals — foreign direct investment is money that stays because it’s invested into fixed assets.
In fact, Papua New Guinea’s $23 billion economy is getting in excess of $10 billion, maybe $15 billion FDI in the coming years. So we’re having a significant inflow of foreign investment into that country.
That should help improve the overall revenue opportunity of Kina, which is a direct beneficiary of foreigners coming into the country because they are — as the leading foreign bank in the country and number-two overall — they are the first choice for many foreign companies.
There’s also a very interesting dynamic happening here in that Westpac (OTCMKTS:WEBNF) from Australia has announced that they are leaving Papua New Guinea.
They are not just leaving Papua New Guinea, Westpac is leaving the entire Pacific, and this is part of a broader strategy shift of Westpac.
As a result, Kina is having a clear run at picking up a couple of customers who will have to look for a new banking home in Papua New Guinea.
It arguably is a more exotic security, but we think it’s a very attractive and nice name. That company is paying a dividend yield of 12%, listed in Australia trading around one times book, and earnings are on a nice upward trajectory.”
Katie Stockton, Founder and Managing Partner, Fairlead Strategies
Katie Stockton is warning that current US equity values are not supported by cash flow so value stocks are not the support for portfolios that investors wish.
“…We’ve been recommending reduced exposure to the U.S. equity market for now with the intention of revisiting it when we feel a long-term low has been established.
Our indicators are looking their worst since, unfortunately, 2008, and it doesn’t mean that we’ll have that kind of downdraft in terms of magnitude, but it does increase risk to the downside, more so than we’ve seen for many years.
And with that, especially on the brink of retirement, it doesn’t make sense to have aggressive long equity exposure at this time.
That’s why we feel that the TACK ETF is appropriate for folks at that stage of their investing career, and with their time horizon, because it allows for them to leverage upside in that equity market when the equity market is trending higher.
But it has that risk-off piece that helps them avoid the kind of downdrafts that we did see in 2008, and before that in 2000 through 2003. So, to us, a conservative equity strategy with real attention to managing risk, somewhat of a hedged equity exposure, seems appropriate to us.”
Joe Van Cavage, CFA, Vice President and Portfolio Manager, Intrepid Capital
Saudi Arabia is gushing with cash flow now that they have raised prices for oil to all time highs. Joe Van Cavage has found a value stock company that will benefit.
“Let’s discuss Valvoline (NYSE:VVV). That company is over 150 years old. But it’s another company we really like. Valvoline has two related but distinct businesses inside of it. The first is a nationwide chain of automotive quick-lube stores that provides oil changes and ancillary services to customers.
The second is a manufacturing business that makes engine lubricants under the Valvoline brand and sells them wholesale to other auto maintenance shops, mass market retail and of course, through its own chain of stores.
This company was spun out of Ashland Chemical (NYSE:ASH) in 2016. And management right away went to work fixing the company’s capital allocation, which meant taking the cash flow from a mature manufacturing business and investing to aggressively grow the quick-lube business, which was ignored under Ashland.
This strategy has really paid off because the quick-lube business is a gem.
It has several things going for it. First, they’ve been able to outmanage a very fragmented industry, as customers need less and less oil changes and used cars can extend the period between them. Valvoline has gained share by focusing on an important niche: extreme convenience and quality products.
This means investing heavily in the client experience as well as branding to ensure customers are aware of Valvoline’s quick turnaround times to get them on their way. As a result, the average throughput to Valvoline quick-lube stores is much higher than the industry average and steadily growing each year.
Second, they’ve continually improved their training and upselling capabilities at the point of sale to attach further services to the quick oil change people come for.
Think replacing wiper fluids, engine and cabin filters, etc. Attach rates continue to climb and increase the average ticket at a nice margin.
Finally, newer cars on the road are more often requiring synthetic oil versus conventional.
This costs the consumer about three times more, but doesn’t cost nearly that much more to make. And this has been another ticket and gross margin driver, although less driven by management’s efforts.
So you combine the market share gains with these ticket drivers, and you’ve got a business that has had 15 years in a row of same-store sales increases, including in 2020 when the country was shut down and basically no one was driving. So this is a really nice consumer franchise.
With that said, we believe management was smart to aggressively invest the company’s cash flow into expanding it. The company’s store count has more than doubled since the spin off and will continue to grow double-digits.
Margins in that segment are already high, but we believe are under-earning as the large base of new stores takes time to reach maturity.
There’s just a lot to like about the setup when you consider the existing store base is guiding to comp double-digits this year despite a huge rebound in 2021.
And then, the manufacturing business is a decent business as well, just not quite on the same level with slower growth prospects and weaker pricing power.
It’s been suffering over the last year as its main input, which is petroleum, spikes. And it takes them longer to pass this along to the retail customers like Walmart (NYSE:WMT) than it does for the quick-lube business to raise prices for a consumer who just rolled into the shop.
But it’s something they will get back over a cycle and can probably be seen as a margin catalyst embedded into the idea.
Valvoline is going to separate these two businesses. Now, the separation of these businesses can create a lot of value by allowing more appropriate shareholder bases for a steady cash flow gusher that can pay a large dividend on the manufacturing side versus more of a high-margin retail growth concept that is investing most of the cash flow into new quick-lube stores.
However, it is a trickier-than-normal separation since the manufacturing business sells the quick-lube business its products at cost. So some care needs to be taken to ensure this separation doesn’t destroy value. But management has communicated well that they are aware of this issue while structuring any deal to avoid something like that.”
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