Investment Pitches

Pitch Summary:
Signify NV (LIGHT): Previously known as Phillips Lightning, it has annual sales of 7.5 billion EUR, pays truly handsome >4+% dividends, at current prices, and was offered by Mr. Market between 0.4 and 0.45 levels of the Price-to-sales ratio. In contrast, the usual and fair valuation should be between 0.6 and 0.75 price to sales. Everyone knows the lightning solution of Phillips, everyone who bought lamps for their homes or cars. Additionally, the company is constantly fighting for better efficiency of its lightning products, developing greener and futuristic solutions to illuminate our lives. We would like to keep this business as long as possible if it continues to operate with a lower debt level.

BSD Analysis:
The manager presents a compelling value proposition for Signify NV, emphasizing both income and valuation metrics. With 7.5 billion EUR in annual sales and a dividend yield exceeding 4%, the company offers attractive current income while trading at a significant discount to fair value. The manager identifies a clear valuation gap, with shares trading at 0.4-0.45x price-to-sales versus a fair value range of 0.6-0.75x. The investment thesis is strengthened by Signify's market-leading position in lighting solutions and ongoing innovation in energy-efficient and sustainable lighting technologies. The position generated a +15.88% return and $50.3 million gain in 2023, representing the fund's third-largest contributor. The manager's preference for long-term holding contingent on maintaining low debt levels demonstrates disciplined risk management.

Pitch Summary:
CSE Global, a dynamic systems integrator, is a compelling player in the provision and installation of process control systems, turnkey telecommunication solutions, and security solutions, with a pronounced focus on the energy, infrastructure, and mining & minerals sectors. Notably, its expertise lies in SCADA, DCS, PLCs, and plant systems, primarily servicing the oil, gas, and power facilities. Recently securing two significant contracts, the company is poised for substantial growth. One contract involves designing, manufacturing, and integrating power distribution centres and electrical systems in the US from 2023 to 2025, while the other pertains to communication and security systems for the Singapore government. As of the end of 1H23, CSE Global's order book stood at SGD 520 million, and it is on track to reach SGD 900 million by year-end. The company's financial outlook is impressive, with profit growth projections as follows: +300% for the current year, +30% in 2024, and +25% in 2025. This translates to attractive valuations, with a price-to-earnings (PE) ratio of 10x for 2024 and 7x for 2025. Furthermore, investors can anticipate robust dividend yields of 6% and 8% for 2024 and 2025, respectively.

BSD Analysis:
The manager presents CSE Global as an attractive systems integration play with exposure to high-growth energy infrastructure markets. The investment thesis is anchored by a rapidly expanding order book, growing from SGD 520 million in 1H23 to a projected SGD 900 million by year-end, representing 73% growth. The company has secured two major multi-year contracts - US power distribution systems (2023-2025) and Singapore government communication/security systems - providing strong revenue visibility. The financial projections are particularly compelling, with explosive 300% profit growth expected in the current year, followed by sustained 30% and 25% growth in 2024-2025 respectively. At forward valuations of 10x 2024 PE and 7x 2025 PE, the stock appears significantly undervalued relative to its growth profile. The company's specialization in SCADA, DCS, and PLC systems positions it well within the energy transition and infrastructure modernization themes. Attractive dividend yields of 6-8% provide additional downside protection while investors await the realization of the growth trajectory. The combination of order book visibility, attractive valuations, and exposure to secular infrastructure trends creates a compelling risk-reward proposition.

Pitch Summary:
HelloFresh SE (HFG): HelloFresh is a fast-growing founders-led business with a turnover of>7 billion EUR that delivers sets for cooking meals: the exact amount of ingredients for the exact period, say a week or three days. It is geo-diversified (EUR and US) and provides sound growth. It is slightly profitable, has excellent potential, and delivers food straight from farmers/producers; this is a greener practice. For a double-digit grower - it was super-cheap in 2023, below 1 Price to Sales, despite all risks. Our strategy is to keep that excellent business as long as possible.

BSD Analysis:
The manager maintains a strong bullish stance on HelloFresh despite a -27.77% decline and -$62.2 million loss in 2023. The investment thesis emphasizes HelloFresh's position as a fast-growing, founder-led meal-kit delivery company with over 7 billion EUR in revenue and geographic diversification across Europe and the US. The manager highlights the company's sustainable business model, delivering ingredients directly from farmers/producers, and views the sub-1.0x price-to-sales valuation as extremely attractive for a double-digit growth company. The slight profitability and excellent growth potential support the long-term holding strategy. This represents a growth-at-a-reasonable-price play on the evolving food delivery and sustainability trends, despite current market headwinds affecting the position.

Pitch Summary:
Gemadept, the preeminent port operator in Vietnam. Our steadfast confidence in Gemadept stems from its role as the premier conduit for harnessing the influx of Foreign Direct Investment (FDI) into Vietnam. A recent on-site assessment reaffirms our conviction, even in the face of a global economic slowdown. Gemadept remains adept at steadily expanding its market share, bolstered by robust export volume growth and the promising potential of forging equity partnerships with major shipping corporations. Additionally, the imminent prospect of raising fee tariffs and deep-water port terminal handling charges adds another layer of investment appeal. Vietnam Maritime Administration's ongoing efforts to craft a circular aimed at revamping regulated port fees hold strategic significance. This initiative, albeit delayed due to pandemic-induced disruptions, is pivotal for players like Gemadept. The agreements previously inked allowed for incremental fee hikes of up to 10% every three years, but were hindered by COVID-related delays. In terms of international cargo, the draft circular introduces a noteworthy increase in the floor price for non-deep-water ports, alongside a lift in the ceiling price for various ancillary fees like berth and marine pilot charges. Furthermore, the deep-water port terminal handling charges (THC) are slated for a 10% boost. Of particular interest is the prospective 21% THC increase at the deep-water Gemalink port, should the circular gain approval. Gemalink, which currently quotes THC at the prevailing ceiling rate, would witness a consequent approximate 13% ascent in its Average Selling Price (ASP). However, for non-deep-water ports under Gemadept's purview, including Nam Hai, Nam Dinh Vu, Phuoc Long, and Binh Duong ICD, the impact of the increased floor price in the new circular is expected to be minimal, given that their THC rates already surpass the stipulated floor price. In conclusion, Gemadept's strategic positioning in the Vietnamese port sector, combined with its potential for revenue expansion through fee increases and burgeoning partnerships, makes it an attractive proposition within our portfolio. The evolving landscape of regulated port fees further amplifies its investment allure, presenting us with a well-positioned opportunity to navigate the intricacies of this dynamic market.

BSD Analysis:
The manager presents a compelling bull case for Gemadept as Vietnam's premier port operator, positioning it as the primary beneficiary of Foreign Direct Investment flows into the country. The investment thesis centers on multiple catalysts for revenue growth, including regulatory fee increases and market share expansion despite global economic headwinds. The manager highlights specific pricing power opportunities, with deep-water port terminal handling charges set for a 10% boost and the Gemalink port potentially seeing a 21% THC increase, translating to a 13% rise in average selling prices. The company's diversified port portfolio across Nam Hai, Nam Dinh Vu, Phuoc Long, and Binh Duong ICD provides operational resilience. Recent on-site assessment reinforces management's conviction in the company's ability to capture market share growth through robust export volumes and potential equity partnerships with major shipping corporations. The regulatory environment appears favorable with Vietnam Maritime Administration's efforts to revamp port fees after pandemic-related delays. This combination of pricing power, market positioning, and regulatory tailwinds creates an attractive risk-adjusted opportunity in Vietnam's infrastructure sector.

Pitch Summary:
Zalando SE (ZAL_GR): Is a 10 billion EUR in sales European e-commerce clothing retailer with a stiff grip over the EU market. Financially healthy but with a thin profit margin, this clothing retailer is a leader that could bring stable double-digit growth for the portfolio over the years. The least exciting part about this business - it is less green than we previously thought because Fast-fashion is not green, even with conscious execution. We believe the company two to three times undervalued and we shall see its recovery.

BSD Analysis:
The manager presents a bullish thesis on Zalando SE, viewing it as significantly undervalued at 2-3x below fair value. The investment case centers on Zalando's dominant market position as a 10 billion EUR revenue e-commerce clothing retailer with strong market share across the EU. Despite acknowledging thin profit margins and environmental concerns around fast fashion, the manager believes the company's market leadership and financial health position it for stable double-digit growth. The fund suffered a -26.03% loss on this position in 2023, representing a -$59.6 million impact. The manager maintains conviction in the long-term recovery potential despite current headwinds. This appears to be a contrarian value play on a market leader trading at depressed valuations.

Pitch Summary:
The launch of Open AI's Generative Pre-Trained Transformer (GPT) has set in motion an arms race for artificial intelligence applications. Like any model, the competitive differentiation that an artificial intelligence model provides is rooted in the data inputted into the model. To drive meaningful value, large sets of data need to be collected and stored in a way that is then readily available for the model's GPU hardware to access for training and inferencing. However, access to this data is constrained by technical debt in enterprise data architectures that were previously designed for the lowest cost method of bulk data storage. Because historically there was no usage requirement to access such data, bottlenecks caused by slow input and output speeds were never an issue. With the advent of artificial intelligence, the need to access data has reset the requirements for data infrastructure. Data previously relegated to "cold" bulk storage now needs to be "warm" (accessible) so that it can be processed on demand. With data generation and data collection growing at exponential rates amidst a multiyear technological catalyst driven by artificial intelligence, we see an inflection in the value proposition for businesses to optimize data management as a high technology value driver. Pure Storage was founded in 2009 to drive a purpose-built, high technology approach to data management. While others approached data management as a commodity, Pure's high technology approach has created a data management platform whose market share gains are poised to accelerate. In Pure, we see several paths to value creation. First, in breaking the upfront price barrier with hard disk in March, Pure extended its runway for long term revenue growth. Due to historical upfront cost advantages, hard disk is the predominant bulk storage architecture. Because of technological advancements, constraints posed by the laws of physics, and demands from artificial intelligence applications, hard disk is no longer the lowest cost option and bulk storage is no longer a commodity market. The issue facing hard disk drives lies in their speed, reliability, and cost of ownership. Hard disk drives use spinning disk that are magnetically copied when read and written in sequential order when data is stored. Solid state drives were designed to fit in hard disk architectures and are thus subject to the control rules of hard disk protocols. Flash memory used in solid state drives is then subject to the constraints of both solid-state drive manufacturers and the hard disk drive architecture itself. The end result is that hard disks are slow and unreliable and solid-state drives require memory and compute to accommodate hard disk protocols which adds expense and creates instability. In addition to inferior performance and additional costs, both hard disk and solid-state drives require full time employees to manage the inherent system constraints. Pure, on the other hand, was purpose built to solve all these problems. The result is the only software and hardware platform that works directly on the flash semiconductor to provide greater speed, higher reliability, less complexity, and lower operating costs. Pure has long offered superior data management services, but with data management viewed as a cost center, inferior embedded solutions were slow to cede market share. As bulk storage replacement cycles come due, we see a multiyear catalyst for accelerated market share gains backed by tailwinds from a secularly growing market. Second, Pure's growing revenue streams represent sustainable growth that creates value. Unlike businesses selling hardware in episodic replacement cycles, Pure has a repeatable business model with a recurring storage as a service revenue stream. Subscribers receive the most modernized data management architectures without the burden of obsolescence or the need to manage hardware migrations. In a growing base of 11,550 global customers, we see meaningful net expansion opportunities. Additionally, we see more data centers moving to all flash architectures, a future expansion of co-developed products and partnerships with Nvidia, Snowflake, Microsoft and Meta, and a pipeline of new opportunities with hyperscalers and large telecom operators. We also see a shift in mix favoring subscription revenue, which carries a greater margin profile, and we believe the resulting operating leverage and earnings growth profile is misunderstood and undervalued. Third, Pure's portfolio sale is creating a standard in high technology data management. After first validating the market for high performance data management, Pure has since enabled the technology to fulfill larger segments of customer needs from the highest performance all the way down to the lowest price. Because every aspect of the software and hardware platform was purpose built, an automated operating system and consistent user experience create an environment that "just works". When the alternative is dozens of architectures that require full time employees to manage, it is easy to see why new customers expand the product offering to standardize Pure across their architecture. We see Pure creating an emerging standard for data management infrastructure across a growing base of global customers. In Pure, we see a long runway of profitable revenue growth, an emerging standard in data management, and competitive advantages and economies of scale to lower costs and grow earnings.

BSD Analysis:
Spree Capital presents a compelling bull case for Pure Storage centered on the AI-driven transformation of data infrastructure requirements. The manager argues that AI applications have fundamentally changed data storage needs, shifting from "cold" bulk storage to "warm" accessible storage, creating a secular tailwind for Pure's flash-based solutions. The investment thesis rests on three key pillars: Pure's technological superiority over traditional hard disk and solid-state drives, offering better speed, reliability, and lower total cost of ownership. The company's transition to a subscription-based storage-as-a-service model provides recurring revenue streams and higher margins, with 11,550 global customers offering significant expansion opportunities. Strategic partnerships with major tech companies like Nvidia, Snowflake, Microsoft, and Meta position Pure for accelerated growth in the AI ecosystem. The manager believes Pure is establishing itself as the emerging standard for high-performance data management, benefiting from both market share gains and secular market growth. With the company breaking price parity with hard disk storage, Pure has removed the primary barrier to adoption while maintaining superior performance characteristics.

Pitch Summary:
One of the recent additions in this regard is Schneider Electric (Schneider). A French company, Schneider has expanded globally and is now organised around four hubs: Europe, the Americas, India and China. More than 75% of the company's revenue comes from electrical products – primarily 'low-voltage' (switchboards, circuit breakers, surge protectors, power meters, etc.), supplemented by 'medium-voltage' (substations, transformers, industrial power meters, etc.) and specialist equipment for niche sectors such as data centres (uninterruptible power supply, cooling, specialised surge protection, etc.). The remainder comes from industrial automation hardware, software and systems where Schneider helps clients improve the efficiency of their manufacturing processes. Electrification of the built environment is both an enabler and a beneficiary of the transition to net zero. For example, heat pumps have a smaller carbon footprint than the gas boilers they replace. Smart controls for domestic appliances, lights, heating and cooling allow more efficient use of energy. Companies like Schneider provide the upgrades of the electrical installations required to enable these appliances and controls. The company also benefits from electrification of other sectors. Higher penetration of electric vehicles, for instance, requires not only the rollout of charging infrastructure but also an upgrade of the electrical infrastructure in most buildings. We added Schneider to our Focus List in September 2021. Our investment thesis was underpinned by three key considerations. First, we believe Schneider is a global leader in electrification. The company has a ~30% market share in low-voltage equipment – twice the size of the number two player. Schneider's customers tend to show significant brand loyalty. Low-voltage equipment is often recommended by the electricians who install it, and is typically a low priced but critical item where the cost of failure is high. In turn, electricians prefer to use products they already know and trust, allowing them to complete more installations per day and reducing the risk of customer complaints. We know these dynamics well through our position in Legrand, which competes against Schneider in certain markets. Second, the company is well positioned in a number of fast-growth areas. For example, through several acquisitions in the 2000s and early 2010s, Schneider established a robust presence in supplying equipment to data centres, which today represents just under 20% of the company's revenue. Similarly, the company has also built up a strong portfolio of smart products and software offerings, from home automation controls to building management systems and standalone industrial software. Finally, we believe that Schneider's end markets will see rapid, sustained growth in the future. Electrification of buildings and industry, more than ever, makes economic sense: it lowers operating costs and results in good returns on investment. Government-supported initiatives are now providing serious incentives for this transition. For example, the EU wants to triple the deep renovation rate of buildings, from 1% to 3% per annum. In the US, the Infrastructure Investment and Jobs Act, the CHIPS and Science Act as well as the Inflation Reduction Act all support significant growth in Schneider's end markets. We think these changes are likely to have disproportionate benefits for a company like Schneider. For example, a newly built home with rooftop solar panels and battery storage, electrified heating and cooking, as well as home automation for lighting and temperature control has an addressable market for Schneider that is five times bigger than a standard gas-powered home. We believe that the company can more than double its organic growth rate, from ~3% per annum historically to more than 6% per annum for the foreseeable future. Schneider has a long-standing best-in-class sustainability approach that informs its strategy and resource allocation. In the past two decades the company has focused its investments in areas that facilitate a transition to a lower-carbon world, and that benefit significantly from a stronger societal focus on sustainability. It also focuses on sustainability internally. Schneider tracks a detailed list of sustainability metrics related to its core operations. Crucially, 20% of management's annual bonus and 25% of their long-term compensation are linked to achieving the related targets – a best-in-class approach, in our view. Since 2019, the company has tracked the proportion of revenue that comes from products bringing environmental efficiency to customers. In 2022 this was 72% of group sales. Schneider also aims to reduce global carbon emissions by 800 million tonnes of CO2 through the use of its products – one of the most significant commitments of this nature amongst companies on our Focus List. Schneider has taken a leadership role in decarbonising its own operations, along with those of its suppliers. The company has set near- and long-term science based targets consistent with a 1.5°C trajectory. It is one of the companies on our Focus List that is most involved with reducing the carbon footprint of its supply chain, setting ambitious targets for its key suppliers. A key driver behind the company's focus on sustainability was prior CEO and current Chairman Jean-Pascal Tricoire ("JPT"). He led the company between 2006 and 2023, where he laid the foundations for today's Schneider. An active period of portfolio shaping resulted in more than EUR 28 billion spent on more than 30 acquisitions. While not every one of them has been an unqualified success, we believe the net result has left Schneider in an ideal position to benefit from secular growth within its industries. As the portfolio shaping is now largely complete, new CEO and Schneider veteran Peter Herweck is rightly focused on organic growth, harvesting the results of JPT's active M&A work before him.

BSD Analysis:
Generation Investment Management presents a compelling bull case for Schneider Electric, positioning the company as a prime beneficiary of global electrification trends. The fund's thesis centers on Schneider's dominant market position in low-voltage electrical equipment with a 30% market share, double that of its nearest competitor, supported by strong customer loyalty and electrician preferences for trusted brands. The company's strategic positioning in high-growth segments like data centers (20% of revenue) and smart building automation creates multiple expansion opportunities. Generation expects Schneider to more than double its organic growth rate from 3% to over 6% annually, driven by government incentives including EU building renovation targets and US infrastructure legislation. The investment case is strengthened by Schneider's sustainability leadership, with 72% of revenue from environmentally efficient products and ambitious carbon reduction targets. Management quality appears strong under new CEO Peter Herweck, who is focused on harvesting returns from predecessor Jean-Pascal Tricoire's EUR 28 billion acquisition program. The addressable market expansion is particularly compelling, with electrified homes representing five times the revenue opportunity of traditional gas-powered homes.

Pitch Summary:
Philip Morris International (PM) continues to make progress on their mission of becoming a smoke-free company. This last quarter, users of their flagship IQOS heat-not-burn device grew by 1.4M, or 14% year-over-year. Combined with increasing traction for their newly introduced ILUMA devices, total heat-not-burn units grew just shy of 27%. From a standing start, this product portfolio has captured nearly 10% of the ex-China global nicotine market. Furthermore, Zyn, a so-called modern oral product that came with PM's acquisition of Swedish Match earlier this year, is growing volume at a 50% rate as it continues to take share from traditional chewing tobacco. We believe Zyn still has room to significantly grow distribution in the US and international markets. The success of their reduced-risk product portfolio has increased our confidence that Philip Morris will exit the calendar year of 2025 with more than half their revenue coming from products other than cigarettes. Despite all this progress, PM trades at roughly a 15x P/E multiple, a discount to the broader market and other consumer staples that has only widened as the rest of the market has rallied this year. With their heat-not-burn devices launching in the US sometime in 2024, we believe the current price is an attractive level to add to our position and collect a 5% dividend yield as we wait for the market to recognize the quality of Philip Morris's assets and future growth potential.

BSD Analysis:
Kovitz highlights Philip Morris's successful transformation toward reduced-risk products as a compelling investment opportunity. IQOS heat-not-burn devices show strong momentum with 14% user growth and 27% total unit growth, capturing nearly 10% of the ex-China global nicotine market from inception. The Swedish Match acquisition adds Zyn oral products growing at 50% rates while gaining share from traditional tobacco. Management's target of majority non-cigarette revenue by 2025 appears achievable given current trajectory. Trading at 15x earnings represents a discount to broader markets and consumer staples despite transformation progress. The upcoming US launch of heat-not-burn devices in 2024 provides additional growth catalyst, while the 5% dividend yield offers attractive income during the transition period.

Pitch Summary:
Keysight Technologies (KEYS) reported Q3 earnings that exceeded consensus estimates, but a sharp drop in orders combined with management's reduced outlook for Q4 and the first half of 2024 resulted in the shares selling off. The drop in orders was entirely driven by weakness in the Asia-Pacific region, particularly in China, and in the area of semiconductor testing, which has a history of fluctuating demand patterns. Orders in the Americas actually grew while the European region was stable. Keysight is not alone in experiencing this Asia-related weakness, as companies across a wide range of industries are seeing a difficult environment in China and the broader region. We do not pretend to have any special insight into the timing of when this cyclical downturn will end, but we remain very confident in the strength of Keysight's moat and believe the long-term secular drivers for Keysight's products and services across numerous end markets are still intact.

BSD Analysis:
Kovitz maintains conviction in Keysight despite near-term cyclical headwinds concentrated in Asia-Pacific markets. While Q3 earnings beat consensus, order weakness in China and semiconductor testing drove share price decline and reduced forward guidance. The geographic nature of the weakness is notable, with Americas orders growing and Europe remaining stable, suggesting company-specific rather than fundamental issues. Semiconductor testing historically exhibits cyclical demand patterns, making current weakness unsurprising. Management acknowledges the challenging timing but emphasizes Keysight's durable competitive moat and intact long-term secular growth drivers across diverse end markets. The investment thesis relies on the company's technological leadership and market position surviving the current downturn.

Pitch Summary:
Hasbro (HAS) is a leading maker of toys and games with a stable of well-known brands, including Magic: The Gathering, Play-Doh, Nerf, Transformers, Monopoly, Peppa Pig, and Dungeons & Dragons. The toy industry has a number of attractive characteristics. It is relatively stable competitively, with Hasbro, Mattel, and Lego comprising the vast majority of global sales, and it has historically shown consistent growth with resilience during times of broader economic stress. For example, in 2008, according to industry-leading market research firm NPD, global toy sales fell only 1% in dollar terms and actually grew in local currency terms. Long-running fears of video games and time spent on mobile devices eroding the sale of physical toys and games have also largely failed to materialize despite widespread smartphone ownership among older kids for going on a decade now. Hasbro's brands continue to resonate today, and the company has found ways to monetize these brands through various digital offerings. Contrary to popular perception, Hasbro's largest brand by both sales and profits is Magic: The Gathering. A tabletop card-based game, Magic was created in 1993 and purchased by Hasbro in 1999. Magic is on track to become Hasbro's first billion-dollar brand and currently makes up the majority of Hasbro's profits. Throughout our ownership, Hasbro has struggled under an ill-fated acquisition of eOne, a general entertainment content production company from the UK. Acquired in late 2019, right before Covid, the timing could not have been worse. Furthermore, the strategy to utilize an in-house production company to create television shows and movies using Hasbro's extensive IP library never gained traction. The signature production, the Dungeons & Dragons: Honor Among Thieves movie released earlier this year, was a relative disappointment at the box office despite receiving largely favorable reviews. Hasbro has announced the sale of most of this business to Lions Gate, which should close by the end of the year. However, with sentiment at a very low level, we believe there is opportunity. The CEO who spearheaded the eOne acquisition tragically passed away last year, which led to the promotion of the former head of the Wizards of the Coast business (where Magic is housed) to the lead role. Since that time, essentially the entire leadership team at the company has turned over and there is a renewed focus on leveraging Hasbro's core toys and games brands, improving supply chain and marketing efficiency, and licensing or discontinuing unprofitable product lines. Given the underlying stability of the toy industry, the removal of a huge distraction in the form of the eOne business, Hasbro's collection of brands and IP, and Magic's popularity continuing to grow, we believe the new strategy should lead to substantial margin expansion and earnings growth that we do not believe is being incorporated in today's share price.

BSD Analysis:
Kovitz presents a compelling turnaround story for Hasbro centered on refocusing on core strengths after strategic missteps. The toy industry's defensive characteristics and oligopolistic structure provide stability, with Hasbro, Mattel, and Lego dominating globally. Magic: The Gathering emerges as the crown jewel, approaching billion-dollar brand status and generating majority profits. The ill-timed eOne acquisition created significant value destruction, but its pending sale to Lions Gate removes a major distraction. New leadership from Wizards of the Coast brings renewed focus on core toy and game brands, supply chain efficiency, and profitable product rationalization. With sentiment depressed and the company returning to its competitive advantages in a resilient industry, substantial margin expansion and earnings growth appear undervalued by current market pricing.

Pitch Summary:
For Diageo (DEO), the recent earnings update revealed that management has worked through excess inventory more quickly than anticipated. We now anticipate sequential improvement in volume and sales growth. Moreover, cost inflation in key categories like agave supply and energy costs for glass and transportation is subsiding, which should help profit margins. Valuation remains near 7-year lows, and we continue to believe in the thesis that spirits are taking share from beer and Diageo's premium brands are outgrowing the spirits category globally.

BSD Analysis:
Kovitz maintains a bullish stance on Diageo based on operational improvements and favorable industry dynamics. Management has successfully cleared excess inventory faster than expected, positioning the company for sequential volume and sales growth acceleration. The easing of input cost pressures, particularly agave supply and energy costs for glass and transportation, should drive margin expansion. Trading near 7-year valuation lows provides an attractive entry point for a premium spirits portfolio. The long-term thesis remains intact with spirits gaining market share from beer globally, while Diageo's premium brand portfolio continues to outpace overall spirits category growth, supporting sustainable competitive advantages.

Pitch Summary:
While the economy has been performing much better than people feared at the start of the year, early signs of credit stress have led to some recent share price weakness for American Express (AXP). Yet, in several ways, American Express is in a better position now than it has been at any point in the last decade, with an excellent value proposition for customers, a growing base of younger users, less concentration risk with key partners, a demonstrated ability to control expenses, and, as always, an affluent customer base that typically weathers economic cycles much better than the average consumer. If there is a downturn in consumer credit and spending, we believe American Express will exit that period with a healthy economic profile and with their durable ability to grow earnings power intact. At 15x for an enduring brand, best-in-class returns on equity among the financial sector, and a management team that is targeting mid-teens earnings growth if we do get a softer landing, we find the current valuation attractive.

BSD Analysis:
Kovitz presents a compelling bull case for American Express despite recent credit stress concerns. The manager emphasizes AXP's strengthened competitive position over the past decade, highlighting improved customer value proposition, expanding younger demographics, reduced partner concentration risk, and disciplined expense management. The affluent customer base provides defensive characteristics during economic downturns, while the company's proven ability to maintain earnings power through cycles supports long-term durability. At 15x earnings for a premium brand with best-in-class ROE in financials and management targeting mid-teens growth in a soft landing scenario, the valuation appears attractive. The thesis balances near-term headwinds with structural improvements and defensive positioning.

Pitch Summary:
Digital Bridge (New Position) – We began to buy stock in Digital Bridge ("DBRG") this quarter. DBRG is an American alternative asset manager focused on digital assets namely data centres, fibre networks, cell towers, small cells (cellular radio access nodes), and edge infrastructure (small data centre sites located near populations). It currently has $72.2bn in AUM and $29.1bn in Fee-Earning Equity Under Management ("FEEUM"). DBRG has 30+ Portfolio companies (including advised companies) across the Americas, Europe, and Southeast Asia. DBRG was founded in 2013 by Marc Ganzi (CEO), Ben Jenkins (President and CIO), and Alex Gellman (Senior Advisor) after Ganzi's several successes as a digital infra. Ganzi has had many forays in the digital infra space, but the most notable was his founding of Global Tower Partners in 2003 which was the largest privately owned telecom tower operator in the US. In 2005 Blackstone took a majority stake in the business, after which it was sold to Macquire in 2007 for an enterprise value of US$1.43bn. Eventually Macquire sold this business to the American Tower Group for $4.8bn in 2013. Initially the founders of DBRG were doing deals on an adhoc basis, but after a successful partnership with Colony Capital, the two companies were merged in 2019 and Marc Ganzi was named CEO. Now, this is where things get interesting. Due to this merger, DBRG was a confusing story for many years. It had several legacy assets on the balance sheet including hotel properties. It had to transition from being a REIT to a C-Corp, it also had to clear up its shareholding by buying out investors in its asset management business. Almost all of this was cleared up by early 2023, however, the final step is the deconsolidation of two businesses – DataBank and Vantage Data Centers (both operate Data Centres) which currently sit on DBRG's balance sheet. The DataBank deconsolidation has occurred as of this writing through a recapitalization of the company, and the Vantage Data Center sale should happen before the end of 2023. While DBRG will maintain stakes in these companies, their shareholding will fall below the 10% threshold which requires them to consolidate. Post this transaction DBRG will be transformed into a pure asset management business (just like a Blackstone). This "confusion" with the balance sheet has led to a mispricing in the stock price that we believe is trading at a 25-30% discount to fair value. Further this is fair value based on current assets, which assumes that DBRG does not raise any more capital from Limited Partners. However, given their focus on digital infra (which we will discuss below) and Marc Ganzi's salesmanship (just read one earnings call transcript and you'll see what we mean), we do not think this will be the case. Digital Infra is an exciting space and we highlight three points to capture the potential of the investment opportunity: ● 5G subscriptions are set to expand from 1.5 billion at the end of this year to over 5 billion by the end of 2028 globally. ● Data Center capex is likely to hit $1.3 trillion/year by the end of this year to support the ongoing AI boom. ● By 2025, globally, we are likely to see over 50 billion connected devices, increasing the demand for Data Center and Edge Infrastructure. DBRG has investments spread across all these spaces as highlighted by the infographic below. Thus, the thesis for Digital Bridge is quite clear. It's a rapidly growing asset manager, trading at significant discount to fair value, investing in sectors which have a long runway of growth. We believe that alternative asset management, at scale, is a fantastic business. Capital is locked up for typically 8-12 years or in some cases is permanent, fees are linked to committed/invested capital giving high visibility on cash-flows, and most asset managers operate across asset classes providing for diversification (DBRG along with private equity investments has capital allocated toward credit and public equity). The key here, as mentioned, is scale. Digital Bridge is likely to hit ~$34billion in FEEUM by the end of 2023 (a growth of 30% yoy) and is guided to hit $45bn by 2025. The company has guided that distributable earnings (essentially cashflow) will be around $170MM by 2025, valuing the business at 15x multiple, which for a growing asset manager is very reasonable (Blackstone and KKR trade at around 25x). Now the case against DBRG is two-fold. 1) They have overpaid for assets and 2) They are riding on the "AI" boom and any cutback in Data Centre spend will hurt. On the first bear case, criticism mostly revolves around the price they paid for the Switch (Data Centres) deal, and the issues they are having in Zayo (fiber). On the Switch price (around 31x adj. EBITDA), which was a rallying call for bears on the stock, Ganzi has laid out his rationale for that price based on pending contracts, cost elimination and growth which we find compelling (his defence of Switch can be found here at the 20:40 mark). On Zayo, even the company must admit that the investment is likely to yield just a single digit return overtime. While that's disappointing, there isn't an alternative manager in existence that has not had a bad investment. On the AI boom point, we believe the potential risk here to be valid, and while the company is diversified across asset classes, all investments are in the digital infra space. This is unlike Blackstone (which we also own) that is differentiated across sectors as well as asset classes. Thus, given this risk, we will keep the DBRG position size modest in our portfolio. Overall, though, we find that DBRG is a niche, but fast-growing alternative asset manager, focused on a rapidly expanding space, with a highly experienced operator/investor at the helm, rounded out with a stock trading far below fair value.

BSD Analysis:
The manager initiated a position in DigitalBridge, viewing it as a mispriced alternative asset manager poised to benefit from massive digital infrastructure growth trends. With $72.2bn in AUM and $29.1bn in FEEUM, DBRG is positioned in high-growth sectors including data centers, fiber networks, and cell towers, driven by 5G expansion (1.5bn to 5bn subscriptions by 2028), AI-driven data center capex ($1.3 trillion annually), and IoT growth (50bn connected devices by 2025). The investment thesis centers on the company's transformation from a complex REIT structure to a pure-play asset manager following deconsolidation of DataBank and Vantage Data Centers, which has created a 25-30% valuation discount. Led by experienced operator Marc Ganzi, who previously built and sold Global Tower Partners for $4.8bn, DBRG targets $45bn FEEUM by 2025 with $170MM distributable earnings, implying a reasonable 15x multiple versus 25x for Blackstone and KKR. While acknowledging risks around asset pricing and AI boom sustainability, the manager views the secular growth opportunity and current mispricing as compelling.

Pitch Summary:
Assaí (-15% during the quarter): We thought Assaí posted a strong set of results this past quarter. Revenue grew 20%, EBITDA was up 16% (margin was up 60bps sequentially), and while same-stores sales were down -1.7%, the company mentioned that they recorded growth again in June (about two months earlier than competitors indicated they would). We think the stock is now de-risked. The Casino group (the much-hated controlling shareholder) has left the building, same-store sales are growing again, the balance sheet will naturally deleverage as the newly converted Extra stores mature, and declining Brazilian interest rates will increase profit margins over the next several quarters. The stock currently trades at an 11x 2024 PE, which seems low for a company posting 20%+ returns on capital.

BSD Analysis:
The manager views Assaí as significantly de-risked following strong quarterly results that demonstrated the company's operational resilience and improving fundamentals. Despite a 15% stock decline, the company delivered impressive 20% revenue growth and 16% EBITDA growth with sequential margin expansion of 60bps. The investment thesis centers on multiple positive catalysts converging: the exit of the problematic Casino Group controlling shareholder, same-store sales returning to growth ahead of competitors, and natural balance sheet deleveraging as converted Extra stores mature. The manager expects further margin expansion from declining Brazilian interest rates, creating a favorable operating environment. At 11x 2024 P/E for a business generating 20%+ returns on capital, the valuation appears attractive for a market-leading cash-and-carry retailer with improving operational metrics and a cleaner capital structure.

Pitch Summary:
IAC (-20% during the quarter): IAC earnings were uninspiring, and the company continues to be a work in progress. While DotDash Meredith grew its EBITDA to $54MM (its highest since the merger), revenue growth has been disappointing due to sluggish online traffic in some key properties (Parents, InStyle, Shape). We must concede that while we initially were pleased by the Meredith acquisition, it's clear now that IAC paid peak earnings for the business, and it's going to take a while to return to that peak. That said, digital revenue was up during the last month of the quarter, so we should see a return to growth in 2024 as the overall advertising market improves. Further, Angi continues to be a distraction with management guiding to declining revenues until H1 2024. To be fair, much of this decline is due to IAC ridding itself of unprofitable growth, and thus making the right long-term decisions. The overall earnings IAC however were not all bad, and in fact on a consolidated basis, EBITDA increased by 88% yoy. The company has been smartly buying back stock at cheap levels (both at the IAC and Angi level), and we expect them to have continued to do so in Q3. As of this writing, the stock trades at around 8x expected 2023 Adj. EBITDA (ex-MGM) and has a FCF yield of around 9% (adjusting for the one-off purchase of headquarters). Overall, we think IAC management is doing the right things. They are right sizing their various businesses, improving cashflows and profitability, and buying back stock. Financials are moving in the right direction, and with the combination of smart capital allocation and growth returning in H12024, we should see the stock do quite well. Lastly, in early September, Bloomberg reported that Turo (of which IAC owns 31%) could go public before the end of the year. Turo, a car-sharing platform, posted revenues of ~$750MM and adj. EBITDA of of ~$62MM in 2022. A successful IPO should unlock significant value for IAC.

BSD Analysis:
The manager maintains conviction in IAC despite a 20% quarterly decline and mixed operational results, viewing current challenges as temporary headwinds in a broader turnaround story. While acknowledging that IAC overpaid for Meredith at peak earnings, the manager sees encouraging signs with DotDash Meredith achieving $54MM EBITDA and digital revenue growth resuming in the quarter's final month. The thesis emphasizes management's disciplined capital allocation, including aggressive share buybacks at depressed levels and strategic rightsizing of unprofitable operations at Angi. At 8x 2023 adjusted EBITDA (ex-MGM) and a 9% FCF yield, the valuation appears compelling for a company with improving fundamentals. The investment case is further supported by consolidated EBITDA growth of 88% YoY and the potential catalyst of Turo's IPO, which could unlock significant value given IAC's 31% stake in the $750MM revenue car-sharing platform.

Pitch Summary:
Evolution (-19% during the quarter): Evolution posted revenue growth of 28.2%, EBITDA margins of over 70%, and operating profit margins of nearly 60% during the second quarter of CY2023. With results like that one would think the stock of the company would significantly appreciate, but it seems that the market is caught up on two issues. First is the sluggishness of its RNG (slots) business whose revenues declined 4% yoy on a pro-forma basis. While we share the market's frustration with this vertical, we must also recognize that Evolution's margins have been increasing (profit margins increased 150bps yoy) due to the profitability of RNG games. The second issue was a slowdown in growth in the North American business which de-grew slightly on a qoq basis. This is certainly not ideal, but management has clearly mentioned that growth in the North American market will be lumpy. It takes time for new states to legalize online gambling, but it is in the offing. Currently only six states in the US have legalized online gambling, but 37 states have legalized sports betting. Thus, the pathway to further TAM expansion is clear in our opinion. The path to legalize online gambling will be like that of marijuana (which is legal in 23 states). Its slow at first, and then approvals happen all at once. Further, the ever-present risk of "unregulated" revenues continues to keep new investors away. However, with a clear pathway in the US and legalization of online gambling in countries like Brazil on deck, Evolution's share of regulated revenues should increase steadily over the next few years. In any case, the stock now trades at 18x forward P/E ratio, which for the company's financial profile, is more than reasonable.

BSD Analysis:
The manager maintains a bullish stance on Evolution despite a 19% quarterly decline, emphasizing the company's exceptional fundamentals with 28.2% revenue growth, 70%+ EBITDA margins, and nearly 60% operating margins. The thesis centers on US market expansion potential, noting that only 6 states have legalized online gambling versus 37 with sports betting, creating a clear pathway for TAM growth. The manager draws parallels to marijuana legalization, suggesting regulatory approvals will accelerate once momentum builds. While acknowledging near-term headwinds in the RNG business (-4% YoY) and North American growth volatility, the manager views these as temporary issues. The investment case is strengthened by Evolution's improving profitability in RNG games and the anticipated shift toward regulated revenues as markets like Brazil come online. At 18x forward P/E, the valuation appears attractive given the company's margin profile and growth runway.

Pitch Summary:
Among the leading stars in this emerging field are Eli Lilly's tirzepatide and Novo Nordisk's semaglutide. Originally developed to address Type 2 diabetes, these drugs have garnered immense attention for their remarkable ability to help individuals shed significant amounts of excess body weight. At the heart of this breakthrough lies the unique mechanisms of action of these medications. Both tirzepatide and semaglutide belong to a class of drugs known as glucagon-like peptide-1 (GLP-1) receptor agonists. These drugs mimic the function of GLP-1, a hormone naturally produced in the gut that regulates blood sugar and appetite. By imitating this hormone, tirzepatide and semaglutide set off a chain reaction in the body. They stimulate the pancreas to produce more insulin, slow down the digestion process, and induce feelings of fullness. The result is not only improved blood sugar control but also substantial and sustained weight loss. The success of these weight loss drugs has paved the way for broader applications. Initially designed to tackle Type 2 diabetes, tirzepatide and semaglutide have now gained approval as treatments for obesity. These drugs have rapidly gained popularity in the pharmaceutical landscape. With the rising demand for these medications, pharmaceutical companies are scaling up production to meet the growing need. At Tall Oak, we continue to own both Eli Lilly and Novo Nordisk in our strategy to take advantage of what we feel could be a multi-year thematic profitable investment for our clients.

BSD Analysis:
Tall Oak Capital presents a bullish thematic investment case for Eli Lilly centered on the revolutionary weight loss drug tirzepatide. The manager highlights tirzepatide as a leading breakthrough medication originally developed for Type 2 diabetes that has gained significant attention for its remarkable weight loss capabilities. The investment thesis is built on the drug's unique mechanism as a GLP-1 receptor agonist that mimics natural gut hormones to regulate blood sugar and appetite, resulting in substantial and sustained weight loss. The fund emphasizes the expanding applications beyond diabetes treatment, with tirzepatide now approved for obesity treatment and rapidly gaining popularity in the pharmaceutical landscape. The manager views this as a multi-year thematic investment opportunity, noting that pharmaceutical companies are scaling up production to meet growing demand. Tall Oak positions both Eli Lilly and Novo Nordisk as strategic holdings to capitalize on what they believe could be a profitable multi-year theme in the weight management pharmaceutical market.

Pitch Summary:
Cameco Corp. is one of our top equity holdings and, in our view, the most compelling way to invest in what we feel is a multi-decade theme. This Canadian-based company specializes in uranium exploration, mining, refining, and marketing, with over three decades of industry experience and a solid reputation as a reliable uranium producer. As the world focuses on reducing carbon emissions and addressing climate change, nuclear power stands out as a key part of the solution, offering significant benefits to Cameco. Emerging economies and established nuclear powerhouses are expanding their nuclear energy capacity, driving up the demand for uranium. Cameco's diverse customer base and global reach uniquely position it to meet this growing demand. The uranium market is characterized by concentrated supply, with a few producers dominating the landscape. Cameco is among these key players, contributing to supply stability and strengthening its market presence. Cameco is committed to environmental and social responsibility, aligning perfectly with the growing trend of ESG (Environmental, Social, and Governance) investments. This factor makes the company an attractive option for those interested in sustainable investing. In our view, Cameco offers a unique investment opportunity in the energy sector. As the world turns to cleaner and sustainable energy sources, nuclear power and uranium are gaining prominence. In the energy transition, Cameco presents a compelling choice to consider.

BSD Analysis:
Tall Oak Capital presents a compelling bull case for Cameco as a multi-decade uranium investment theme. The manager emphasizes Cameco's position as a top equity holding, highlighting the company's three decades of industry experience and reputation as a reliable uranium producer. The investment thesis centers on the growing demand for nuclear energy driven by climate change concerns and carbon emission reduction goals, with emerging economies and established nuclear powers expanding capacity. The fund views Cameco's diverse customer base and global reach as key competitive advantages in meeting rising uranium demand. The manager notes the concentrated nature of uranium supply, positioning Cameco among the key players that contribute to supply stability and market presence. Additionally, the ESG alignment of nuclear power as a clean energy source makes Cameco attractive for sustainable investing trends. The pitch positions uranium and nuclear power as gaining prominence in the global energy transition.

Pitch Summary:
We rolled the proceeds from PSX into a new position in Pioneer Natural Resources (PXD). That company is the second largest shale oil producer in the US and the largest land acreage holder in the Permian Basin, most of which is considered highly productive "Tier 1" acreage. The company has some of the most productive wells in the country that cumulatively produce approximately 370,000 barrels of oil per day and 800 million cubic feet of natural gas. At current oil prices and levels of production, PXD has more than a decade of reserves remaining. PXD is one of the lowest cost operators in the Permian basin with cash operating costs of $10.50-$12.00 per barrel. We believe this cost can come down further as PXD expands the lateral length of their horizontal wells from 10,000 ft to 15,000 ft. Management has identified more than 1,000 future drilling locations where they own enough contiguous acreage to drill 15,000 foot laterals (3 miles in length). Given current commodity prices, the company is printing money and is redirecting this cash back to shareholders with a policy that returns 75% of free cash flow directly to stockholders through a base dividend of $1.25 per quarter, a variable dividend, and share repurchases. In just the last two years, PXD has paid out $9.75 billion in dividends ($40.30 per share) and repurchased $2.6 billion of shares. Over the next five years, we believe PXD can generate between $25-$40 billion of free cash flow at oil prices of $80 and $100 per barrel respectively. This compares to their current market cap of $56 billion. Given their cash return policy, we believe PXD can support a dividend yield of over 8% annually. PXD also has an excellent balance sheet with just $5.2 billion of net debt or 0.5x net debt/EBITDA. Only $3 billion of this debt matures prior to 2030. The company also has $1.8 billion of availability on their unsecured credit facility for any extra liquidity needs. Given our forecast for oil prices of $75-$100 in the medium term, we believe PXD can generate $19-$32 in normal earning power. Applying a 12x-14x price-to-earnings multiple, we believe shares are worth $260-$380, and potentially much more should the oil prices rise above $100 per barrel. We initiated our position at $244 per share. Unfortunately, the management team at Exxon Mobil saw that shares were undervalued too, and after the quarter they agreed to merge with PXD for consideration of XOM shares currently worth $264. Please note the purchase price will fluctuate with XOM's share price. This offer price represents a small premium to our purchase price and is at the lower end of our estimate of fair value. While the quick gain represents a very nice return on an annualized basis, we would have preferred to realize an outcome at the upper end of our valuation range.

BSD Analysis:
The manager initiated Pioneer Natural Resources as a replacement for Phillips 66, attracted by PXD's position as the second-largest US shale producer with the most Permian Basin acreage. The company's low-cost structure at $10.50-$12.00 per barrel and ability to extend laterals to 15,000 feet across 1,000+ drilling locations provides significant operational leverage. PXD's shareholder-friendly capital allocation returns 75% of free cash flow through dividends and buybacks, having returned $12.35 billion over two years. The manager projects $25-$40 billion in free cash flow over five years, supporting an 8%+ dividend yield against a $56 billion market cap. With a conservative 0.5x net debt/EBITDA ratio and $19-$32 in normalized earnings power, the $260-$380 valuation target reflects 12-14x earnings at $75-$100 oil. Exxon's subsequent $264 merger offer validated the undervaluation thesis, though the manager would have preferred realizing the upper end of fair value.

Pitch Summary:
Phillips 66 (PSX), an oil refiner, rose in sympathy with oil prices as refining margins increased substantially in the third quarter. PSX has had an excellent run and remains attractive should refining margins be sustained at current levels of $30 per barrel. This is well ahead of $10-$16 per barrel margins that were considered normal prior to the pandemic. There have been structural changes that suggest this margin could persist, such as a shortage of diesel fuel relative to gasoline and the closure of refining capacity in the US following the Pandemic and in Europe following the Ukraine war. The discount of US natural gas prices to global natural benchmarks has also contributed to the spread. However, we believe market forces will ultimately result in the refining margin shrinking from a record level back towards historic rates that represent reasonable return on capital. We believe that over time US natural gas prices will converge with international prices as the US builds more LNG export capacity, that will increase refining operating costs. Additionally, PSX was trading near the upper end of our valuation range of $75-$130 per share. We sold our shares of PSX for $117 per share, representing a total return of 121% since our initial purchase.

BSD Analysis:
The manager took profits in Phillips 66 after a 121% total return, selling at $117 near the upper end of their $75-$130 valuation range. While current refining margins of $30 per barrel are well above historical $10-$16 levels, the manager expects mean reversion over time. Structural factors supporting elevated margins include diesel shortages, refining capacity closures post-pandemic and Ukraine war, and discounted US natural gas prices. However, the manager anticipates margin compression as market forces normalize and US natural gas prices converge with international benchmarks through increased LNG export capacity. The decision to exit reflects disciplined profit-taking at fair value rather than holding for potentially unsustainable margin levels. The successful investment demonstrates the manager's ability to capitalize on cyclical refining opportunities while maintaining valuation discipline.