Investment Pitches

Pitch Summary:
In our last letter we noted the uncertain political backdrop this year, with elections creating a wide range of outcomes and implications for markets. One which we didn’t anticipate was the French National Assembly elections, a surprise which caused a sell-off in French stocks and bonds, and an opportunity for us to increase our positions, which we took. In June two of our stocks, Vinci and Eiffage, fell as much as 15%, although they have already begun their recoveries. The primary concern was a new government led by the right-wing National Rally who have previously discussed nationalising France’s motorway concessions. Of course, quite the opposite has now happened as the left-wing alliance won more seats than anyone, although not a majority, resulting in a hung parliament. This is another reminder of our approach to macroeconomic affairs – predicting outcomes, and subsequent market reactions, has a high failure rate and is something we won’t attempt. Preparing for inevitable surprises and taking advantage of opportunities as they present themselves has a high success rate. Less “fortune favours the brave”, more “fortune favours the prepared”. That said, we do discuss below the risks of nationalisation (and why we believe they are incredibly low) and the upside potential for both companies over the next few years as the durable, non-motorway businesses continue to grow as a percentage of profits and value. Nationalisation Realisation Nationalisation involves taking assets that are owned in the private sector and bringing them onto the public balance sheet, which is actually a misnomer in this case where motorway assets were never actually owned by the private sector. The French state own all the “freehold” to the motorways in France, while the operation of certain motorways was privatised under concessions in 2006 which have fixed terms. To save money, the French government decided to delegate responsibility for finance, design, construction, maintenance and operation of the motorways to concession operating businesses. At the end of the concession the control of the motorways reverts to state control, debt free. In other words, if the government does nothing, control will revert to them anyway in around fifteen years. If a newly galvanised populist government did want to force the issue sooner, they have no realistic options other than to fully compensate the concession owners. It’s not immediately clear that this would be a good use of funds given it is simply a premium for getting control back early, resulting in a loss of billions in annual revenue coming from taxes that the concessionaries pay. The basic principle is that unilaterally altering the economics of the concession contract (itself a legally binding act of parliament) is not possible without fair compensation to the concessionaire. Legality & Precedent There are precedents of similar attempts in Europe to nationalise infrastructure assets and they have shown the difficulty of changing those contracts. In August 2018, Atlantia saw one of their bridges collapse, causing the death of 30 people. Despite a three-year process by various Italian governments to strip the operator of the contract, courts found in favour of Atlantia. If a company that hasn’t performed effective maintenance is still legally allowed to retain its concession, it seems likely that Vinci and Eiffage will be afforded similar protection. Especially given that toll roads in France have proven to be successful at providing well maintained and up-to-date infrastructure to the population, with low tariff hikes. During state control of the operating companies (2000 – 2006), tariffs rose +2.06% per year, compared to the era post the privatisation of the concessions where tariffs rose +1.80% per year. Moreover, a recently introduced additional tax from the Macron government (equating to 4.6% of revenues until 2030) is being challenged in court. Recently the French supreme court has allowed for hearings and a first decision on September 12th, sooner than expected. If this tax is overturned the possibility of nationalisation decreases further still. Government Costs The motorway contract provides clauses to legally repurchase the concession before expiry if this is in the best interest of the public. The timing is such that the earliest time possible would be a year after a decision is taken which, given the likelihood of deadlock in French parliament, could be three to four years’ time. The price to be paid is a function of the net present value of cash flows from the concession until expiry. Under reasonable assumptions the total cost to the government would be c. EUR 50bn, a prohibitive amount and frankly, at current share prices, a boon to both Vinci and Eiffage (these payouts representing 41% and 105% of total market cap today). That latter point is worth dwelling on – 100% of the value of Eiffage today is represented by the fair value of their motorway assets, which represent far less than half of the total value of the company. The final economic point is that, once nationalised, the state would likely lose EUR 7bn of annual tax receipts coming from the operators, while having to pay to maintain and expand the roads (with Vinci and Eiffage the most likely to manage that contract). Finally, 10-20% of the shares are owned by employees, with meaningful blue-collar representation on the register. Any undervalued asset appropriation would be a serious financial hit for workers and cause a major backlash. The Toll Road Business Model Both Vinci and Eiffage derive about 30% of their value from French motorway concessions, down from about 60% fifteen years ago. Given these assets have fixed lives (i.e. until the concession agreement expires) and the remaining 70% of the businesses are growing strongly, this proportion will mathematically continue to shrink over the next few years. There are two dynamics in the French toll roads we particularly like – inflation protection and structural growth. Tolls on the French motorway network benefit from contracted increases in inflation that amount to 70% of CPI, which becomes increasingly valuable as inflation risks return. Motorways also offer structural growth as more traffic, both light vehicles and heavy trucks, use the network. France is key to many trade routes in continental Europe and lorries are still a cost-effective way of moving freight. Over time traffic has grown steadily at 2%, and this is before any inflationary increase. The Other Side of the Road Both companies generate high levels of organic free cash flow and have shown incredible capital allocation over the past 25 years. Initially, when acquiring the concessions to diversify their civil works businesses and, more recently, their investments in broader infrastructure assets, energy contracting, renewable concessions and construction. These new businesses are performing very well, with record order books and rising margins, supporting strong growth for the foreseeable future. In effect, the cash flow from concessions have afforded these companies the opportunity to invest in a diverse range of new businesses with wide moats, and far longer duration than the concession assets themselves, resulting in major value creation for shareholders. Despite this, and due to the political overhang, they trade at the widest discount to intrinsic value of the past ten years. Morgan Stanley estimate Vinci’s upside to intrinsic value at 50%, and Eiffage’s at closer to 80%, similar to our own figures. Conclusion Fundamentals are strong, the stocks have never been cheaper, while business mix is improving. With strong balance sheets and growing dividend yields already approaching 5% (compared to long-term averages of 3%), the outlook for capital returns and capital investment are strong. Exposure to global growth themes such as rising air traffic, the energy transition and the need to replace and improve infrastructure will support growth over the next decade, with very limited competitive threats. We believe the upside potential for shareholders is currently material, and we earn defensive, inflation-linked cash flows while we wait. As ever, please get in touch with anyone in the team if you have any questions. Best wishes from all of us at Latitude, Freddie Lait

BSD Analysis:
Vinci offers a rare blend of defensive, inflation-linked cash flows from French motorway concessions and attractive growth from airports and global contracting, yet trades at a discount to intrinsic value and to private infrastructure transaction multiples. The manager argues that nationalisation risk is remote: the state already owns the underlying assets, would have to fully compensate concession holders under EU and French law, and would lose sizeable annual tax receipts while assuming operating capex risks. With motorway exposure now roughly one-third of group value and shrinking, Vinci is increasingly driven by higher-growth, long-duration infrastructure and energy projects built on a 25-year track record of disciplined capital allocation. Cash flows comfortably fund a growing dividend yield approaching mid-single digits and ongoing reinvestment, keeping leverage in a prudent range. On low-teens earnings and cash-flow multiples for a business of this quality, the risk-reward skews positively if political overhang fades and investors refocus on fundamentals. Catalysts include a favourable court ruling on the Macron windfall tax, continued growth in airport traffic and energy transition capex, and any renewed appetite for listed infrastructure from long-term capital.

Pitch Summary:
Our largest position as of today has become Ashtead Technology, a subsea rental equipment company that we are particularly excited about owning, given it passes all our Buffett checklist criteria. The business is operated by an excellent CEO, grew organically +35% in FY23, and will benefit from the accelerating demand for rental equipment for the maintenance of subsea oil and gas infrastructure, as well as for the new construction of offshore windfarms. Some may consider services, maintenance, or IT value added distributor businesses as not exciting enough; we couldn't disagree more, given they are durable, high cash generative, often system critical, typically family controlled, small in size, and often overlooked.

BSD Analysis:
Baumann Capital has made Ashtead Technology their largest position, viewing it as a high-quality subsea rental equipment business that meets their strict investment criteria. The manager is particularly bullish on the company's excellent leadership and impressive 35% organic growth in FY23. The investment thesis centers on accelerating demand from two key end markets: maintenance of existing subsea oil and gas infrastructure and the construction of new offshore wind farms. The manager appreciates the business model characteristics typical of specialized service companies - durable cash generation, mission-critical services, and often overlooked by larger investors. This positioning allows Ashtead to benefit from the energy transition while maintaining exposure to traditional offshore energy maintenance needs.

Pitch Summary:
This company was a main headache for the Steppe Eagle portfolio in late 2023. The share prices dropped from $14 to $1.63 (lowest point) out of fear that the company is losing its grasp with its customers, the wind energy titans (Vestas, GE, Nordex). That proved false because sales figures for the last quarters show that business is still big and its ties with titans are strong. In the previous report, we wrote that "the company's stock is undoubtedly depressed much more than it should have been. It will require more time for the dust to settle and for TPIC to recover above $6 or $9 per share". In May 2024 TPIC climbed as high as $5.75 making a +250% comeback from the lows. We decreased our risk here by 60% above $5 without any considerable loss. Time and patience are crucial in dealing with Mr. Market.

BSD Analysis:
The manager demonstrates successful contrarian investing by maintaining conviction in TPI Composites during severe market pessimism. The dramatic decline from $14 to $1.63 was driven by unfounded fears about customer relationship deterioration with major wind energy OEMs like Vestas, GE, and Nordex. Recent sales figures validated the manager's thesis, confirming that business relationships remained intact and the company maintained its market position. The subsequent 250% recovery to $5.75 vindicated the patient approach, though the manager prudently reduced exposure by 60% to lock in gains. The $6-9 price target suggests further upside potential remains. This case study exemplifies the value investing principle of buying quality businesses during temporary market dislocations. The wind energy sector's long-term growth prospects support the underlying investment thesis, while TPI's established relationships with industry titans provide competitive advantages and revenue visibility.

Pitch Summary:
HelloFresh is a fast-growing founders-led business with a turnover of 7.6 billion EUR that delivers the "cook and eat" sets. Subscription-based ready-to-cook ingredients are straight from producers and farmers. It is a geo-diversified (EU and US) business with sound growth. It is slightly profitable, has excellent potential, and its debt-to-assets ratio is below 30%. Our strategy is to keep that superb specimen for as long as possible. The company is the worldwide market leader in its sub-industry, with nearly 80% market share in the US and a comparable share in key European countries. The business suffered through a period of slow growth in 2023, mainly owing to inflation-related issues, but also a shift in post-pandemic consumer behavior resulted in slow growth. The management is currently busy making the business more efficient and re-inventing its growth strategy, which is achievable given the scale of operations and leading role in the sub-industry. The business didn't suffer any significant setbacks; it just needs a moment or two to find a firm ground to push off. It is uneasy to figure out when exactly this will happen, so we decided to use the opportunity to load up this stock while it was cheap. The current market capitalization of HelloFresh is below 1 billion EUR, which is ridiculous for a company with almost 8 billion EUR in revenue, resulting in a 0.17 EV/Sales ratio. The all-time average for EV/Sales is 1.5, enabling 400% to 700% growth from the current price. The most pessimistic DCF model gives us 14 EUR per share versus 5.8 EUR presently.

BSD Analysis:
The manager identifies HelloFresh as a dominant market leader trading at severely depressed valuations due to temporary headwinds. With 80% market share in the US and comparable European dominance, the company enjoys significant competitive moats in the meal kit delivery space. The 0.17x EV/Sales ratio appears extremely attractive for a business generating €7.6B in revenue, especially compared to the historical 1.5x average multiple. Post-pandemic normalization and inflation pressures have created temporary growth challenges, but the underlying business model remains intact. The company's geographic diversification across EU and US markets provides stability, while the low 30% debt-to-assets ratio offers financial flexibility. Management's efficiency initiatives and strategy reinvention efforts should drive recovery given their scale advantages. The DCF-derived €14 target price represents significant upside from current €5.8 levels, making this an attractive value opportunity in a market-leading franchise.

Pitch Summary:
Starting with SolarEdge (SEDG): The company is a fast-growing, financially viable business. It is one of the best, alongside Enphase (ENPH). But, alas, it is prone to energy cycles. It produces power optimizers and string inventors for the solar energy sector for homeowners and companies; it also manufactures battery solutions and power trains for commercial EVs. It grabbed our attention because it could increase its sales every year at a 25-35% rate, increasing its operating profits using a considerably small amount of debt. For five years, from 2017 to 2022, the company grew its sales from a meager $601 million to $3.1 billion. This business is working at both great markets for solar energy (the US and the European Union). As we mentioned in the Fiscal 2023 Investment report: '2024 could be dangerous for them because of oversupply issues in the solar energy sector, which tend to appear every 3-5 years.' This risk occurred in full force. However, having in mind the bigger picture, fund manager is waiting for another big step up for the portfolio companies. In 2022, the world installed 1185 Gigawatts of solar energy, greater than any other energy source installation. And though the data for 2023 is not fully published yet, the capacity is expected to surpass 2022's amount. This winning streak has been intact for more than five years by now, on purely economic footing. The especially fruitful year could be 2025, with a full recovery of the sector. The world spends over $300 to $350 billion yearly on new solar projects. Our company won't be shocked to see SEDG stock at $110-150 in two years from now. As the following Exhibit shows, SolarEdge was growing its sales at a high double-digit rate, but during solar energy cycles, the rate would fall to a negative area every 3-5 years. Yet, the current cycle is the worst of them all; sales for the 4th quarter of 2023 and the 1st quarter of 2024 fell -70% due to oversupply issues caused by rescheduling projects to 2025 after the glut of war-instigated panic installations in 2022. That is bound to change in late 2024 and the following year in full force. The sense of the bigger picture and confidence in the company's ability to weather this storm, emerge victorious, and lose some weight created a market opportunity to invest more. It is impossible for any market participant to call a "Bottom." We used steps of every -15% price change to buy this stock, 1-1.5% each time in 2023 and 2024 after SEDG's price fell -50% from its high of $350. The current Economic Value to Revenue (EV/Sales), which is our favorable metric for fast growing companies, is below 1. The average level of EV/Sales is 3.85, which gives birth to a raw but reasonable expectation of tripling the price from this level. In fact, we expect more.

BSD Analysis:
The manager presents a compelling contrarian thesis on SolarEdge, viewing the current downturn as a cyclical opportunity rather than a structural decline. The company's historical growth trajectory from $601M to $3.1B in sales (2017-2022) demonstrates strong execution capabilities and market positioning. The current 70% sales decline represents the worst cyclical downturn in the solar sector, creating an attractive entry point with EV/Sales below 1x versus a historical average of 3.85x. The manager's dollar-cost averaging strategy during the decline shows disciplined capital allocation. With global solar installations continuing to grow and $300-350B in annual solar investment, the secular tailwinds remain intact. The 2025 recovery thesis is supported by project rescheduling dynamics and expected sector normalization. The $110-150 price target implies significant upside from current depressed levels, making this a classic value play in a growth sector.

Pitch Summary:
MTU Aero Engines (MTU) is a new company in the TGV portfolio. Unfortunately, the Munich-based company has no owner. However, it has been very rational in its capital allocation for a very long time and all signs indicate that it has a good culture. MTU operates in three areas: The first is maintenance, repair and operation of aircraft engines (MRO). This area accounts for two thirds of sales and 40% of profits, with relatively little capital tied up. The second and third areas are the original parts business (OEM), one military with 8.5% of sales and one commercial with 26% of sales. The exciting area for MTU's future value is the commercial OEM business. In this area, MTU manufactures parts for the new engine program, the PW1100. This engine is one of two that have been developed and certified for the A320neo. The A320neo is one of the most efficient aircraft types. For the PW1100, MTU provides the first four stages of the high-pressure compressor, the low-pressure turbine and other components. MTU thus has an 18% share in the engine program, alongside Pratt & Whitney and Japanese Aero Engines Corporation. The engines have been in use since 2016. Since then, various teething troubles have been identified. The latest one was added last year: it resulted from a faulty powder at a partner for which MTU is jointly liable. According to current estimates, this latest teething problem will cost MTU a maximum of 1 billion USD before taxes. According to current estimates, all program partners together will pay up to 5.5 billion USD. Further teething troubles cannot be ruled out. Unfortunately, this is unavoidable with an engine program that will be running for decades. However, none of the problems to date can be attributed to MTU and with every additional mile flown and every additional inspection, the probability of a new, major problem decreases. These teething troubles are completely normal in the industry. Here are a few examples: The Trent 1000 engine had problems with the intermediate pressure turbine, the XWB engine had wear problems with the compressor blades, the LEAP engine had problems with the turbine blades and due to material contamination, and the GEnx engine had problems with ice formation on the blades of the high-pressure compressor and cracks in the turbine casings. Hardly any of the newer generation of jet engines has started up without problems. These engines are highly complex and must work flawlessly. However, this also has a nice consequence: new engines are very rarely developed. The costs of development and introduction with teething troubles are in the mid-single-digit billion range. In addition to these prohibitively high investment requirements, the existing players already have quality problems. No airline will bet on new suppliers for the huge investments in new aircraft. A single engine costs tens of millions and an aircraft costs hundreds of millions. This is why no new competitors have emerged for decades. The predecessor of the PW1100 was the V2500 for the A320. Development work on the engine began in 1983. It flew for the first time in 1987. Today, over 5,500 V2500 engines are still in use. Due to the high demand for flights and therefore also aircraft, it is not yet clear when the era of the V2500 will end. Every fyling V2500 and PW1100 engine generates profitable spare parts business for MTU in the OEM segment and maintenance work in the MRO segment every year. Each new engine sold should generate decades of predictable and highly profitable revenues for MTU. MTU is currently in a terrific situation: MTU continues to supply spare parts and maintenance services for the V2500, the PW1100 is fully developed and, at the current production rate and the order backlog of 24.4 billion Euro, PW1100 production is fully utilized until well beyond 2030. The development of a new generation of engines is currently not foreseeable. This means that profits should grow very steadily at least for five years.

BSD Analysis:
The manager initiates a position in MTU Aero Engines, emphasizing the company's dominant position in the aerospace aftermarket and participation in next-generation engine programs. The investment thesis centers on MTU's diversified revenue streams, with MRO services generating two-thirds of sales and 40% of profits with minimal capital intensity, providing stable cash flows. The key value driver is MTU's 18% stake in the PW1100 engine program for the highly successful A320neo aircraft, alongside legacy V2500 engine revenues. Despite recent teething problems costing up to $1 billion, the manager views these as industry-normal issues that create barriers to entry rather than fundamental concerns. The aerospace engine industry's massive development costs and complexity prevent new entrants, creating an oligopolistic structure with decades-long revenue visibility. With a €24.4 billion order backlog ensuring production through 2030 and no new engine generation development foreseeable, MTU is positioned for steady profit growth over the next five years from both legacy and new engine programs.

Pitch Summary:
Femsa is once again part of the portfolio. Femsa is a Mexican holding company. The company has long been very complex: it consisted of a large stake in the Dutch brewer Heineken, a controlling stake in Coca-Cola Femsa, the largest Coca-Cola bottler in the world, 100% of the largest convenience store chain in Latin America, 100% of Valora, a retail chain in Europe, and various other investments in the retail, logistics and digital sectors. Each of these businesses generates above-average returns on capital. In total, the company employs almost 400,000 people. The company has two long-term and rational anchor investors in the form of the pooled founding families and Bill Gates' family office. Most of the management has been with Femsa for decades. It is incentivized to invest the holding company's capital for the highest possible returns. Last year, Femsa sold its stake in Heineken. The company is focusing on further reducing complexity and investing in growth in Mexico. One example of this is the investment in Spin by OXXO. This app gives customers easy access to financial services such as bank transfers and online payments. In Mexico, almost two thirds of the population still have no access to banking services. The app has created this access for almost 8 million customers. Mexico has 130 million inhabitants. The potential for growth with attractive returns is therefore there. Thanks to the sale of the Heineken stake and its profits, the company will have significantly more capital available over the next few years than it can reinvest at attractive returns. This is also because parts of the company will be sold as part of the reduction in complexity, as happened in mid-July 2024. This surplus capital will be invested in share buybacks and dividends.

BSD Analysis:
The manager re-initiates a position in FEMSA, viewing the Mexican holding company as an attractive capital allocation story following strategic simplification. The investment thesis centers on FEMSA's transformation from a complex conglomerate to a focused Mexican growth story, highlighted by the Heineken stake divestiture. The manager emphasizes strong governance with founding families and Bill Gates' family office as long-term anchor investors, plus decades-tenured management incentivized for optimal capital allocation. A key growth driver is the Spin by OXXO fintech platform, addressing Mexico's massive unbanked population of nearly two-thirds, with 8 million customers already onboarded from a 130 million addressable market. The company's portfolio of businesses generates above-average returns on capital across convenience stores, Coca-Cola bottling, and retail operations. With excess capital from asset sales, FEMSA is positioned to return significant cash to shareholders through buybacks and dividends while investing in high-return Mexican growth opportunities.

Pitch Summary:
In terms of TGV's investment strategy, the investment in the subordinated AT1 bond of Aareal Bank AG (Aareal) may seem unusual at first glance. However, this bond is not the first in which we have invested in the TGV. The first investment in bonds was the perpetual bond of the Chapters Group, with which the TGV achieved an annualized yield of 9%. The second was Grenke bonds when the company was the target of a short seller's media campaign. With the Grenke bonds, TGV achieved a return of 15 to 27% in less than a year. The investment in Aareal's AT1 bond generated a return of over 26% as of 30th June. After these encouraging figures, let's take a step back: why am I recommending these bond investments at all? Typically, TGV only invests in equities. In principle, investments in equity, i.e. in shares, are more attractive than in bonds. The maximum risk in bad scenarios with equities is the loss of the investment, just like with bonds. On the other hand, there is the potential to get back a multiple of the capital invested if things go well. This directly creates an asymmetrical result. This applies to almost every investment in equity. This asymmetry can be further increased through intensive analysis and disciplined price-conscious buying of companies that hold valuable assets and still have above-average potential. At portfolio level, this gives rise to the hope of above-average returns in the long term. In a nutshell, these are the reasons why TGV only invests in equities. Bonds, on the other hand, do not normally exhibit this asymmetry in their potential outcomes. The upside potential is naturally limited. In negative scenarios, bonds can also be worthless, just like equities. This was not the case with the Grenke and Aareal bonds: The reason for this in both cases was the price compared to the risk. I recommended buying both bonds because both companies were perceived by the market as being under extreme stress at the time. I had known both companies well for years at the time. My impression of both was that although they were under stress, the situation was only temporary, and the bonds would continue to be serviced. The potential was still limited, but due to the very attractive price I still expected equity-like returns. At Aareal, the mispricing was even clearer than at Grenke AG, as there was less chance of a complete default: Aareal is a bank that focuses on the commercial real estate sector. In this area, Aareal has been one of the best addresses in Europe for years. The company has achieved this through outstanding risk management. Since 2005, Aareal has only posted a negative result in one financial year: In the Corona year 2020. In addition to its very well-managed banking business, the company has also developed service and software offerings for the real estate sector, particularly in Germany. These offerings were bundled in the subsidiary Aareon. In 2020, the investor Advent acquired a stake in Aareon. Valuation at the time: 860 million Euro. This value of Aareon was never properly reflected in the company's equity and valuation. In February 2024, the market for office properties in the USA came under pressure. Aareal had EUR 3.2 billion in loans for office properties outstanding there as at the first quarter of 2024. As is so often the case, the market threw the baby out with the bathwater: Anything that smelled like office real estate USA was sold and prices fell. Aareal's AT1 bond was no exception. It fell from over 80% of its nominal value to 60%. I had known the company for over 10 years and was also familiar with this AT1 bond. During the market panic, the following points were relevant to convince me that Aareal was not in an extreme stress situation, but in a temporary stress situation in one segment of the portfolio: 1. Aareal held € 3.1 billion and € 3.2 billion in office real estate loans in the US at the end of 2023 and the first quarter of 2024, respectively. This was 10% of Aareal's total portfolio. 2. These loans had already been impaired - in 2023, i.e. the 2024 stress had already been partially taken into account. Nevertheless, 2023 was a profitable year for Aareal. 3. 84% of the US office properties had a loan-to-value ratio below 60%. In total, the loan-to-value ratio for this part of the portfolio was 71%. 4. Aareal's liabilities side was and is particularly strong because it had a very high equity ratio of over 20% for a bank, and because a "bank run" was very unlikely due to the special deposit structure. The bank's equity amounted to EUR 3.1 billion. 5. This equity did not fully include the share in Aareon. Aareon was sold in full in June 2024 and Aareal will receive a further EUR 2.1 billion from this. This increases equity by 67%. If the US office properties in Aareal's portfolio had lost 50% of their value beyond depreciation in 2023, the company would have lost around 20% of its equity. This would still have left the bank with above-average capitalization, without considering the value of Aareon. So even in a very extreme scenario, the servicing and repayment of the bond would not have been jeopardized. This was also the view of the Supervisory Board: some members bought Aareal bonds during the stress month of March, including the AT1 bond. The fund bought the bonds at an average of 76% of the nominal value. The bond pays 10.8% interest on the nominal value. This amount is adjusted annually so that inflation protection is built in. This corresponds to a yield of over 14% p.a. This makes it easy to wait for the bond to either be redeemed or for the valuation to come closer to Aareal's actual risk situation. This yield is significantly higher than that of most equity investments. In my view, the biggest risk here was and is that the new owner of Aareal, a consortium of Advent and Centerbridge, will make larger distributions, thereby increasing the risk for the AT1 holders. I consider the risk to be manageable: I assume that Aareal would like to redeem the AT1 bond first, as this is very expensive and rather annoying for the owners in the overall context. Furthermore, I consider it unlikely that the regulator will approve a large distribution in the current situation.

BSD Analysis:
The manager presents a compelling contrarian investment in Aareal Bank's AT1 bond, capitalizing on market panic surrounding US office real estate exposure. The thesis centers on temporary market mispricing versus fundamental credit quality, with Aareal's US office loans representing only 10% of total portfolio and already partially impaired in 2023. The manager emphasizes Aareal's exceptional risk management track record, posting only one loss year since 2005, and strong capitalization with over 20% equity ratio. A key catalyst was the €2.1 billion Aareon subsidiary sale, increasing equity by 67% and providing substantial downside protection. The investment generated over 26% returns by June 2024, with the bond purchased at 76% of nominal value offering 14% annual yield with inflation protection. The manager's decade-long familiarity with Aareal and validation from supervisory board members purchasing bonds during the March stress period reinforced conviction in this asymmetric risk-reward opportunity.

Pitch Summary:
Auto Partner is a Polish distributor of aftermarket auto parts. It is one of the largest distributors of auto parts in Europe with more than 15 million individual spare part items inventoried within 160,000 m2 of warehouse capacity. These parts are stored and delivered to garages and retailers across Europe on a just-in-time basis with delivery to domestic customers occurring 3-5x per day. Auto Partner offers its customers the industry's widest assortment of auto parts, available for delivery within hours of purchase, at competitive prices, with best-in-class customer service. This value proposition is superior to that of Auto Partner's primary competition (local parts distributors) which are unable to provide the same level of availability, speed, or service. There is reason to believe that Auto Partner has a very long runway ahead of itself for the continued consolidation of market share and capital efficient growth of revenue, as Auto Partner continues to replicate, in its own unique way, a business model that has proven to be very successful in the United States over the last 50 years. Auto Partner has an estimated 10% market share in its home country of Poland but only around 0.5% market share in the rest of Europe, a region that it is growing quickly within. Auto Partner is owned and operated by its founder, Aleksander Górecki, who continues to serve as President of the company, while retaining 44% of the shares outstanding. Aleksander takes a low salary (~$100,000 USD) with no variable remuneration. His two Vice Presidents, Andrzej Manowski and Piotr Janta, are long-time employees who have been with the company for 30 and 15 years, respectively. These VPs receive 92% of their annual compensation based upon fundamental performance and the growth of shareholder value. All bonuses are paid out in cash as Auto Partner has not issued a single share in the last five years. Lastly, Auto Partner trades between 10-12x FY24 earnings and 15-20x FY24 free cash flow. Auto Partner has grown EPS by >10x in the last eight years, at a 34% annual growth rate, and maintains a long reinvestment runway for the redeployment of capital into existing operations at similar, if not higher, returns on incremental capital. I believe it is reasonable to project EPS growth between 18-25% over the next five years, and for mid-teens growth thereafter. If this were to occur, then our shareholdings would appreciate at a similar rate of return even in the absence of multiple expansion. A fundamental downside scenario of a slowdown in revenue or earnings is possible but unlikely, given that Auto Partner operates in a highly durable industry with a model that is allowing them to continue to take market share. Auto Partner is closely comparable to that of AutoZone, O'Reilly Automotive and Advance Auto Parts in the United States. This is an enviable peer group when you consider that two of these (AutoZone and O'Reilly) are two of the most successful stocks of the last three decades, having compounded their share values at a 21% and 23% annual rate of return for more than thirty years! AutoZone, O'Reilly, and Advance operate with simple business models. They sell auto parts across two main channels: Retail and Commercial. Auto Partner has no retail channel. Only Commercial. Therefore we will focus the majority of our attention here. Commercial is an auto parts fulfillment service that sells to mechanics, auto parts retailers and wholesalers. Mechanics have a daily need for spare parts and do not have the time to visit a store, which may or may not have all of the inventory available that they need. That is why it makes sense for auto parts distributors to maintain the warehouse capacity and logistics capabilities that allow them to store and deliver auto parts as quickly as possible in order for the mechanics themselves to maximize garage throughput. Mechanics' rank of priorities when ordering from a vendor goes as follows: 1) The availability of the item 2) Speed of delivery 3) The price. Price is not the top issue because garage throughput is the ultimate goal of the repair shop and mechanics bill customers based on a cost-plus model, thus allowing them to pass through parts prices to consumers who are not in a position to negotiate, nor are they able to price compare. Importantly, after making hundreds of purchases per year, each mechanic has their own preferred commercial partner. This preferred partner almost always receives the vast majority of the order volume from that particular garage (between 60-80%), with second- and third-ranked distributors receiving significantly lower minorities alongside OEMs. This preference is non-contractual (meaning mechanics can order from any distributor, any time) but mechanics frequently elect to order from the distributor that offers them the most consistent level of availability, speed, and price. Therefore, the preferred auto parts distributor maintains a somewhat defensible position within that customers' mind as long as they continue to remain reliable. This means that there are no real switch costs in this industry yet mechanics tend to repeat purchase from their preferred distributor with a very high frequency rate. In Poland, and increasingly across all of Europe, Auto Partner has proven itself to be that superior vendor. Auto Partner has 250,000 SKUs, which is 100k more than the largest of its local parts distribution competition. Furthermore, it is able to deliver these parts 3-5x per day… within hours of purchase, thereby enabling garages to maximize throughput. Most local parts distributors are unable to match those delivery speeds, delivering within 24 hours on most purchases. This superior experience of increased availability and increased delivery speeds, coupled with competitive prices has led to the gradual migration of mechanics away from local parts distributors towards Auto Partner. Once these mechanics begin shopping with Auto Partner as their preferred vendor of choice, they then funnel the majority of their order volume through Auto Partner much the same way that mechanics in the US will funnel the majority of their order volume through one of AutoZone, O'Reilly or Advance Auto Parts. Mechanics that shop with Auto Partner are increasingly difficult to win over because Auto Partner has made it a core focus of their business model to offer the best service that the industry has to offer. This consistent shopping behavior becomes engrained into the customers' shopping patterns and makes it so that insurgent competitors have a difficult time competing away order volumes in much the same way that Walmart currently has a hard time competing away my household purchases from Amazon. In Poland, Auto Partner estimates that it has approximately 10% market share, based on PLN 1.8 billion of domestic revenues in 2023, thus implying an PLN 18 billion industry size. The vast majority of this market share is owned by these local parts distributors, which maintain the aforementioned inferior value proposition. Another ~20% is owned by Inter Cars, another scaled parts distributor that has performed well in consolidating market share alongside Auto Partner. Going forward, it seems likely that Auto Partner continues to gain market share at the expense of these local distributors. But the true long-term growth driver is in the rest of Europe. Auto Partner generated PLN 1.8 billion of revenue internationally in 2023. Despite this international export business accounting for 50% of revenue, Auto Partner estimates that they do not have more than 1% market share yet in any of the 30 countries that they service. Auto Partner's value proposition of availability, speed of delivery, and price is similar to that of its domestic segment, and I do not see much of a reason why Auto Partner should not be able to gain well in excess of 1% market share, approaching towards the 10% market share that it currently has in Poland. There are more competitors, to be sure, in Europe. Notably, LKQ (~PLN 23 billion of revenue), and GPC (PLN 14 billion) alongside Inter Cars as well (with ~PLN 11 billion of revenue earned internationally), but the European auto parts industry is approximately 20x larger than that of Poland (at PLN 360 billion or $89 billion USD), and there is still an incremental PLN 300 billion of market share that is owned by local parts distributors. This amounts to ~80x Auto Partner's existing scale. It is near-inevitable that this market share will gradually shift into the hands of the scaled auto parts distributors that can offer mechanics the better value proposition, much in the same way that market share has gradually shifted into the hands of AutoZone, O'Reilly and Advance Auto Parts over the last four decades that they have been in business. Today these three companies have approximately 40% of the American auto parts industry. Which brings an important topic to mind. That of barriers to entry. Not only is this business capital intensive, requiring close to $100 million USD in capital equipment and more than $250 million in working capital, but even more importantly, it requires the intelligent use of that working capital in a hub and spoke logistics model that allows for the most in-demand parts to be the most proximally located ones to the customers, thus ensuring minimal delivery times and maximal customer satisfaction. Perhaps most importantly, however, the primary barrier to entry is one of trust. It has taken Auto Partner more than 30 years to build up its customer base to what it is today, starting with Aleksander Górecki selling auto parts out of his home in 1994 and scaling up to today with thousands of garages, retailers, and wholesalers relying on Auto Partner to distribute parts to them, error-free, daily. Other parts distributors (LKQ, GPC, and Inter Cars) have scaled these barriers to entry as well, but the barriers remain high and make it incredibly difficult for small insurgent competitors to attempt to enter and compete on a large scale. Finally, while competition remains high, the likelihood of a price war (and declining gross margins) is unlikely, given that price is not the first, or even second, priority when it comes to making a purchase decision. That coupled with the aforementioned repeat purchase behavior being difficult to compete with, makes it likely that each of these competitors will have a steady-state proportion of market share at some point off into the distant future, and more-or-less gain or lose minimal market share from each other on an annual basis. As previously stated, I believe Auto Partner is executing a very similar business model to that of AutoZone and O'Reilly, two of the most successful stocks of the last three decades. And I believe that Auto Partner has the opportunity to produce similar returns over the next two decades. The operating business is capable of producing a similar 10% earnings growth rate over the next 20 years, like AutoZone has achieved over the last 20 years. But AutoZone is not distinguished for its earning growth, but for its share cannibalization. Beginning in 1998, AutoZone did something quite unique. They used the excess cash flows available to them after reinvestment needs, and it used that cash to repurchase its shares. Over the last 25 years, it has repurchased 90% of its shares outstanding from 154 million shares in 1998 to only 17 million today. Auto Partner is similarly going to find themselves with an excess of cash flows after reinvestment and they have communicated a willingness to return capital to shareholders… most recently with an 8% payout in the form of a dividend. I would rather see these cash flows utilized for the repurchase of shares outstanding given that dividends are taxable and share repurchases are not. This will have the dual effect of juicing earnings per share in addition to returning capital to shareholders, while dividends merely return capital to shareholders less taxes. Although AutoZone only achieved a 10% growth in earnings over a twenty year period, by repurchasing 8% of its shares, this served to increase EPS by 18% per year, which is far superior that the otherwise 10% EPS growth that would have been achieved plus dividends less taxes. So… Aleksander, Andrzej, Piotr, and Tomasz, if you are reading this… I think you have created a fantastic business and I think you have the potential to produce AutoZone and O'Reilly-like equity returns if you shirk dividends in favor of share buybacks at a regular cadence while shares remain reasonably valued. Auto Partner trades at 14x LTM earnings and ~12x FY24 Earnings. This is a relatively cheap multiple when you consider that earnings per share have increased by more than 10x in the last eight years and grown at a 31% CAGR over the last five years. Auto Partner is likely to continue to grow both domestically and internationally and has proven itself capable of doing this while maintaining its profit margins. There should be room for further improvement of profit margin, given that the international segment carries a higher operating margin and that there is a growing segment of private label items that now account for 20% of sales and carry with them a higher gross margin. Auto Partner's cash flow statement is not nearly as smooth as its income statement. The lumpiness in recent years in cash flows has been due to a build up in inventory due to the supply chain crisis of 2021 and 2022. This inventory was purchased when the PLN was relatively weak, with the current EUR/PLN exchange rates being low. Further, there has been an investment in capital expenditures in recent years as the company is building out its last large warehouse until ~2029. This warehouse is on the border of Germany and should help to facilitate faster fulfillment of orders internationally. This is precisely what we want to see Auto Partner doing to ensure the continued growth of revenue, earnings, and free cash flows while they can be gained capital efficiently. In future years, the hope is that the cash flow dynamics will be smoother than the last three years, but if investors' can ignore any lumpiness from transient things like foreign exchange rate fluctuations, supply chain disruptions, or pandemics (hopefully not), we should witness a steady continuation of what has already been happening… the continued growth in revenue, earnings and cash flows through the taking of market share via its advantaged business model in a deeply underpenetrated industry. When asked to provide guidance, the management team has shied away from doing so, except to say that they believe 20% revenue growth per year is reasonable. On an inflation-adjusted basis, Auto Partner would have not achieved this in 2023 (having only grown 18%), and they have also reported 18% growth through Q1 of 2024, but I believe the management team will continue to execute on high growth, generally. My reason for conviction can be simply stated: The management team deserves a significant degree of trust. Not only are they well-aligned with shareholders, but they have also invested their entire careers into building this business and have proven themselves reliable through their financial performance to-date. I would love to see them consider returning capital to shareholders via the tax-advantaged channel of share buybacks but their ability to execute in terms of operations should be without question. Regardless, if Auto Partner were to grow revenues at 15% per year for the next five years, we should expect a 15% rate of return. I think this is reasonable with limited true downside and significant upside through the growth of earnings, which are at a temporary low-point due to fx conversion weakness. On a constant currency basis, net earnings margins are 200-300 bps higher. Most importantly, I view the durability of Auto Partner's business model and growth potential to be top-notch. Auto Partner can continue to grow at a mid-teens to low-twenties growth rate for the next decade and still have only 3-4% market share within its industry. Just like with AutoZone and O'Reilly, the durability of their business model and their growth have been surprisingly sturdy, especially when you consider all of the changes to the world economy that have transpired over the last thirty years. I consider it highly likely that the need for auto parts will continue into the future and that mechanics and retailers will continue to gravitate towards the distributor that offers them the best combination of availability, speed of delivery, and price. There is therefore significant confidence in the business model and we are buying it at a more than fair price. Electric vehicles are the big risk to this industry over the long term, but the average age of vehicles is ~14 years in Poland and ~13 years in the rest of Europe. Those vehicles will not suddenly disappear from roads in the coming years even if electric vehicle sales were to ramp upwards. Perhaps that will happen, but this is a transition that will likely unfold slowly over time and nobody knows the extent to which all vehicles will become electric. Further, electric vehicles still require repairs and maintenance and auto parts distributors are well positioned to sell auto parts to these mechanics with the distribution capabilities that OEMs lack. This is a risk but not an existential one. The other risk is that I am wrong about the priorities of mechanics in Poland and Europe and that price actually has a higher priority for mechanics. This could lead to a price war and declining returns on capital. If we ever see price cuts and gross margin reductions, this will be a clear sign that the competitive environment is higher than I suspect and the thesis will be damaged. Lastly, Auto Partner has some debt on the balance sheet, about 1x debt/EBITDA. This is not a large amount, especially considering the highly durable nature of this industry. But if another pandemic were to occur and vehicles stopped being driven for an extended period of time, this could become a problem. To summarize: Auto Partner operates with a compelling value proposition that is allowing it to take market share within an industry that it has only cracked the surface of. Barriers to entry are high and the current competitive environment is favorable considering that the majority of the market share is slowly being whittled away by Auto Partner and its scaled distribution peers. Over time, market share will stagnate, but that is likely many years away given the extreme fragmentation of the industry. Auto Partner appears to be the best-positioned of these, with the highest revenue growth opportunity in the most capital efficient manner. This has already seen EPS 10x since its IPO, eight years ago, with the potential for further growth at similarly high rates. Auto Partner is ran by a management team that is both well aligned and highly competent.

BSD Analysis:
The manager presents a compelling bull case for Auto Partner, positioning it as the European equivalent of successful US auto parts distributors AutoZone and O'Reilly. The thesis centers on Auto Partner's superior value proposition of availability, speed, and service that is driving market share gains from fragmented local competitors. With only 10% market share in Poland and 0.5% across Europe, the runway for growth appears substantial in a €89 billion European market. The company has demonstrated exceptional execution with EPS growing 10x over eight years at a 34% CAGR, while trading at attractive 12x forward earnings. Management alignment is strong with founder ownership at 44% and performance-based compensation tied to shareholder value creation. The manager advocates for share buybacks over dividends to maximize tax-efficient returns, similar to AutoZone's successful capital allocation strategy. Key risks include electric vehicle adoption and potential price competition, though the manager views these as manageable given the industry's durability and mechanics' prioritization of availability over price.

Pitch Summary:
The company is selling GLP-1 weight loss injection without FDA approval; reliant on a sole supplier that is previously related to fraud and bankruptcy; legal liability; chief executives cashed out $26mil since the drug announcement; Update 12/31/24 - Follow-up: GLP-1 shortage will be eliminated shortly.

BSD Analysis:
Hims & Hers Health provides telehealth and subscription-based treatments for wellness, sexual health, and mental health. The bear case stresses customer acquisition cost inflation, limited clinical differentiation, and regulatory oversight in prescribing practices. Growth has been fueled by aggressive marketing rather than durable competitive advantages. Profitability remains narrow, and questions around churn raise sustainability risks. Regulatory tightening could materially alter the cost structure.

Pitch Summary:
The company uses dishones and fraudulent ads to collect data and sell those data; ongoing investigation by FTC due to deceptive practices; sham health insurance policies; insiders are dumping shares due to significant adverse effect from the investigations;

BSD Analysis:
MediaAlpha operates an ad marketplace primarily serving insurance carriers. The BSD short thesis emphasizes dependency on cyclical insurer ad spend, regulatory headwinds on lead-gen, and fragile unit economics. Insurance companies have sharply cut back marketing budgets amid claims cost inflation, hurting MAX’s revenue base. Longer term, insurers investing in direct-to-consumer digital channels could structurally reduce reliance on third-party aggregators. While bulls highlight a rebound opportunity, bears argue valuation still implies growth resilience not supported by fundamentals. Investors should watch TAC (traffic acquisition cost) ratios, insurer ad budgets, and evolving regulations.

Pitch Summary:
Over the past decade we have followed Disney with interest. It is a competitor to numerous stocks we've owned, including 21st Century Fox (which Disney purchased in 2019), Comcast and Netflix. We've always been impressed with their IP, and therefore were a bit surprised by the company's underperformance over the last few years. Adjusted operating income declined from nearly $16b pre-pandemic to less than $13b in 2023, and the stock dropped by more than 50% from its 2021 peak. Disney's once-proud linear networks are now mired in secular decline. Its once-heralded streaming services have yet to turn a profit. Disney has faced numerous proxy battles with disgruntled shareholders. The firm has been trashed in the media, with headlines like "[CEO] Iger found Disney in worse shape than he expected." It was also the near-unanimous pick for "Biggest Business Loser of 2023" from the hosts of the popular All-In podcast. To top it off, Elon Musk told Bob Iger, "Go fuck yourself" on live TV. Despite the headlines, we see a company with a tremendous business today, and a promise of more growth to come. We believe Disney is undervalued because investors have fallen prey to availability bias: investors have focused on negative news headlines and challenges to prominent business lines rather than impartially evaluating the totality of the enterprise relative to its valuation. We think that at Disney's current valuation, earnings at the Experiences segment can justify the entire market cap virtually by itself. Investors are getting the rest of the business – including Disney's inimitable IP, growing streaming services nearing profitability, and shrinking but still profitable linear networks – at a steep discount. Disney's most profitable segment is Experiences, predominantly parks, resorts and cruises. Attendance, pricing, and margins have all grown consistently over the years, and in FY 2023 this business did $7b in operating income. This is up from $1b in 2004, which is a >10% CAGR. Very few businesses can sustain this sort of growth rate over 20 years and at this scale. This speaks to the unique nature of Disney's parks, which integrate the world's greatest entertainment IP with iconic rides and experiences. There is little direct competition. The beauty is that they still have room to grow. Just in the last few months they added a "Zootopia" land and a "World of Frozen" land at the Shanghai and Hong Kong parks, respectively. Many more additions are planned over the next decade, partially filling the 1,000 acres the company owns adjacent to their current parks. As they put it in a press release, "Disney will explore even more characters and franchises, including some that haven't been leveraged extensively to date, as it embarks on a new period of significant growth domestically and internationally in its parks and resorts." While their plans will consume capital – projected at $60b over the next ten years – we expect Disney to generate attractive returns on this investment, continuing to grow profits in the parks business at a 10% annual clip. By 2030, we expect the Experiences segment, which also includes consumer products, to generate $18b in annual EBIT, up from $9b in 2023. The vast majority of Disney's other revenue stems from the monetization of original video content: movies, TV shows, and sports broadcasting. Historically, Disney's linear TV networks generated much of this revenue. But linear networks are now in decline as the world moves towards a streaming-first model. This has created upheaval at Disney, with its cable channels losing subscribers and cash-cow ESPN seeing a material decrease in profitability. At the same time, Disney has attempted to unhitch itself from the doomed prospects of linear by investing heavily in streaming. Disney was late to the streaming game, launching their flagship Disney+ service a full 12 years after Netflix began streaming online. But the product is popular: Disney+ has 118m subscribers worldwide as of the end of Q1. At current run rates, it generates $10.3b in annual revenues. To date, Disney's streaming efforts (which also includes Hulu and ESPN+) have not been profitable. For a while this was accepted by investors, as streaming was seen as a land grab with a very large pool of potential subscribers and profits down the road. And in the heady days of 2018 through 2021, few investors cared if your business was profitable if you were growing quickly. Disney prioritized rapid expansion of its streaming business, disregarding profitability in the process. However, we have entered a new era. Netflix, Disney, and the other streamers are now laser-focused on margins, with Netflix guiding to record profit margins of 24% in 2024. Disney has pushed through large price increases in the ad-free Disney+ product, and forecasted a multi-billion dollar decline in content investment in 2024 as they focus on quality over quantity. While this combination might sound risky, we think that Disney's evergreen content and still-attractive pricing – $8/mo for ad-supported and $14/mo for ad-free in the US – will continue to retain old customers and attract new ones. Other avenues for growth include growing its ad-supported tier and reducing password sharing. Furthermore, we think Disney has a chance to greatly improve its DTC economics by bundling its disparate DTC services. Though the content bundle distributed by cable is dying a slow death, the bundling value proposition remains extremely attractive for consumers and producers alike. Bundling maximizes appeal and revenue, and reduces churn. Disney is uniquely positioned to recreate their own in-house version of the cable bundle. Disney+ has inimitable specialty IP, including Disney Animation, Pixar, Star Wars, and Marvel. Hulu, soon to be wholly owned by Disney, has a wide selection of general entertainment content. In 2025, Disney will launch a flagship ESPN streaming service with ESPN's full suite of content. With this content mix, Disney can create a compelling bundled offering for an enormous swath of consumers. Advertisers will love the one-stop shop for a large and diverse audience. We think this bundle will become an integral part of the entertainment package for hundreds of millions of households around the world. Fundamentally, we believe that Disney's content is extremely valuable. They have not been able to monetize this content effectively in a streaming-first world. Instead of profits, their valuable content has been generating huge losses, which has artificially depressed their earnings. We trust that with a newfound focus on profitability and an emphasis on rebundling, Disney will be able to find a revenue model that rewards them appropriately. Disney expects its combined streaming businesses to reach profitability in the third quarter and become a meaningful earnings growth driver from there on out. We anticipate Disney eventually generates at least 15% margins in its DTC business, swinging from a $2.5b operating loss in 2023 to a substantial profit within a few years. The combination of losses in streaming, declines in cable subscribers, and escalating sports rights pricing has resulted in a significant decline in Disney's profitability. However, with the Experiences segment alone justifying most of the current enterprise value, investors can acquire the rest of the business at a steep discount. We believe that DTC will generate strong earnings within a few years. The Sports and Linear Networks segments, though secularly challenged, will continue to generate substantial income in the near term, which is an added bonus. We made a material investment in Disney in Q1 and today it is one of our largest positions.

BSD Analysis:
Bireme Capital presents a compelling contrarian thesis on Disney, arguing the market has overreacted to negative headlines while undervaluing the company's core assets. The fund's analysis centers on Disney's Experiences segment, which generated $7 billion in operating income in FY 2023 and has delivered over 10% CAGR growth for two decades. Management projects this segment alone can justify Disney's entire market capitalization, with plans to invest $60 billion over the next decade to expand parks and leverage underutilized IP. The streaming transition thesis is particularly noteworthy - while Disney+ currently operates at a loss, the fund expects a swing to 15% margins as the company shifts focus from growth to profitability. The bundling strategy combining Disney+, Hulu, and the upcoming ESPN streaming service could recreate the economics of traditional cable bundles in a streaming format. With Disney trading at a significant discount following a 50% decline from 2021 peaks, Bireme sees an asymmetric risk-reward opportunity where the market is pricing in permanent impairment rather than cyclical challenges.

Pitch Summary:
Mereo BioPharma recently announced promising late-stage data for its lead asset, yet its stock is trading below previous highs and even below the price of a recent oversubscribed private placement. The market appears to be undervaluing the company's potential, especially given the backing of significant hedge funds and insiders.

BSD Analysis:
Mereo BioPharma's current valuation does not reflect the potential upside from its promising late-stage clinical data. The company's strategic investors, including Rubric Capital, which holds significant board influence, suggest confidence in the company's future prospects. The biotech sector often requires a catalyst for re-rating, and Mereo's recent data could serve as such a trigger. Furthermore, the company's focus on rare diseases positions it well in a niche market with less competition and potentially high margins. Investors should consider the broader biotech market dynamics, where many firms are undervalued due to a lack of immediate catalysts, presenting opportunities for those willing to wait for market recognition.

Pitch Summary:
We have great respect for Autodesk, a pioneer and leader in design software over the last forty years. Autodesk is the global leader in design, engineering, and entertainment software solutions, with strong market leadership in its core markets of architecture, engineering, and construction. We believe Autodesk has continued runway for growth, with incredibly sticky solutions that are the industry standard and integral to how its customers work, as well as an opportunity to expand further into attractive new verticals, such as construction. We also believe Autodesk has an opportunity to create significant shareholder value by meaningfully improving its combination of growth and profitability through substantial margin improvement, as well as adopting more shareholder-friendly capital allocation policies and improving governance and oversight. Autodesk occupies an enviable position in the design software category, an attractive segment of the broader software market. As a result of its strong market position and attractive business model, Autodesk generates best-in-class gross margins. Despite a meaningful gross margin advantage, however, Autodesk's adjusted operating margins are subpar because the Company outspends its peers on operating expenses. We believe Autodesk can significantly reduce expenses in multiple cost centers and drive improved operating leverage to generate significant margin expansion. In addition, we believe Autodesk can adopt more shareholder-friendly capital allocation policies, increasing the amount of capital it returns to shareholders through share repurchases. We also believe Autodesk should refrain from any material acquisitions unless and until it can execute with excellence. Given the Company's current valuation and our belief in the value creation opportunity at Autodesk, we believe repurchasing its own shares represents the best use of capital for Autodesk today. By taking these actions, we believe Autodesk can drive significant growth in Adjusted EBITDA, free cash flow, and free cash flow per share over the next few years, which we believe will drive significant long-term shareholder value.

BSD Analysis:
Starboard Value presents a compelling activist thesis on Autodesk, recognizing the company's dominant market position in design software while identifying significant operational inefficiencies. The fund highlights Autodesk's best-in-class gross margins and sticky customer relationships as core strengths, but criticizes management's excessive operating expense structure that has led to subpar adjusted operating margins compared to peers. Starboard's value creation plan centers on substantial cost reduction across multiple expense categories to drive operating leverage and margin expansion. The activist also advocates for more shareholder-friendly capital allocation, specifically increased share repurchases over acquisitions given the company's current valuation discount. The pitch is strengthened by documented evidence of management's repeated failure to meet financial targets and concerning accounting practices that artificially inflated free cash flow metrics. Starboard's legal action to delay the annual meeting and reopen director nominations demonstrates their commitment to governance reform and board accountability.

Pitch Summary:
Barfresh is positioned to disrupt the school meal industry with its USDA-approved ready-to-drink smoothies, capturing a significant market share in a short time. Despite operational setbacks, including a bottling crisis and supply chain issues, the company is poised for a strong recovery and growth, with management guiding for record revenues and profitability in 2024. The company's unique product, Twist & Go, has no direct competition and has been well-received in schools, leading to increased breakfast participation rates. Barfresh's expansion strategy includes increasing its presence in schools, entering new markets, and potentially launching in retail channels. The company has a credible path to achieving $100M in revenue in the next 3-5 years, with significant upside potential.

BSD Analysis:
Barfresh's strategic collaboration with the USDA and its focus on healthy, tasty breakfast items position it uniquely in the school meals market. The company's ability to quickly adapt to challenges, such as the COVID-19 pandemic and supply chain disruptions, demonstrates resilience and operational agility. The expansion into new markets and products, coupled with a strong brokerage network and sales team, supports its growth trajectory. While operational execution remains a risk, recent hires and capacity expansions suggest management is addressing these issues. The potential for significant revenue growth in the education channel, along with opportunities in the military and entertainment sectors, provides multiple avenues for future growth.

Pitch Summary:
The company's flagship drug is mostly made up of two widely available generic drugs, with no special ingredient; undisclosed consignment deals for its drugs; ballooning receivables and sales outstanding (43% of the reported revenue was not paid); potential anti-kickback concerns; false claims;

BSD Analysis:
Axsome develops therapies for CNS disorders, with key products Auvelity (major depressive disorder) and Sunosi (narcolepsy/EDS). The BSD short thesis emphasizes execution risk in commercializing differentiated products, payer reimbursement hurdles, and ongoing cash burn. While Auvelity represents a mechanistically novel antidepressant, its adoption curve has been slower than bullish forecasts, reflecting entrenched generics and physician conservatism. Bears argue the pipeline (migraine, Alzheimer’s agitation) remains risky and that valuation already prices in blockbuster outcomes. Dilution risk remains if uptake underwhelms. Investors should track prescription growth, payer coverage breadth, and trial readouts.

Pitch Summary:
BQE Water Inc. is positioned to capitalize on its advanced selenium water treatment technology, which is gaining traction in the mining industry. Despite recent skepticism about its growth prospects, the company's recurring revenue has surged, and its involvement in significant projects like the KSM gold-copper project suggests substantial future earnings potential. The company's asset-light model and focus on high-margin services provide a strong foundation for long-term growth.

BSD Analysis:
BQE Water's current valuation appears attractive, trading at approximately 20x NTM earnings, which is low given its growth trajectory and the potential from its selenium treatment technology. The KSM project, one of the largest undeveloped gold projects globally, could significantly boost BQE's revenue, with an estimated CAD $9 million in annual recurring revenue from selenium treatment alone. This project, along with others in the pipeline, underscores BQE's strategic positioning in a niche market with high barriers to entry. The company's ability to secure long-term contracts and its focus on mission-critical services for mining operations enhance its revenue visibility. While the timing of revenue realization from these projects may extend into the next decade, the long-term prospects remain robust, supported by the company's strong technical expertise and growing demand for sustainable water management solutions in mining.

Pitch Summary:
Diageo (DEO) was likewise added to the portfolio this quarter. We don't believe we have any special insight into this well-known spirits maker, but believe DEO is capable of providing long-term attractive returns and became priced at a level where we felt we were taking less risk in the short term as well. Owner and marketer of the Johnnie Walker Scotch, Tanqueray gin, Smirnoff vodka, Guinness beer, and Baileys liqueur brands, plus a stable of emerging brands, Diageo is a fixture any time alcohol is being served. We believe we're paying a high-teens multiple of quite stable and growing earnings, and benefit from a healthy 3% dividend in the interim. We won't wow anyone with our analysis on this one, but when everyone else is rushing to buy NVIDIA, our exposure to alcohol should help with any hangovers in the rest of the market.

BSD Analysis:
The manager takes a straightforward value approach to Diageo, acknowledging no special insights but focusing on attractive risk-adjusted returns. The investment thesis is built on Diageo's portfolio of premium global alcohol brands including Johnnie Walker, Tanqueray, Smirnoff, Guinness, and Baileys that provide defensive characteristics and market presence. The valuation appears compelling at a high-teens earnings multiple for a business with stable and growing earnings profile. The 3% dividend yield provides attractive income while waiting for capital appreciation. The manager positions this as a defensive hedge against market volatility, contrasting with the speculative fervor around growth stocks like NVIDIA. While the analysis lacks deep fundamental insights, the focus on valuation discipline and risk management aligns with the fund's conservative approach. The global reach and brand strength of Diageo's portfolio provides diversification and recession-resistant characteristics that should deliver steady long-term returns with lower volatility than growth-oriented investments.

Pitch Summary:
While a small position, it is worth explaining what I find attractive about Tiendas BBB (TBBB). Started by a McKinsey consultant (not always a sign of an attractive investment), Tiendas BBB is a hard discounter a la Aldi or Lidl, retailers well-known in the United States. TBBB operates over 2,200 stores in Mexico, with visibility to 12,000 stores over the long-term, and I believe the potential for even more beyond that. As with Aldi, TBBB offers a limited number of primarily private label products, approx. 2,000-3,000, at less than 15% gross margins, in relatively small stores supplied by an efficient supply chain network. These metrics compare to competitors who stock tens of thousands of items, mostly third-party brands, and at gross margins >20%. What allows the hard discounter model to thrive is the low number of stock-keeping units (SKUs), which results in higher sales per SKU, which allows the hard discounter to negotiate competitively at even a small scale vs other retailers. As their scale grows, hard discounters can negotiate increasingly better prices with suppliers, placing greater pressure on competitors who already operate on thin margins. Also as a result of the low number of SKUs, hard discounters are able to negotiate attractive payment terms, and because their inventories remain low as a result of high inventory turnover, they have negative working capital and generate positive cash flow as basically a perpetual loan from their suppliers. This cash flow allows hard discounters to pay for their growth without incurring significant debt. As a result, we estimate TBBB's 2020-2023 growth was 33% per year, while long-term debt only grew at a 5% rate. Because of the characteristics discussed here, TBBB is capable of growing stores by 15% per year in addition to growing same-store sales at 5-10% per year going forward. It seems likely they can continue at this pace for the next 10-15 years and returns could approach or exceed 20% per year.

BSD Analysis:
The manager presents a compelling growth story for Tiendas BBB based on the proven hard discount retail model. The investment thesis centers on TBBB's ability to replicate the Aldi/Lidl success formula in Mexico through limited SKUs (2,000-3,000 vs competitors' tens of thousands) and ultra-low gross margins under 15%. The business model creates powerful competitive advantages through higher sales per SKU, superior supplier negotiation power, and negative working capital from attractive payment terms and high inventory turnover. Historical performance validates the model with 33% annual revenue growth from 2020-2023 while debt grew only 5% annually. The runway for expansion is substantial with current 2,200 stores having visibility to 12,000 long-term stores. The manager projects sustainable 15% annual store growth plus 5-10% same-store sales growth for the next 10-15 years. The self-funding growth model through cash generation could deliver 20%+ annual returns, making this an attractive long-term compounding opportunity in the Mexican retail market.

Pitch Summary:
Going back to at least 2017 with research on Syntel that ultimately led to Syntel's acquisition by Atos, I have spent a lot of time understanding and investing in IT services. IT services generally earn extremely high returns on capital, and historically have augmented organic growth with acquisitions that build capabilities in other technical or geographical areas. Over time, IT services have evolved from relatively low-skilled IT infrastructure monitoring and troubleshooting, and now some companies are more focused on customer-facing activities. This new generation of IT services businesses is involved in custom application development, generating next generation experiences for customers. Admittedly, the buzzwords in this industry are annoying and it can be sometimes difficult to understand the scope of services companies offer, and how much overlap there is with the older generation of IT services businesses. The main differentiator is that most of their work is on a time-and-materials basis, whereas legacy providers were replacing a previously insourced cost and needed to offer fixed price contracts to win business by guaranteeing customers superior cost to insourcing. Finally, one of the main characteristics of Endava's business model is that its engagements are project-based and have single deliverables for completion. This makes the business more sensitive to the economic cycle relative to legacy IT providers who are, again, generally replacing an ongoing function previously performed by a company's internal team, i.e. is recurring in nature. Right now is an interesting time to add to our investment in DAVA because the company has experienced a hangover from the COVID pandemic surge in spending. The pandemic caused significant IT investments to accommodate work-from-home policies and an expectation of permanent changes to how business was conducted, from remote sales calls to social distancing in manufacturing operations and more. From fiscal 2019 through fiscal 2023, sales grew at a 28.9% compound growth rate (CAGR). This is a small decline from the 31.0% CAGR from 2017 to 2019, when the business was much smaller. To frame this more succinctly, in the last six years, the business has increased revenue by 5x. Unsurprisingly, at least to me, the business is going through a post-COVID hangover, and needs to lap some strong comparables before resuming double-digit growth. On top of the need to lap strong comps, the business over-invested in people, believing that the boom times would persist. The slowdown caught management by surprise and their worker utilization has fallen significantly. Fortunately, this can be fixed relatively quickly and margins should rebound towards 2019 levels. In addition to all of this, the advent of artificial intelligence (AI) has caused some people to question the value that Endava can provide if companies adopt AI. Who is going to help these companies adopt AI? Sure, Google and Amazon will have their own internal resources, but there are so many more companies who don't have a need for full-time software engineering talent who will need a company like Endava to help them adopt AI. AI seems like more of an opportunity than a threat for Endava. The business currently trades for 15x next year's still-depressed earnings, a multiple we believe is far too low for a business that should grow at double digits for at least the next five years. There is certainly a realistic scenario where DAVA can trade for a price approaching $80 in 2-3 years.

BSD Analysis:
The manager presents a compelling bull case for Endava based on cyclical recovery and AI opportunity. The thesis centers on the company being in a temporary post-COVID hangover after experiencing explosive 28.9% revenue CAGR from 2019-2023, with revenue growing 5x over six years. The manager views current challenges as transitory, including over-hiring during the boom and reduced worker utilization that can be quickly corrected. A key insight is positioning AI as an opportunity rather than threat, arguing that most companies lack internal AI expertise and will need Endava's services for AI adoption. The valuation argument is compelling at 15x depressed forward earnings for a business expected to resume double-digit growth. The manager's deep sector expertise since 2017 and understanding of IT services evolution from infrastructure monitoring to custom application development adds credibility. Target price of $80 implies significant upside potential over 2-3 years.