Dear partner,
The time has finally come, the CC Multi Strategies Chess Capital Fund SICAV-SIF is officially launched from today. In a few days, you will receive a “contract note” on this from the new administrator.
But let us start with a word of thanks.
Firstly, because you all joined us in this new structure. Secondly, for your patience. In the past, communication from the administrator was not to our liking, especially the lateness of quarterly calculations was an eyesore.
In the new structure, we are therefore working with a new partner and control of this partner now falls entirely to us . Throughout the merger, the contact and responsiveness of our new partner was already very encouraging.
From now on, we will also switch to a monthly NAV calculation instead of quarterly. Each month, you will receive an overview of the status of your shares from the administrator. We aim to be able to provide this to you by the middle of the following month. Letters like this one will remain quarterly.
A monthly calculation also means that investments or withdrawals can be made on a monthly basis.
Will AI change the world?
In terms of commentary on the stock market or economy in general, the title of the newsletter from six months ago is still very apt. In many areas, we see that the short-term pain in the stock market is grossly underestimated and the long-term pain is overestimated.
More than ever, we feel we are getting a division between sectors that are glorified and those that are treated like rubbish. It is in such a sector that we can now find bargains, by selection the right companies
It does surprise us that new bubbles are created in the stock market so soon. We have only just got rid of SPACs, NFTs and other things and there is Artificial Intelligence already.
Will AI change the world? Yes absolutely. But what is the order of magnitude of that going to be? Is it a new iPhone or internet moment? And in the long run, will it all matter that much? For some companies it will, for others not at all. But in the past automation and the internet didn’t cause an economic crunch, AI won’t either. As with the rise of the internet and the iPhone, old economic things will die out, but new ones will emerge as well. How we work, what jobs and businesses there are, will change, but we will adapt to that too. Just like in the past to the steam engine, the train, electricity, the car, the plane, the internet,… .
In the stock market, anything tending towards AI is now immensely popular. Look at Nvidia, for example. Nvidia is a top company that is possibly best known for its graphics cards for computers, but is also active in other components including super-fast chips used for AI.
Despite being a top company that will definitely benefit from the whole evolution around AI, it looks like this will not be a good investment. Currently, Nvidia is for sale on the stock market at 34x revenue. Yes, you read correctly, 34x revenue, not even profit yet. Nvidia is now listed at 218x earnings for the past 12 months.
When you see numbers like that, as an investor you have to ask yourself, what can I earn with this investment? Even if the wildest predictions come true, what is your potential return?
If we then look at our portfolio, we see few companies where AI will have a significant impact. We see AI making their lives easier, but we don’t see disruption that will make them obsolete.
For Tessenderlo, fertilisers, gelatine and looms will still be needed. Cake Box will not bake one less cake, Deceuninck will still supply its windows when a new building or renovation is underway , Somero’s laser screens will still be the best way to level concrete and we will still give Smartphoto’s gift items. And so we can continue for all our businesses.
Just as we answered positively in the previous video meeting whether our companies would survive a world war, we are also convinced that they will survive Artificial Intelligence.
The beauty of value investing
The beauty of value investing is that you can (must?) focus on the long term, so you also don’t have to deal with short-term perils such as changing ways of doing things. The great opportunity is also that few people take a long-term view so there are always opportunities in the market for value investors.
At the same time, the downside is that few people take a long-term view, which also means that, as a value investor, you always have to have a lot of patience before you are proven right, and moreover, your investment can go in the wrong direction for a long time first. Long-term investing is a battle of reason against emotion.
There are two things that drive the price of a stock on the stock exchange. In the long term, it is the profits the company generates, and therefore the growth of those profits. In the short term, it is the price someone is willing to pay for those same profits, or the so-called sentiment. One moment, investors are very pessimistic and are willing to pay only 5 or 6 times profit for a company, and then you also get crazy spikes of euphoria like Nvidia, where they are suddenly willing to pay 218 times profit.
What someone is willing to pay and when this sentiment reverses cannot be predicted. What profits will do is easier to estimate. If you can also see through any temporary problems in the process and focus on the long term, you can see what will drive your stock market returns in the long term.
So if earnings and earnings growth is the most important thing, does the purchase price matter if they are very high-growth companies, like possibly Nvidia? Yes, because that growth is not infinite and, moreover, there can always be a sudden change that causes growth to shrivel up or even disappear completely.
Unexpected things happen more often than you think when investing and if you overpaid it hurts a lot. The ideal kind of investments are growing companies that you can estimate relatively well, but where you don’t pay for that growth.
Nor does such growth always have to be tremendously large. Sometimes a slow-growing company can be a great investment. Especially if it can buy its own shares cheaply for years, as Tessenderlo is now doing and before that Picanol did with Tessenderlo’s shares.
Whatever the short term brings, in the long term we have full confidence in our portfolio. Occasionally there will be companies among them where not everything goes as desired and we will have to take a loss, but the majority of the companies continue to run well, which is why we see the future as bright.
Transactions
Going forward, the number of transactions will be lower than in the past. Since the beginning of this year, Bonava, Marinemax and Nextensa were bought. Of which Marinemax is a small start position where we are still considering whether to expand it or liquidate it. Both Bonava and Nextensa, together with Bellway, are engaged in property development where they are setting up entire neighbourhoods. The construction sector is currently being crushed on the stock market and we see good opportunities there with these companies ranging from Austria to Sweden and England and everything in between.
In addition, existing core positions were expanded: Sofina, Tessenderlo and Somero. Why go look elsewhere when you already have very nice portfolio companies that became cheaper?
On the day NAV closed for the merger on 12/5, no sale had happened. It was only in the weeks that followed that Kernel was sold.
Kernel is a Luxembourg-based company with agricultural operations in Ukraine listed on the Polish stock exchange. Kernel was bought substantially below its book value because of the threat of war in Ukraine. The analysis at the time, that Russia would not get beyond the eastern regions proved correct, but the impact of the blocking of exports was underestimated. In itself, Kernel continued to perform well under the circumstances and the fertile land in their possession will also retain its value in the long term, in short, no reason to panic.
But, because of the hugely depressed share price, the main shareholder decided to make an offer for all Kernel shares, below the share price at the time, with the pressure of delisting Kernel. This ridiculously low bid was actually a slap in the face to other shareholders. It’s not only us that feel so, but also other funds like Lind Value, which we then consulted with. However, like Lind Value, we had to recognise that Poland’s stock market is not yet of the same order as those in Western Europe and America. The protection of the small shareholder is not sufficient which forced us to exit at this ridiculous price.
The fund
The results below refer to the NAV calculation made before the merger, with a cut-off date of 12 May.
From now on, there will also be a distinction between A-class and T-class in reporting. The biggest losers and winners are of course the same for both classes.
As of 1 January this year, these are the biggest winners and losers:
Since the start of the fund (including before the merger), this gives the following picture for the companies still in the portfolio.
You will note Kernel still listed, since the sale happened only after the closure of the NAV.
Our five largest positions and cash were on May 12:
T-Class results
The T-Class only opened in October 2021, figures from before then have been recalculated prorata the performance of the A-Class.
Our calculated net asset value per T-Class share is €1,512.76 and 74.6% higher than the NAV.
A-Class results
Our calculated net asset value per A-Class share is €1,853.52 is 74.6% higher then the NAV.
As long as we can grow this intrinsic value, despite another small downward adjustment (Foot Locker) we are satisfied, the price will follow with time.
Company news core positions
Cake Box has given a positive update on the financial year ending 31 March. They expect a 5% increase in sales for the full year, after a difficult first half of the year. Profits are expected to be in line with market expectations.
Raw material costs have stabilised and transport costs have decreased, which will lead to a small improvement in margins in the second half of the year.
Despite rising costs, franchisees have been able to maintain margins through higher sales, supported by marketing. Cake Box and the franchisees have selectively raised prices so as not to deter customers, but despite the higher prices, customers have continued to come and new customers have been won.
Twenty new shops opened, bringing the total to 205. Although this is four shops less opened compared to last year, there have been no closures, which is somewhat surprising. Cake Box’s net cash position rose to £6.3 million at the end of March, indicating that the company is still profitable.
Tessenderlo sold its stake in Rieter Holding. Tack also sold private stakes and clearly wants to focus on where he can take the reins. That his daughter too is now part of the board of directors instead of sitting at other companies is something we consider positive.
Next meeting
We maintain the rhythm of quarterly video meetings. We are planning the next meeting on Thursday, 27 July. Virtual doors open from 19h15, start at 19h30.
Chess Capital Q2 quarterly meeting
Thursday, July 27 – 7:15 – 10:30pm
Time zone: Europe/Brussels
Participation information for Google Meet
Link for video call: https://meet.google.com/vst-mrcv-diu
Or dial: (BE) +32 2 896 38 97, PIN: 923 939 360#
More phone numbers: https://tel.meet/vst-mrcv-diu?pin=3741453114994
Anyone with questions about this letter or the transition to the new fund knows how to find us.
In conclusion, we would like to mention that from June we are again open to new partners. Anyone wishing to introduce us to friends or acquaintances is of course always welcome to give us a call.
Kind regards and thanks,
Sam & Joel