AGT Avi Global Trust Plc

AVI GLOBAL TRUST PLC

Monthly Update

AVI Global Trust plc (the "Company") presents its Update, reporting performance figures for the month ended 30 November 2024.

This Monthly Newsletter is available on the Company's website at: AGT-NOVEMBER-2024.pdf

This investment management report relates to performance figures to 30 November 2024.

Manager's Comment

AVI Global Trust (AGT)'s NAV increased +2.8% in November.

For the second consecutive month Apollo (+105bps) was the top contributor and we provide an update on the investment below. News Corp (+74bps) and Chrysalis (+70bps) were also meaningful contributors.

At the other end of the portfolio, a relatively new holding in Rohto Pharmaceutical was the most significant detractor (-51bps). We have been adding to the position and introduce the investment case below. Dai Nippon Printing (-36bps) and FEMSA (-21bps) also detracted.

Apollo Global Management

Apollo ("APO") shares continued their ascent, rising a further +22% over November, buoyed first by stellar Q3 results and then - just a day later - by a US election result that poured rocket fuel on the US financials sector as a whole - and the alternative asset managers (AAMs) in particular - on optimism around a revival of deal activity and the prospect of a more benign regulatory environment. The shares ended the month at $175. Remarkably, we took the opportunity to add to our position at $100 as recently as August 2024, when the shares overreacted to a Q2 earnings miss.

We believe APO's share price has led the post-election charge amongst its peers for two specific reasons.

Firstly, there had been growing concerns that its life insurance business, Athene, (more accurately described as Retirement Services), may become subject to increased regulatory oversight given an increasing media focus on "private equity owned insurers". While even this label is highly misleading, suggesting as it does that insurers like Athene either sit within limited life funds - they do not - and/or that their balance sheets are loaded with private equity investments managed by their owner - in most cases, certainly in Athene's, they are not - the fact is that the election result reduces the probability of tightened regulation to close to zero.

Secondly, there is a heightened prospect of alternative investments being allowed into the $12trn 401(k) US pension market. While there are no legal restrictions on such pension plans investing in private assets, fears of litigation have prevented any such moves to date. Such fears are likely to be diminished under a more permissive regulatory regime.

We note APO CEO Marc Rowan's comment some time ago that "we are likely one administration away" from changes here. It is very possible that the US election result may well mean that administration has arrived. With its experience in retirement services via its ownership of Athene and having been first to identify what Rowan terms the Fixed Income Replacement Opportunity (replacing a portion of the ~$40trn public investment grade market with private investment grade credit), APO is best placed of all its peers to capitalise on an opening up of the 401(k) market.

We bought APO in 2021 at a time when we believed the AAM sector was misunderstood and undervalued; when valuations for balance sheet heavy companies like APO and KKR (AGT also owned KKR until recently) within the sector were overly penalised; and when APO's share price was suffering from the scandal around former CEO Leon Black's links to Jeffrey Epstein. Our thesis was that the market viewed the companies as levered plays on financial markets when, in fact, the bulk of their value, resides in their high-quality, visible, recurring, and predictable streams of fee-related earnings derived from management fees charged on long duration capital.

In the specific case of APO, there were also concerns ahead of its merger with its sister company, Athene. Life insurance businesses are, understandably, often lowly rated by the market. But the reasons why they are so - unpredictable liabilities with tail risks (e.g., long-term care) and hard-to-hedge liabilities such as Variable Annuities - simply do not apply to Athene which has a highly focused business model predominantly centred on fixed annuities.

As such, Athene can be looked at as effectively a spread-lending business, earning a spread between the rates paid on annuities and the yields earned on its investments. Its fixed income portfolio (95% of total assets) is 96% investment-grade, with Athene seeking to earn a return premium from complexity and illiquidity rather than from taking duration or additional credit risk and targeting a mid-to-high-teens return on equity. Life insurance businesses are also correctly perceived as being capital intensive, and this was a source of some disquiet when the Apollo/Athene merger was announced. But capital intensity is not a bad thing if one is earning high returns on that capital; and, as we understood at the time, a material proportion of Athene's growth was likely to be funded by third-party "sidecar" vehicles.

While consensus estimates of forward earnings have increased over our holding period, the bulk of returns have come from multiple expansion as the market has favourably re-assessed the company's earnings quality and the duration of its growth opportunity.

With our view and that of the market now much more aligned, we sold our position in the first half of December just after the announcement of APO's inclusion in the S&P 500. This long-awaited event was met with a disappointing reaction by the market, perhaps because the shares being on the cusp of inclusion for so long means it was more priced in than we thought.

We are still pleased with overall returns of +166% and an IRR of +41% over our three-and-a-half year holding period vs. +28%/+9% for the S&P 500 and +42%/+13% for the S&P 500.

Rohto Pharmaceutical

Rohto Pharmaceutical ("Rohto") is the largest skincare and eye-drop manufacturing company in Japan. We first initiated into the company in June 2024 and it is currently a 4.3% weight in the AGT portfolio.

Rohto exhibits many of the qualities we look for at AVI, with an investment case predicated on 1) Rohto's underlying business quality, having grown its top-line consistently at +12.8% P.A over the last five years and generating a mid-teens EBIT margin; 2) the company's position as the number one player in the domestic self-selection skincare and eye-drop industries; and 3) despite the business' superior underlying quality and stronger growth versus other Japanese skincare peers, the company continually traded at a steep discount.

Rohto has a portfolio of very profitable brands in multiple categories. Japan and Asian account for around 90% of total sales, and the company enjoys operating margins of between 15-16% in the region. Elsewhere, the company has benefitted from strong global customer growth, with revenue growing at an annual rate of +15% in the US and +10% in Europe. Since Kunio Yamada, the current Chairman, assumed the role of CEO in 1999, the skincare business has grown strongly, and with a 5-year track record of growing operating profits at +13% CAGR. We believe by refocussing management's efforts, there is potential for an even higher sustainable earnings growth rate, going forward. Despite significantly outperforming its peers, based on its profitable and stable brand portfolio, Rohto trades at an EV/EBIAT multiple of 13.0x compared to the peer group average of 18.2x.

From our research, it is AVI's belief that Rohto's undervaluation could be explained by the lack of focus on its core businesses, misleading IR communication, and lower allocation to shareholder returns than its peers. Specifically, management needs to reallocate its R&D spending from low-profit business areas such as the prescription drug business and regenerative medicine business, towards its high-value, high market share product lines, such as skin care products (e.g., Obagi, Melano CC, Hada Lab). Despite having a +14% operating margin, outperforming the peer average of +6%, Rohto's inadequate IR communication about its business portfolio and growth story contributes to its significant relative undervaluation. Finally, Rohto's total shareholder return ratio is just +22% vs peers +64%, leading the market to perceive the company as having low awareness of increasing shareholder value through the realisation of an optimal capital structure and appropriate shareholder returns. Positively, corporate governance is improving, and with a diverse Board in terms of experience, age, tenure and gender, we look forward to engaging with the company with constructive suggestions to rectify the undervaluation.

Rohto was the largest detractor over the month, detracting -52bps from AGT's NAV, following a weak set of 1H results with operating profit coming in well below consensus. While the top line grew steadily, the weak earnings was reflective of management's continued lack of focus on the core business, allocating resources to the non-core, low-margin regenerative medicine segment. We intend to leverage our long track-record of active engagement to form a constructive relationship with management, remedy the company's failings and unlock substantial value for all shareholders.

Contributors / Detractors (in GBP)

Link Company Matters Limited

Corporate Secretary

13 December 2024

LEI: 213800QUODCLWWRVI968

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