market folly

Christopher Cooper-Hohn's Children's Investment Fund is out with its 2012  Q4 letter and we wanted to highlight some excerpts.  One of the main takeaways here is that Porsche SE is now Children's largest holding.  The fund had a great 2012 and was up 29.52% for the year.


Children's Top 5 Holdings At 2012 Year-End

1. Porsche SE: 20.6% of Fund NAV
2. Lloyds Bank Bonds: 17.6%
3. News Corp: 15.4%
4. Japan Tobacco: 14.7%
5. Aurizon (QR National): 13.7%

Porsche shares have appreciated considerably over the past few months, but Cooper-Hohn thinks there's more room to run, with an upside of 160%.  They see 4 ways they can profit from the investment: "strong underlying performance of the investment in VW, a successful and benign resolution of the legal cases, large and increasing dividends from VW flowing through to Porsche shareholders, and the longer-term potential for a merger between Porsche and VW."


News Corp: Publishing Assets Undervalued?

Cooper-Hohn has previously talked about his News Corp position, but his latest letter breaks down how the company's spin-off of the publishing assets could come as a surprise.

While Children's has a 'pessimistic' view on print, they do acknowledge that valuation could easily double to $10 billion based on the new publishing co's assets:

" •    $0.5bn of cash: This likely be higher as the group is still considering how much cash to allocate to PubCo, but any change should be a wash with the change in the market cap.
•    $3.0bn: 50% stake in Foxtel, Australia's main pay-TV provider in a third of all homes in Australia. 14x net operating profit after tax (nopat).
•    $1.5bn stake in RealEstate.com: the listed and dominant online property listings company in Australia.
•    $1.5bn: at 10x EBIT, 14x nopat the Australian Cable Network (Fox Sports Australia) assets which account for 27% of PubCo EBIT are clearly worth a higher multiple than the publishing assets.
•    $0.7bn: listed stake in Sky Network Television, a New Zealand pay-TV operator.
•    $0.5bn: Harper Collins book publishing on 8x nopat.
•    $3.2bn: Newspapers on 8x nopat: includes DowJones, New York Post, HarperCollins, News America Marketing, Australian Publishing and UK Publishing.
•    $0.5bn: The PubCo also has NOLs and capital loss carryforwards of $1.2bn. These probably need a huge discount, but should have some value.
•    $0bn: The Education business Amplify will generate $180m of losses in 2013. These losses are capitalized in many valuation approaches. First, we think this is a credible enough investment to be valued at zero rather than negative $1.2bn (10x $120m nopat losses); News Corp will clearly argue it’s worth a considerable premium to NAV, let alone zero. Second, the company guides to a sharp narrowing in these losses over the coming years which will actually contribute strongly on a starting base $535m PubCo EBIT in 2013."

Overall though, Children's sees NWSA as a story on affiliate/re-transmission re-pricing as they focus on the Fox Entertainment Group. 


Disney: Entering a 'Multiyear Growth & Re-rating Phase'


Sticking with media, Cooper-Hohn also shared thoughts on Walt Disney (DIS).  He writes,

"We believe we are in the midst of a very long-term transfer of economics from distributors to content providers which, as we argued at our investor conference, is still in an early phase ... For the last decade, this power shift has driven consistent 8-10% pricing growth, a unique and truly giant expression of pricing power. Disney has arguably the strongest bargaining leverage of its peers and we are entering an affiliate re-pricing cycle which we think delivers some acceleration in pricing, off this extremely high base for the next 3-4 years."

He also points out how the company is finishing its massive capex at its parks and will soon begin to see margin expansion.

For more from this hedge fund, we've posted up Cooper-Hohn's presentation from the Sohn London Conference where he talked about being long News Corp and Porsche and short Fiat.  Additionally, you can view excerpts from Children's Q3 letter on Porsche and Japan Tobacco.