Jamie Ross, Fund Manager of Henderson EuroTrust, provides a snapshot of the typical analysis undertaken on every company considered for the portfolio. In this case, he explains the rationale behind the inclusion of the Swiss packaging company SIG Combibloc.
When considering an investment for the Henderson EuroTrust portfolio, we tend not to focus on market noise or any technical factors; the main thing we are doing is trying to establish whether what we are looking at is a good company or not. This is a key part of the research process.
There tend to be many features that most good companies have in common, but there are myriad characteristics and features to analyse that will be unique to each and every business. By undertaking detailed analysis of the 50 or 60 companies we have on our radar (a portfolio of ~40 positions and a watch list of 10-20 names) we try to ascertain whether a business is a good business and if so, whether now is the right time to be invested or not.
We have held a position in the Swiss-listed packaging company SIG Combibloc since its listing in late 2018. When we analyse companies, we focus our attention on the following five areas; ‘Potential returns and margin of safety’, ‘Quality and sustainability’, ‘Mispricings’, ‘Catalysts’ and ‘Fundamental and technical momentum’. Our analysis of SIG highlighted a business that scored very highly especially on the second of these five categories of analysis; we see SIG as a high-quality company managed with a sustainability-focused mindset and our original investment thesis was based on the following key premises.
First, the product they sell, aseptic packaging, is an essential component in the food value chain. Aseptic packaging enables the safe storage and transport of long-shelf life items such as UHT milk, soups and even water. This type of packaging is used extensively throughout the world, both in developed countries and in developing countries. In some developing countries, the importance of the product is heightened by the lack of refrigerated supply and distribution chains. Aseptic packaging is nearly 100% recyclable, and this positions it well against other packaging solutions. The food industry is characterised by steady, defensive growth and this is something that benefits the business.
Second, the economics of the business model are very favourable. SIG sell or ‘place’ their filling machines with food companies. These filling machines are placed with a multi-year volume-based contract in place for the purchase of the aseptic ‘sleeves’. This is a classic, ‘razor, razor-blade’ business model and one that provides high degrees of revenue visibility. In addition, the aseptic packaging industry is very consolidated with only two players operating at scale on a global and on a regional basis; SIG Combibloc and their larger, better-known peer Tetra Pak. Consolidation brings a stable industry where innovation rather than pricing leads discussions with potential customers.
Third, SIG is a company very focused on innovation. It is this focus that both maintains their competitive standing against Tetra Pak, but also makes it hard for new entrants to gain a foothold in the market. SIG work on innovation in conjunction with their customers. If a large food company wants to try a new style of packaging for a particular product, SIG will work with them to develop it. This symbiotic relationship is a powerful driver of sticky behaviour from customers.
Fourth, for the reasons outlined above together with other factors, this is a high Return on Invested Capital (ROIC) business model. This means that when SIG invest in new filler machines, they make a very strong financial return on this investment (far higher than their cost of capital); thus as they invest, they grow their book value or net worth.
As with every investment decision we make, there are many other factors that we analyse such as the quality of the management team, the approach to capital allocation, cash flow generation and the management of the balance sheet. For us, SIG has long ticked the boxes as a quality, long term focused business.
Return on invested capital: the amount of return a company makes above the average cost it pays for its debt and equity capital.