Newsletters

Cosan Ltd (CZZ) contributed 61bps to returns, as the NAV rose by +17% and the discount tightened from 15% to 6%, resulting in share price returns of +31%. Underlying holding companies Cosan SA (72% of CZZ’s NAV) and Cosan Logística (31%) both performed well, returning +12% and +8% respectively over the month.

We initiated our investment in CZZ in July 2017, with a thesis predicated on the quality of the underlying assets, the strong management team in place, and the potential upside from group simplification. It is clear to us that the ultimate intention of CZZ’s Board and Management is to directly own its underlying investments through a collapse of its holding structure. In January 2019, CZZ started this process by taking Comgás – a listed subsidiary of Cosan SA – private.

The market reacted positively to this transaction, as evidenced by the tightening of the discount from 26% to 6% over the past year. Discount tightening was also supported by share buybacks amounting to 9% of outstanding shares – a move which we applaud given the risk-free accretion to NAV per share it generates for remaining shareholders. Aligning AGT’s capital with capital allocation-savvy managers is always an attractive opportunity.

Over its lifetime, the CZZ position has been a successful one for AGT’s portfolio, with a multiple on cost of 1.7x and an IRR of 36% (local currency). Returns have been driven by a combination of NAV growth (+80%) and a tightening of the discount from 33% (weighted average across purchases) to 6% currently. With the discount at increasingly tight levels, we have been trimming the position on share price strength over the past year, such that CZZ now accounts for 2% of AGT’s NAV.

Cosan Ltd (CZZ) was the second-largest contributor in July, adding 50bps to returns. The share price rose +10%, benefitting from strong NAV growth (+12%) but dampened by a 1% widening of the discount to 28%. Both of CZZ’s underlying holding companies – Cosan SA and Cosan Logística – performed well with share prices up +10% and +5% respectively. We continue to believe that CZZ offers attractive returns from a high-quality portfolio of operating companies and ongoing efforts to simplify the holding structure which should result in a structurally tighter discount. To date, CZZ has been a successful investment, with an IRR since initiation in July 2017 of +26% in USD terms (+31% in GBP).

Cosan Ltd (CZZ) was the third-largest contributor over the month,
adding 26bps to AGT’s returns. Cosan’s NAV rose by +5% in May,
although this was tempered somewhat by a 1% widening of the
discount, with an overall share price gain of +3%. Cosan SA (71% of
NAV) posted consensus-beating EBITDA growth of +11%, although
sugar prices continue to weigh on the company’s results. Comgás
posted EBITDA growth of +14% and the fuel distribution business
continues to grow volumes strongly and outperform peers. On a lookthrough
basis (i.e. valuing the holding companies underneath CZZ at
NAV rather than market price, as these companies too attract
discounts), CZZ trades on a 49% discount to NAV. We view this as extraordinary given the quality of the underlying businesses and
management’s ongoing attempts to tackle the discount. Examples of
management’s adept capital allocation include share buybacks,
cancelling a large proportion of treasury shares, and the recent tender
offer by Cosan SA for the portion of Comgás that it does not own. Over
the medium-term, we estimate that the returns from de-complexifying
CZZ’s holding structure would be in the order of 49% which, together
with NAV growth from the underlying holdings, would result in
compelling returns for shareholders.

Elsewhere in BTEM’s portfolio, an excellent month for Cosan Ltd (CZZ)
saw it add 86bps to BTEM’s NAV despite a widening discount (a share
price increase of +25% in USD terms lagged NAV growth, with the
discount moving out from 25% to 33%). Cosan SA, the principal holding
company beneath CZZ, announced that it would buy out the remaining
18% of Comgás, a Brazilian gas distributor, at an 18% premium to the
pre-offer market price. While we applaud management buying more of
what is already a successful investment, the acquisition – perhaps more
importantly – indicates CZZ’s seriousness in reducing the complexity of
its holding structure which has led to an excessively wide look-through
discount of 52%. We estimate the share price gain from simplifying the
ownership chain into a single-holding structure should be in excess of
+55% assuming a more normalised discount level.

We wrote extensively on Cosan Ltd in last month’s newsletter. For the
second consecutive month, it was one of our best performers despite a
headwind from a weakening Brazilian real. At the end of the month,
Cosan announced a $100m tender offer (approximately 4% of shares
outstanding), at a 10-15% premium to the previous day’s close. This
underscores the significant undervaluation the controlling shareholder –
like us – sees in the shares.

A convincing victory for the “Trump of the Tropics” Jair Bolsonaro in the
Brazilian presidential elections and – more pertinently for markets – the
appointment of Chicago-trained economic adviser, Paulo Guedes, to his
cabinet sparked a sharp rally in what had been one of the year’s worst
performing markets with both the local market (up +9%) and the Real (up
+11% vs GBP) staging a pronounced recovery. Cosan Limited (CZZ)’shares,
which are traded in USD, soared by + 24% while GP Investment (GP)’s were
up +11%.

For CZZ, there were key idiosyncratic drivers in addition to the political and
broader market developments. As a reminder, CZZ’s complex corporate
structure has resulted in a huge amount of value being trapped in the double
discounts that prevail between CZZ and its investments in two other listed
group holding companies, Cosan SA and Cosan Logistica, and in turn between
these latter two companies and their underlying investments (Raizen Energia,
Raizen Combustiveis, Comgas, Moove, and Rumo). CZZ’s look-through
discount was an astonishing 56% at month-end. Alongside the attractive
underlying assets, our investment case for CZZ is predicated on our conviction
that the family’s ultimate goal is to collapse the structure.

During the month, it was announced that Cosan SA would acquire Cosan
Logistica in an all-share deal. While this would have simplified the corporate
structure to a degree and allowed Cosan Logistica shareholders to benefit from
the above-market bid, the greater discount on which Cosan SA trades relative
to Cosan Logistica would have resulted in heavy dilution for Cosan SA
shareholders. Furthermore, as we communicated to management, it did little
to eliminate the double discount. It would appear our views were shared by
other shareholders as, just following month-end, the plans were abandoned.

The receptiveness to shareholder feedback and regard for minority
shareholders reflects well on management and the family. While this specific
transaction was sub-optimal, it confirmed to us that a simplification of the
structure is a top priority and we expect work is already underway on
alternative transactions. On a broader point, it also provided support for our
typical strategy across all our holding company investments (whether in South
America, Europe, or Asia) of seeking to align ourselves with the controlling
families where possible (in this case, in CZZ rather than either of its two holding
companies further down the structure).

We expect GP – an internally-managed private equity investment company – to
be a beneficiary of more supportive Brazilian equity markets to the extent they
facilitate IPOs and trade sales of its portfolio investments. In the near-term, we
would highlight its investment in Centauro (13% of NAV at reported values).

While Centauro filed for an IPO in Oct-17, the process has been on hold
pending the results of the Brazilian elections. Centauro is a successful omnichannel
sports retailer which we estimate is held at 9x EV/EBITDA in GP’s
NAV. Listed peers trade at materially richer multiples, and our base case for
Centauro’s valuation upon listing suggests considerable upside. Furthermore,
a successful IPO of Centauro would result in an even larger proportion of GP’s
market cap being covered by listed securities which would serve to shine more
light on GP’s anomalously wide discount of 49%.

Cosan Limited (CZZ) was our most significant detractor. As discussed in
previous commentaries, macro-economic and political factors have weighed
heavily on the company’s share price, which is now down -31% for the year,
with two-thirds of the loss due to the weak Brazilian Real (CZZ is US-listed
and priced in USD). Our investment thesis remains intact with CZZ trading on
a 56% look-through discount. We remain convinced that the ultimate endgame
remains a collapse of the dual holding company structure.

Other material contributors included Cosan Ltd. despite its widening discount
(NAV up +12% due to discount narrowing at both of its intermediate level
holding companies, robust performance at underlying asset Rumo, and FX
gains); Pershing Square Holdings (NAV +4%); and Tetragon Financial
(discount narrowing).

Cosan Ltd (CZZ) was the most significant detractor, as its share price and
NAV fell by -15% each (4% due to FX – CZZ is US-listed despite being
entirely Brazil-exposed) over the month. Despite a truckers’ strike over fuel
prices continuing to rock the Brazilian economy and market, we believe the
investment case for CZZ remains intact. The prospects for long-term NAV
growth are good and with CZZ’s look-through discount of 58%, the
opportunity for returns from simplifying the double-holding company
structure – as management have indicated is their ultimate intention – is still
extremely attractive.

Cosan Limited, the US-listed holding company of two Brazilian holding
companies, was the second most significant detractor from performance, as a
truckers’ strike over fuel prices paralysed the Brazilian economy. During May,
the Brazilian Real weakened-6.5% against the US dollar contributing to a -9%
NAV decline. In spite of this short-term pain, the company remains an
extremely attractive investment trading at a look through discount of 58% with
the potential for a major corporate restructuring.

We discussed our investment case for Cosan Limited in last month’s
newsletter, and there were several further positive developments during the
month. To recap, Cosan Limited (CZZ) is the US-listed holding company of
two Brazilian holding companies – Cosan SA (CSAN3) and Cosan Logistica
(RLOG3) – and now trades at an extraordinarily wide look-through discount
of 57%. The underlying businesses are of high quality and modestly valued,
with the largest exposures being to fuel distribution, railroads, and
sugar/ethanol production.

In December, it was announced that advisors had been hired to look into a
potential spin-out of Cosan SA’s stake in Comgas, its Sao Paulo-focussed
gas distribution business which accounts for 23% of its NAV. Spinning this
stake up the chain to Cosan Limited should remove one level of discount
being applied to it. The second event came with the sale of Cosan SA’s
legal claims against the Brazilian government (relating to the setting of the
ethanol price) for R$1.3bn (6% of its NAV); the in-flow of cash will provide
more flexibility for buybacks, special dividends, and may help facilitate further group restructuring. Lastly, the CEO and CFO at Cosan SA were
replaced by their counterparts at parent Cosan Limited. With the same
management team now in place at Cosan Limited and Cosan SA, our
suspicions that an outright collapse of the holding structure is the ultimate
goal have been reinforced. Cosan Limited’s shares were up +5% over the
month, yet its discount widened significantly as its NAV increased +18%.
We added to our holding.

We initiated a new investment in Cosan Limited earlier this year and recently
finished building our position to its target weight. Cosan Limited (CZZ) is the
US-listed holding company of two Brazilian holding companies: Cosan SA
(CSAN3) and Cosan Logistica (RLOG3). This complex structure has created
a look-through discount of 52%; with CZZ trading on a 25% discount,
CSAN3 on 39% and RLOG3 on 26%. The underlying businesses are of high
quality and modestly valued, with the largest exposures being to fuel
distribution, railroads, and sugar/ethanol production. Management have
indicated they are exploring ways to eradicate the complex structure, and
recently demonstrated an eye for shareholder value by announcing a tender
offer for 8% of outstanding shares which we estimate will generate 2% of
NAV accretion. CZZ’s share price increased by 7% over the month.