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EXOR shares returned +7% during February as a +6% increase in the NAV was boosted by a slight narrowing of the discount from 45% to 44%. During the month, all three main assets – Ferrari, Stellantis and CNH – reported Q4/FY results.

Results from Stellantis (the autos company that resulted from the merger of Fiat Chrysler [FCA] and PSA) were particularly impressive, leading to a +15% share price return over the month. In 2H22, sales and operating profit grew +19% and +17% year on year, both coming in +4% ahead of consensus expectations. The broad trends that typified 2021 and 1H22– low volumes, strong pricing, high margins – were still present, albeit less pronounced and

versus a more demanding comparison period. The full-year group operating margin of 13.0% is a real yardstick of success – driven not only by exceptional North American performance (16.4% margin), but also performance in Europe that was previously unfathomable (9.9% margin vs. the FCA European businesses which was loss-making in five of the last eight years to 2020, with 3.2% the highest margin achieved).

Longer-term readers of our letters may remember that FCA’s extreme undervaluation and the scope for value creation through industry consolidation were key attractions that initially led us to invest in EXOR in 2016. The latter of these two points has of course occurred, with the formation of Stellantis. 2022 results serve to highlight just what a success the merger has been, with Stellantis achieving €7.1bn of net cash synergies – exceeding the €5bn target more than two years ahead of plan. However, the first point – valuation – remains unresolved, with Stellantis trading at a 21% free cash flow yield and roughly half the PE multiple of Ford and GM (adjusted for accounting differences). The recent announcement of a €1.5bn share buyback further highlights the attractive valuation, and combined with the proposed dividend will see a total of €5.7bn (11% of market cap) returned to shareholders.

The past 18 months have been challenging but profitable ones for the auto industry, as volume scarcity has led to increased pricing power, lower levels of dealer incentives and higher margins. Inventory levels are starting to normalise and the path ahead now appears less rosy. With industry-leading breakeven points and a rock-solid balance sheet, combined with the upcoming launch of the RAM BEV, we believe this could be exactly the environment in which Stellantis’ quality is recognised.

EXOR was the most meaningful contributor to returns over the month. The shares rose +10%, as a +6% increase in the NAV was boosted by a narrowing of the discount from 44% to 42%. Since early September when the discount hit 50% shares in EXOR have rallied +25%.

Ferrari (32% of NAV), Stellantis (22%) and CNH Industrial (19%) returned +6%, +9% and +17%, respectively. During the month all three companies reported Q3 results that were ahead of consensus expectations, with both Ferrari and CNH raising full year guidance alongside their results.

CNH in particular continues to perform well in its maiden year as a more streamlined agricultural (AG) equipment company, following the spin-off of truck maker Iveco at the start of the year. For the third quarter industrial sales grew +29% and operating profit by +60%. Gross and operating margins expanded by +260bps and +270bps respectively, with very strong price realisations more than off-setting increased product input costs. This is in keeping with performance earlier in the year, and further reiterates the material pricing power of the AG division, which benefits from low levels of dealer inventory, a powerful dealer network and relatively strong farm incomes. With the acquisition of Ag-Tech company Raven last year, CNH are taking steps to narrow the technological gap versus Deere, the #1 player in the oligopolistic industry. In turn there is room for the valuation differential to narrow further, with CNH trading at 10.4x next year’s earnings compared with Deere on 15.7x. CNH are transitioning to US reporting standards and there are reports that the company might move to a sole US listing, which should further help in this regard. Combined with the Iveco spin earlier in the year, this is indicative of corporate actions EXOR take to unlock hidden value in its portfolio companies.

Turning to the discount – which has narrowed from the depths but remains wider than average – we remain of the view that re-allocation of the proceeds following the sale of Partner Re for $9.3bn remains a key determining factor. EXOR is still (wrongly) perceived by many as a cyclical holding company overly exposed to Italy. As the portfolio continues to transition to higher quality, less capital intensive and cyclical assets, we expect the discount to narrow further. Combined with the prospects for NAV growth, we remain optimistic about EXOR’s prospective returns.

EXOR was a meaningful detractor, knocking 81bps off returns. The shares declined -13% as a -6% decline in NAV was compounded by a widening of the discount from 42% to 47%.

Starting with the NAV side of the equation, the key culprit was Stellantis (20% of NAV), shares in which declined -15% over the month, bringing year to date returns to -24%. Investors have grown increasingly cautious over the state of the global economy generally, and the US consumer specifically, whilst there is a broader debate in autos as to whether current record high margins and low dealer incentives will stick when volumes (hitherto restricted by shortages of semiconductor chips) return. Stellantis now trades at 3x consensus 2022 earnings – a ~40-60% discount to Ford and GM once adjusting for accounting differences. As one sell side analyst put it in a recent note: “What does the market fear? Clearly the answer is “a lot”. With such low expectations there appears ample room for surprise on the upside – much to the benefit of EXOR’s NAV.

As we have noted at various points this year, whilst discounts have been widening in the main they haven’t yet reached the screamingly cheap levels observed in other market corrections. At a 47% discount EXOR on the other hand is now approaching that stage. The maths of discount returns from extreme levels are powerful: a return to the 35% five-year average takes the shares +23% higher, whilst a re-rating to the low 20s (where EXOR traded, albeit rather briefly, pre-pandemic) yields a return of +50%.

So what events might lead to this happening? In our view, it likely all comes down to the allocation of the ($9bn) Partner Re proceeds. Holding companies must give investors a “reason” to own their shares and as such diversification into attractive quality unlisted assets is an important step in sustainably reducing the discount at which EXOR trades. Shortly after quarter-end it was announced that EXOR will invest €833m (3% of NAV) for a 10% stake in Institut Mérieux, the unlisted healthcare-focused holding company of the Mérieux family. The vast bulk (~80%) of Institut Mérieux’s value lies in a 59% listed stake in bioMérieux, the in vitro diagnostics business focused on infectious diseases. We expect EXOR to continue to allocate capital to higher growth, less cyclical and industrial assets such as this, which over time will help shift investor perception and the discount. Combined with the prospects for NAV growth, prospective returns appear attractive.

During the month EXOR announced an agreement to sell reinsurer Partner Re (25% of NAV) to Covea for $9bn. This is the second (and hopefully last!) time such a deal has been agreed.

As readers will remember the same deal was agreed in March 2020, only for Covea to renege on their offer a little while later. John Elkann, EXOR’s chairman, stood firm and did not allow Covea a cut-price deal.

EXOR, Partner Re, and Covea did manage to stay on amicable terms, keeping the relationship open through an agreement for Covea to invest in special purchase reinsurance vehicles managed by Partner Re. In turn this, combined with Covea’s lack of other credible means through which to enter the reinsurance business, meant a new deal was agreed this October.

In relative terms Partner Re was not an especially successful investment for EXOR, returning an estimated +45% inclusive of dividends, versus a +109% return for the MSCI ACWI ($). That said, we felt it provided a useful counter-weight to the inherent industrial cyclicality found in other parts of EXOR’s NAV. Certainly though, reinsurance was a harder business than EXOR anticipated, and their ownership period coincided with what was an unusually difficult operating environment.

Post-deal (inclusive of EXOR’s purchase of Covea’s special purpose reinsurance fund interest), EXOR will have gross cash of €8.1bn (26% of NAV), and net cash of €3.9bn (13% of NAV). Rumours continue to swirl that EXOR will make a sizable investment in the luxury goods industry. Time will tell and the devil will be in the detail, but directionally it seems the re-orientation of EXOR’s portfolio to higher quality assets bodes well for the discount. EXOR shares jumped +12% over the month yet still stand at a 36% discount. There seems ample room for this to tighten and we look forward to hearing more about Mr. Elkann’s capital allocation plans at the upcoming Investor Day later in November.

We initiated an investment in EXOR in December 2016, with a key element of the thesis at the time being the undervaluation of FCA (now Stellantis, 28% of EXOR’s NAV). Now, almost five years later, Stellantis continues to form a major part of our investment thesis. There are, in our view, several reasons to be excited about the company’s prospects:
1. Following the merger, Stellantis is targeting €5 billion of annual cost synergies over the medium-term. For context, Stellantis is expected to earn operating profits of €11 billion in 2021. If the synergies are achieved – and our view is that the CEO, Carlos Tavares, has a credible track record in this regard – they will significantly add to profitability.
2. Stellantis held an “Electric Vehicle Strategy Day” in early July, highlighting that it would invest €30 billion over five years in electric vehicle development. By 2025 Stellantis will have a 100% electrified portfolio across 4 battery electric vehicle (“BEV”) platforms. The merger and scale that it brings means that management believe they can do this c.30% more efficiently than peers, with plans for capex and R&D spending to total 8% of sales. In our view the market continues to under-appreciate Stellantis’ EV strategy, on both an absolute and relative basis, and we view the EV day as an important initial step in changing the narrative.
3. During the strategy day, management also indicated that long-term operating margins are now expected to be in the double-digits – previous guidance had been for 5.5-7.5% margins. Achieving this will likely make Stellantis the most profitable traditional automaker in the world.

Despite the above, Stellantis trades a 25-35% discount to Ford and GM on a PE and EV/EBIT basis. The common push back for a long time has been their EV strategy. We believe it is becoming increasingly hard for the market to ignore the progress here, although we are aware that it might take until next year’s capital markets day, and more details on the North American EV pickup launch, to drive a re-rating. We view 4x EBIT as very good value for the potentially most profitable auto maker, run by an excellent management team and controlled by two families likely to prioritise shareholder returns.

CNH Industrial (19% of EXOR’s NAV)’s plans to split the company into separate “on-highway” and “off-highway” businesses continues to progress, and will hopefully shine a light on the attractive agriculture business. CNH recently announced the acquisition of Raven Industries for USD2 billion, which should help it to improve its precision-farming offering, and thus compete better with key rival John Deere. A stronger competitive position, combined with a supportive demand backdrop and higher commodity prices (leading to higher farm incomes), bodes well for CNH’s profitability. We estimate that CNH trades on a material discount to a sum-of-the-parts model, suggesting potential upside both from earnings growth and a multiple revaluation.

EXOR trades on a 41% discount to NAV – unusual at a time when many of its European holding company peers trade at narrow discounts or even premia. We believe this is excessively wide given EXOR’s track record of value creation, and the attractive prospects for NAV growth that we have highlighted. We note, further, the recent investment in Christian Louboutin, which is indicative of the type of higher-quality asset in which the company will invest in the future. As the impression dissipates that EXOR is a sleepy, industrial, cyclical holding company, we expect the discount will narrow.

EXOR was the fourth-largest contributor to returns over the month, adding 60bps to returns as the NAV rose +7%, bolstered by a 4% tightening of the discount. Just after month’s end, shareholders voted to approve the merging of FCA with Peugeot to form Stellantis, creating the world’s third-largest autos manufacturer by sales and triggering a special dividend payout of EUR2.9bn for FCA shareholders (a 12% yield). Carlos Tavares, CEO of Peugeot, will become CEO of Stellantis. Mr Tavares is well-regarded as an efficient operator with an ability to cut costs, realise synergies, and successfully integrate acquisitions (as he did with the acquisition of Opel in 2017). As such we are excited about the prospect of strong profit growth for the new combined company, with the potential for industry consolidation having been one of the initial attractions that led to our investment in EXOR.

EXOR trades on a 35% discount to NAV which, as we have said previously, likely reflects a legacy misconception that EXOR is a cyclical European industrial holding company. It goes without saying that we disagree with this assessment, and point to Ferrari and Partner Re as examples of the diversified nature of EXOR’s holdings. Furthermore, there is significant merit in holding high-quality cyclical companies such as FCA and CNH Industrial as the global economy recovers from COVID-19. EXOR’s share of the FCA special dividend will amount to c. EUR830m, which may be used to fund NAV-accretive buybacks, or as firepower to fund a sizable new investment.

EXOR, which we had added to earlier in the autumn, was the second-largest contributor to returns over the month, adding 114bps. Its NAV rose +18% which, together with a tighter discount, resulted in a share price total return of +31%. Particularly strong performances were generated by FCA (27% of NAV) and CNH Industrial (15%), whose share prices rose +24% and +38% respectively as they participated in the strong rally in cyclical stocks sparked by the vaccine news. CNH’s performance was further boosted by its quarterly results, posting sales and earnings figure strongly ahead of consensus estimates. Despite the strong NAV growth, the shares continue to trade on an estimated 38% discount to NAV, which we believe reflects a legacy misconception that EXOR is a cyclical industrial holding company. This impression is contradicted by holdings in Ferrari and Partner Re (collectively, 64% of NAV), which certainly do not fit the classification of ‘cyclical industrials’. Furthermore, we see significant merit in owning high-quality cyclical companies (such as FCA and CNH) as the global economy begins its recovery from the shock of the pandemic. We believe that EXOR’s management agrees with our prognosis and are keen to correct this misperception. At the current valuation level, and with significant potential for further NAV growth, we continue to view EXOR as a highly attractive investment opportunity.

EXOR was your Company’s largest contributor, adding 43 basis points (bps) to returns as the NAV rose by +6%. The discount tightened from 31% to 28%, resulting in total share price returns of +12%. Fiat Chrysler Automobiles (FCA), 28% of EXOR’s NAV, was the star performer with a share price rise of +17% following the announcement of its merger with Peugeot. A large part of our thesis for EXOR has been the consolidation of FCA with a large competitor. Under the terms of the deal, FCA shareholders will receive c. 30% of the pre-announcement share price in the form of a special dividend as well as a distribution of Comau shares (a company specialising in industrial automation in which FCA holds a stake), and will own 50% of the combined entity post-merger. Taking just 50% of the expected annual synergies adds 31% to FCA’s earnings, highlighting the accretive nature of the deal.

The deal will create the fourth largest autos manufacturer globally, with annual sales of ~9m vehicles. We view the combination as eminently sensible, given the complementary nature of each company’s geographic operations (e.g. PSA has a large, profitable business in Europe, but low exposure to the Americas; FCA is much stronger in the US than it is in Europe), and the ability to generate cost savings through scale and increased purchasing power. The Agnelli family behind EXOR – particularly John Elkann – has a history of savvy capital allocation at FCA, such as the spin-out of Ferrari and CNH Industrial to unveil hidden value, the sale of parts manufacturer Magneti Marelli to KKR/Calsonic Kansei, and now the planned merger with Peugeot. By aligning AGT’s capital with the Agnelli’s holding company, EXOR, we benefit from this long-term view and disciplined, value-creating approach to capital allocation. At the current 28% discount, we continue to see considerable value in the shares with multiple levers of value creation available, including a spin-out of Maserati & Alfa Romeo from FCA, the planned split of CNH Industrial (16% of EXOR’s NAV) into two specialised companies, and the use of special dividends to conduct NAV-accretive buybacks at the EXOR level.

EXOR was AGT’s second-largest contributor, adding 57bps to returns. The share price rose by +10%, driven by a +6% increase in the NAV and a contraction in the discount from 34% to 32%. EXOR’s main listed assets – Fiat Chrysler Automobiles (FCA)(25% of NAV), Ferrari (30%) and CNH Industrial (15%) – all performed well, with share price increases of +7%, +12% and +16% respectively. It was a turbulent month for FCA, as it withdrew from merger talks with Renault; this was a disappointing development, as the proposed deal would have created a European giant capable of dealing with the next generation of challenges: electrification of vehicles and autonomous driving. Management expected annualised synergies of €3 billion (13% of market cap) to accrue to FCA shareholders. While the deal is struggling –with Renault blaming the French state for delaying a crucial vote, andthe French state blaming Nissan for not supporting the deal – we do not believe it is dead yet. The recent resolution of the Renault-Nissan governance spat is potentially an indication that talks can be resumed to the benefit of all parties. Elsewhere in the portfolio, Ferrari renewed its buyback programme, having already bought back 1% of shares outstanding since calendar year-end, and CNH continue to execute a $700m buyback for approximately 5% of its outstanding shares.

EXOR was the portfolio’s largest detractor in February, reducing returns
by 29bps. Here, the majority of returns came from a declining NAV, with
the discount being more or less static. Despite some good performance
in other parts of the portfolio – Ferrari +4%, CNH Industrial +11% – the
NAV performance was overwhelmed by Fiat Chrysler Automobile (FCA,
30% of NAV)’s share price falling by -13%. FCA released FY2018
results during the month, with EBIT coming in slightly below guidance
and highlighting some problematic performance in Europe, China and
the Maserati brand. On the other hand, the NAFTA and LatAm regions
performed very well. FCA has now instated a dividend policy which, at
just a 20% payout ratio, equates to a 5% dividend yield at the time of
writing.

While we acknowledge that overall the results were not blemish-free, we
would argue that: the group trades on a lowly 3x EV/EBIT; has no debt;
has a long runway of profit growth ahead as it begins to move away
from mass-market cars and into higher-margin product lines; has a track
record of asset divestitures to unlock value; and is guided by a family
and management team with a philosophy of prudent capital allocation.

We continue to believe that FCA is a compelling opportunity.

EXOR contributed 81bps to the NAV in January, with its share price
rising by +18%, driven by a combination of NAV growth (+15%) and
discount tightening (from 34% to 32%). The share prices of EXOR’s two
largest listed holdings, Fiat Chrysler Automobiles (FCA) and Ferrari,
increased by +18% and +25% respectively, providing a powerful boost
to returns. FCA (34% of NAV) announced FY 2018 results just after the
month end, posting EBIT of €7 billion (slightly below guidance) and a
net cash position of €2 billion, which compares to €16 billion of
industrial net debt when the late Sergio Marchionne took over as CEO
in 2004. Despite the strong performance, and the value that
management has consistently unveiled through spin-outs or asset
divestitures, the shares continue to trade on a miserly 3.6x
EV/EBIT. Given FCA’s strong cash generation and the prudent capital
allocation policies of FCA management and the Agnelli family, we think
this too low

EXOR suffered on the back of a falling NAV (-10%) and widening discount (out
to 35.6% from 33.1%). Fiat Chrysler (FCA)’s shares fell by 11%; Ferrari was
down 13%; CNH was down 11%; and the small holding (as a percentage of
NAV) in Juventus fell 36% following allegations made against star player
Cristiano Ronaldo.

We wrote in detail in last month’s newsletter of speculation that KKR would
acquire Magnetti Marelli, the auto parts manufacturer owned by FCA (35% of
EXOR’s NAV). These reports proved well-founded when it was announced in
October that this had indeed come to pass, with the purchase price of €6.2bn
coming in slightly above expectations. FCA subsequently announced that it will
use part of the proceeds to pay a special dividend of €2bn (which equates to a
9% yield), and will begin paying a regular dividend each year set at a 20% payout
ratio (a 4% yield at current levels). EXOR has since committed to using half
of its special dividend receipts from FCA for share buybacks, a wholly
appropriate use of cash given the very wide discount to NAV at which EXOR’s
shares trade.

While FCA’s shares rose on the news, it was nowhere near enough to recover
the losses recorded in the first few weeks of the month, and the share price
ended the month down -11%. We continue to believe the noise around trade
and tariffs is masking the remarkable progress at the company, which now finds
itself in a positive net cash position of €1.5bn having been indebted to the tune
of €5bn just three years ago. While the industry in which it operates will always
be cyclical, FCA’s robust balance sheet and lean cost structure makes it better
placed than most to withstand a downturn.

We continue to see compelling value in FCA, which trades on just 3.3x EV/2018
EBIT versus 6.7x for General Motors and 5.2x for Ford. Furthermore, we see
the ultimate game-plan from EXOR’s perspective as being the sale of FCA to a
larger competitor. Given their 29% stake in the business, EXOR are well
positioned to drive this process.

Former FCA CEO Sergio Marchionne’s seminal 2015 presentation,
“Confessions of a Capital Junkie – An insider perspective on the cure for the
industry’s value-destroying addiction to capital”, lambasted the auto industry’s
wasteful duplicative expenditure and called for industry consolidation to drive up
returns on capital. John Elkann, EXOR’s CEO, is a keen student of Warren
Buffet and his only major new investment during his reign so far at EXOR was
the 2015 acquisition of PartnerRe, a US-based reinsurance business as far
removed from the cyclical autos business as possible. It thus does not require
much imagination to paint a scenario under which FCA is sold to a rival, most
likely – we believe – after the turn-around of FCA’s European business is
completed, and possibly sold, so as to better reveal the valuable and thriving
core US business centred on high-margin SUVs and Jeeps.

Fiat Chrysler (FCA, 33% of EXOR’s NAV) and Ferrari (25% of
EXOR’s NAV) were responsible for EXOR’s contribution to
BTEM’s returns over the month. Ferrari (+5%) held its first
investor day under its new CEO, the key take-away from which
was the re-iteration that the company will be sticking to its four
year plan shaped by former CEO Sergio Marchionne before his
passing. FCA (+4%) was buoyed by reports of KKR’s interest in
Magnetti Marelli (MM), FCA’s 100%-owned auto-parts business.
While MM has been ear-marked for a spin-off as part of FCA’s
value creation plan, a trade sale would be preferable (assuming
an acceptable price can be achieved) given the immediate
injection of cash it would provide for FCA. A sale of the
business at the €6bn valuation reportedly being sought would
equate to 27% of FCA’s market cap, valuing MM at 12x EBIT
versus the derisory 3.9x multiple on which FCA trades; and
would provide FCA with the firepower to buy back 23% of its
shares if it so chose. We continue to believe the market is
failing to price FCA’s shares correctly.

It was with great sadness that we learnt of the death in late July of Sergio
Marchionne, the dynamic and highly-respected CEO of Fiat Chrysler (FCA)
and Ferrari, and the Chairman of CNH. We believe Mr Marchionne should
and will be remembered as one of the all-time great CEOs and capital
allocators, and his role in saving firstly Fiat, then Chrysler, will live long in the
memory.

FCA (32% of EXOR’s NAV) suffered an -11% share price decline over the
month, with most of the decline following Mr. Marchionne’s passing. Q2
results saw reduced guidance for the year amid on-going trade-war-related
concerns. While Q2 results were indeed disappointing, they were primarily a
localised problem relating to China and should not detract from strong
performance in NAFTA and Latin America where the Jeep brand continues to
perform very well. In the US, July sales were up +6%, with Jeep increasing
+15% and RAM Trucks reporting its highest ever July sales figure. Despite
recent weakness, FCA’s share price is still up +43% in the last year yet still
trades at a marked discount to peers. We believe the proposed spinoff of
auto-parts supplier Magneti Marelli later this year may provide a catalyst for
FCA to re-rate and its valuation anomaly to reduce. The impact of FCA’s
share price decline on EXOR was tempered by the performance of CNH
(18% of EXOR’s NAV) which climbed +10% as it reported its strongest
quarterly earnings since 2014 and raised guidance for year-end. Moreover,
management also re-iterated the possibility of future structural reforms which
we believe may include a potential spin-off of the IVECO trucks brands.

Concerns around trade and tariffs hit EXOR via its large holding in Fiat
Chrysler (FCA) (now 37% of NAV), which fell -16% over the month and
contributed to EXOR’s NAV decline of -8%. The sound and fury of the
Trump Administration around trade is obviously unhelpful and volatility may
well continue for some time, but we are cognisant of the need to remain
focussed on fundamentals. EXOR’s wide discount (34% at the time of
writing) and FCA’s cheap valuation help support such a mind-set.

EXOR’s NAV advanced by +10%, with Fiat Chrysler (FCA)’s share price up
+13%, Ferrari up +5%, and CNH up +4%. EXOR’s share price, however,
failed to keep pace with NAV growth, and the discount finished the month
3% wider than it started, at 30%. As CEO John Elkann noted in a recent
shareholder letter, this means one is effectively receiving their investment in
unlisted PartnerRe for free. We continue to believe the market is underestimating
and under-appreciating the expert stewardship of both John Elkann at EXOR, and Sergio Marchionne at FCA (39% of EXOR’s NAV).
FCA’s results released in April highlighted a company on track to meet
Marchionne’s target of having in excess of €4bn of net cash by end-2018
(from net debt of €10bn when the five-year plan was originally announced),
while FCA’s buoyant US sales figures for April published shortly after monthend
showed the company’s decision to focus on high-margin, high-growth
Jeeps and SUVs is paying off. We view the spin-off of auto-parts
manufacturer Magnetti Marelli – now approved by FCA’s board for later this
year – as being another important catalyst to unlock the market’s excessively
discounted valuation of FCA.

EXOR was our largest contributor with its share price rising by +22% over
the month, driven almost entirely by a +31% increase in Fiat Chrysler
(FCA)’s shares. At 40% of NAV, FCA is comfortably EXOR’s largest holding
and we have outlined in previous newsletters our view on the derisory
valuation afforded it by the market. We believe the dramatic extent of FCA’s
re-rating over such a short time period represents the market finally
beginning to appreciate the scale of its transformation, and the potential for
value to be unlocked by the sale/IPO of FCA’s stake in auto-parts
manufacturer Magnetti Marelli and the spin-off of its Maserati/Alfa Romeo
brands.

It has not paid to underestimate FCA’s CEO Sergio Marchionne, who is due
to step down in early 2019. If Marchionne’s swan-song is to include
meeting his 2018 plan guidance, FCA will be trading at a free cash-flow yield
to equity of 15% based on the current share price. With Marchionne’s
hand-picked successor likely to maintain his shareholder-friendly approach
to capital allocation, FCA could be in a position to retire 15% of its share
count each year. Much more likely, of course, is that there is a further rerating
of FCA’s share price to put it closer to fair value if the projected cash
flows do come through. EXOR’s holdings in Ferrari (22% of NAV) and CNH
Industrial (20% of NAV) also chipped in with share price rises of +10% and
+7% respectively in January, while EXOR’s stubbornly wide discount finally
started to tighten (in 450bps to 29.1%) adding a further tailwind to our
returns.

November’s key detractor was Exor, where a combination of discount
widening and NAV weakness resulted in the share price falling by -7.5%.
Ferrari, which fell by -11% on no news, was the main culprit. Exor stands
out to us as compelling value on a 34% discount amidst a universe of
European holding companies that has seen material discount contraction,
and its large weight in BTEM’s portfolio reflects our conviction.

widening discount. Fiat Chrysler Automotive (FCA), which now
accounts for a third of Exor’s NAV, was up +24% on rumours that
Great Wall Motor had made a bid for FCA’s Jeep business. While
Great Wall Motor admitted in a statement that they have been looking
over FCA, they denied making any contact with its management or
board. Regardless of whether anything comes from this specific
potential purchaser, we believe the speculation reflects a growing
recognition of both the compelling discount at which FCA is trading to
the sum of its parts and the stated intent of Sergio Marchionne, its
CEO, to unlock the trapped value.

Marchionne has commented on the low multiples at which the entire
industry trades: “From a valuation stand-point, I have never seen an
industry which is as little-loved as being an OEM today. For a period of
time I thought that banking had reached the bottom but I think we have
now surpassed them in terms of dislike”, but we see FCA as being
particularly undervalued trading on just 2.2x 2018e EV/EBIT, versus
7.4x for GM and 6.0x for Ford. It now seems clear that a spin-off of its
auto-parts business (Magneti Marelli) is likely to occur in the near-term,
with premium-brands Alfa Romeo and Maserati to follow at a later date.
We believe the spin-offs will reveal the true value of “Core FCA” which
will consist largely of its high-growth and high-margin Jeep and Ram
trucks brands.

Exor contributed strongly to returns despite a flat discount, as its
investments in Ferrari (25% of NAV) and Fiat (27% of NAV) performed well.
Ferrari climbed over +20% ahead of its results on the back of several sellside
upgrades; Fiat’s shares rose by 11%. Sergio Marchionne, CEO of both
companies, suggested there could be further spin-offs on the agenda for
Fiat as he seeks to further rationalise its vehicle portfolio. The market is
sceptical that Fiat will be able to meet Marchionne’s well-above-consensus
targets for 2018, his last year in charge before he retires. In the event these
targets are met, Fiat’s current valuation will equate to a 25% free cash-flow
yield, and we are cognisant that it has not paid to under-estimate
Marchionne over the years.