John Burbank’s special opportunities fund ended 2011 down 20%. In the fourth quarter of the year, the fund was down 5.5%. Since the fund’s inception in May 2008, it has returned 9.7% per annum versus -4.0% for MSCI world index.
We recently posted an exclusive article containing excerpts from Burbank’s flagship Passport Global fund 2011 shareholder letter. Burbank was also on Bloomberg TV recently where he discussed his fears about rising oil prices.
The Fund currently has twenty-nine positions long, sixteen positions short, and nine private investments. Net equity exposure declined from 45% to 25%.
Burbank stated that the disappointing performance in 2011 was due to the same factors as the ones mentioned in the Passport Global fund 2011 letter mainly; China, Europe and commodity inflation.
The top five positions in the special opportunities fund are:
Cytec Industries Inc. CYT US 7%
2 Marathon Petroleum Corp. MPC US 6%
3 Tarpon Investimentos S.A. TRPN3 BZ 5%
4 Accuray Inc. ARAY US 4%
5 C&J Energy Services Inc. CJES US
Cytec which makes up 7% of the portfolio, Burbank spelled out the bullish thesis in detail:
Cytec is one of the few companies with the technology to produce aerospace-quality grade carbon fiber, which is rapidly replacing aluminum as the primary material of construction for commercial aircraft. There is a large upswing in both legacy aircraft builds, which are 5%?20% carbon fiber (CF) by weight
as well as in new designs such as the Boeing 787 Dreamliner and Airbus A320X (50%+ CF). On October 26, Boeing’s first 787 Dreamliner was flown with passengers for customer All Nippon Airways.
This plane is one of the first new aircraft designs that primarily use carbon fiber and composites instead of aluminum for its airframe, showing up to 20% more fuel efficiency due to its lighter weight.
Burbank believes that Cytec’s carbon fiber business should grow at approximately 20% annually for the next few years as a result.
The stock trades at a discount to pure-play peers, and we believe significant value will be realized in early 2012 if Cytec sells most or all of its low-margin Coatings Resin business which has been a drag on earnings. We believe this valuation discount will narrow as its carbon fiber unit grows from 43% of
EBIT to at least 62% in 2012, assuming a pro forma sale of its entire Coatings business on Jan 1, 2012.
Burbank believes that Cytec may announce a partial or complete sale of its Coatings Resin business on its 4Q11 earnings conference call on February 1. This event should improve the company’s pure-play status and catalyze the stock to close the valuation gap with peers. One sell-side research report estimates that the Coatings unit could fetch at least 4x EV/EBITDA, or up to $538 million (roughly 26% of CYT’s market cap at year end) not including any NOLs generated. We believe these proceeds would largely be used to buy back stock and for adding smaller acquisitions to its carbon fiber or mining chemical business units. On December 8, Cytec announced that it has been authorized to buy back $200 million of stock. This is in addition to the $150 million authorized in 1Q11.
At the end of the fourth quarter, the company traded at approximately 5.9x 2011 EV/EBITDA and 5.5x 2012 versus Hexcel (HXL US), a pure-play carbon fiber maker, which traded at approximately 10.4x 2011 EV/EBITDA and 8.9x 2012. Using a sum-of-the-parts model and applying Hexcel’s multiple to Cytec Engineered Materials (i.e., carbon fiber) business, the rest of the company is trading at approximately a negative 1x EV/EBITDA multiple.
Marathon Petroleum Corp. (5% of NAV) Marathon has an $11.8 billion market capitalization and an enterprise value of $12.2 billion. We expect
the company to generate $3.9 billion in EBITDA in 2012 and free cash flow (FCF) of $1.5 billion, for roughly a 14% FCF yield.
During the quarter, the company raised their quarterly dividend from $0.20/share to $0.25/share, resulting in approximately a 3% dividend yield at year end. During its first analyst day in December, the company underscored its highly experienced management team, cycle-tested business model, unique
integrated asset base, and sound financial position. MPC also emphasized organic projects in 2012 that could increase access to discounted crudes and increase yield of higher margin products like distillates.
Their Detroit refinery upgrade (expected by the end of 2012) was reported to be on schedule and on budget.
While the fourth quarter was weaker than originally expected given the decline in the Brent/WTI spread, it is seasonally the weakest quarter of the year. Importantly, the decline in the Brent/WTI spread does not impact his free cash flow estimate for 2012, which provides a yield of 14% and remains unchanged.
Burbank is bullish on Gold for 2012. He also likes gold companies and 13% of the long positions are in gold stocks.
The bullish thesis mainly is due to demand from India (INP) and China (FXI) The re-strengthening of the Indian rupee has dramatically helped physical demand so far this year. In regards to China, the improving liquidity situation in China has helped as well.
