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McIntyre Partnerships 4Q20 Commentary: CAAP, MCS

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McIntyre Partnerships commentary for the fourth quarter ended December 2020, discussing discussing their new positions in Marcus Corp (NYSE:MCS) and Corporacion America Airports SA (NYSE:CAAP).

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Q4 2020 hedge fund letters, conferences and more

McIntyre Partnerships Performance Review - FY 2020

Through YE 2020, McIntyre Partnerships returned approx. 22% gross and 20% net. This compares to S&P 500, S&P 600, and Russell 2000 returns including dividends of 18%, 11%, and 20% respectively. Throughout the year, the fund was heavily concentrated in Chemours (CC). Recently, our CC investment has been reduced and our Garrett (GTXMQ) investment has been increased. The fund is off to a strong start in 2021.

2020 was one for the books – a strong beginning, followed by a stock market crash equal to 1929, and then a multi-month recovery to see the fund finish the year with a “reasonable” return. However, despite the roller coaster, 2020 was not a year of significant portfolio turnover. Throughout the year, the fund’s performance was driven by our “big bet” in CC. The stock was highly volatile, falling over 50% at one point, but ended the year up 42% and was the chemical sector’s top-performing stock. Despite the performance, the 2020 recession delayed CC’s TiO2 market share regains, and I believe CC’s results and shares have room to run. The fund maintains a large position. Beyond CC, the fund had several small wins – such as MCS, which I discuss later as a new position – but none of similar significance. The fund did unfortunately have two large losers: GTX and TPHS. As previously mentioned, GTX is in the midst of a restructuring and I will not comment on the name until a clear plan has emerged. TPHS, on the other hand, is just an unfortunate “covid loser.” The fund maintains a position in TPHS, but the reality is the NYC real estate market has been hurt. While I believe we will ultimately still profit on our investment, my expected IRR has been lowered both from lower selling prices and a longer sales timeline.

Looking forward, I believe 2020’s volatility, however painful in the moment, has created a favorable stock-picking environment. While the market exited the year at all-time highs, beneath this is significant dispersion. Numerous stocks and sectors have lagged. Further, the pandemic has created distressed opportunities in bankruptcy and restructuring that our “value with a catalyst” style is suited to capitalize upon. Following a ten-year bull market and economic expansion, I believe the pandemic has created a strong idea pipeline and am cautiously optimistic.

Our largest winner, by a long shot, was our investment in CC, which contributed over 3,000bps. Beyond CC, MCS contributed 200-300bps, while OSW, NTP, and WFC each contributed roughly 100bps. On the losing side, GTX and TPHS each contributed between 500-1000bps, while uranium, PTSB, and LILAK lost 100-200bps each.

Portfolio Review - Exposures and Concentration

At quarter end, our exposures are 111% long, 8% short, and 103% net. Our investment in CC has a significant options component and our GTXMQ investment has “risk arb” qualities, which make our exposures less meaningful versus the market at present.

Our five largest positions are CC, GTXMQ, MCS, CAAP, and TPHS, and account for roughly 90% of assets.

Portfolio Review - Existing Positions


CC posted strong Q3 results in November, significantly beating expectations on TiO2 volumes and EBITDA. Importantly, the TiO2 market appears to have turned, with prices rallying during the seasonally weak winter period. As spring housing demand increases, I believe TiO2 prices will continue higher. TROX also recently pre-announced Q4 results showing a significant 8% increase in sequential volumes during the fourth quarter, when volumes typically fall 10% on weak seasonal demand. I believe the stage is set for CC to take back significant market share and exit 2021 at full utilization. At present, the Street expects EBITDA of $1.1B and $1.2B in 2021 and 2022. If CC reclaims its lost market share, I believe EBITDA will be close to $1.5B in 2022 and FCF over $4/share. Regarding PFAS, CC recently settled the remainder of its WV lawsuits for a modest sum of $29MM. For reference, these cases were what a “certain short seller” referred to as the “key bellwethers” for the supposed $4B liability. In conjunction with the WV settlement, DD and CTVA agreed to the creation of a trust to split PFAS costs 50/50 with CC up to $4B over 20 years. I view both the WV settlement and the trust as favorable developments that help “ring fence” CC’s liability in all but the most draconian scenarios.

Portfolio Review - New Positions

Marcus Corp (MCS)

MCS is a family-controlled movie theater and hotel operator located primarily in the Midwest. I found the stock as part of my search for “covid recovery” plays in the leisure sector. Prior to the positive vaccine news in November, I found numerous ideas in the leisure space with significant upside to “normalized” profits. However, what drew me to MCS was its conservative pre-pandemic financial leverage and significant real estate holdings. Prior to covid, MCS was sub 2x levered despite owning the vast majority of its real estate, a strong advantage versus most public peers. Their conservative financial profile enabled the company to access liquidity on attractive terms and with minimal shareholder dilution. Further, I believe movie theaters, which make up roughly 75% of pre-covid profits, will be some of the first leisure assets to recover. Going to see a movie is by nature a “small-scale” outing as opposed to, say, a 3,000-passenger international cruise, which I believe will make for an easier “reopening” for both consumers and operators. For instance, in international markets that are open such as China and Japan, the box office has largely recovered when supplied with sufficient product. In the US, the current issue is that certain key US box office markets (NYC, LA, SF) are closed, forcing studios to hold back product to maximize profits later when all markets are open. The result is that the studios must now release three years of blockbuster content in a two-year period, which has the potential to drive the US box office to all-time highs in 2022. Longer-term, some investors worry about the growth of direct-to-consumer (DTC) streaming services from key studios, such as Disney+ and HBO Max. While the movie world is changing, I believe theatrical distribution will remain a key part of the movie business for many years. At-home viewing is simply not the same as in-theater for tent pole releases like “Star Wars” and “James Bond,” and the studios have all publicly stated their desire to release in theaters. As DTC subscription services grow, I believe the question is “What does the model look like?” for movie theaters, not “Do movie theaters at exist?” As laid out below, I believe MCS’s current valuation more than compensates for this risk.

To the upside, as film and travel recover, I believe MCS can return to its pre-covid profitability by YE2022 and earn ~$2.50 in FCF/sh. A 15x multiple yields ~$40, which roughly corresponds with its 2019 highs. If DTC subscriptions begin to materially impact MCS, a 35% impairment to 2019 movie profits yields $2/sh. To the downside, MCS has abundant liquidity to last a multiyear downturn and the current market value of its hotel real estate is roughly $6/sh. net of all company debt, which at the current share price of $18 implies MCS is trading at a 1/3rd of movie theater replacement cost. I believe shares are a strong risk/reward, even if the pandemic remains an issue for longer than expected.

Corporacion America Airports SA (CAAP)

CAAP develops and operates airports, primarily in Latin America. Before I get into CAAP’s specifics, I want to provide some background on airport concessions. Most cities only have one or two large airports capable of serving commercial air travel. These airports are effectively natural monopolies and are heavily regulated. Governments either operate the airports themselves, such as the NY/NJ Port Authority does at JFK, or sell a concession to operate the airport to a third party. Typically, this concession is sold with an upfront payment and annual capex commitments that entitle the third party to earn a regulated rate of return over a set period. For example, in exchange for an upfront payment of $100MM and $10MM in annual capex commitments, CAAP would be entitled to earn a 10% rate of return on its invested capital captured by charging airlines a fee per passenger over a 20-year period that yields $11MM in annual operating profit. There are two key features of the airport concession model that attracted me to airports versus other aerospace investments. First, while there are numerous technicalities, airport concessions are basically government guarantees to earn a specific level of profit regardless of macro issues. In theory, if passenger traffic falls 90%, airports are entitled to raise fees per passenger 10x. In practice, the operators and governments have been working together to get through a difficult time without price gouging, but the explicit government guarantees on airport concessions explain the benevolence governments are showing to airports as opposed to airlines. Second, in the event a suitable return cannot be earned, the operator is entitled to the return of its initial payment and capital investments plus fees. In a truly “worst-case scenario,” airport concessions have very real, government-guaranteed liquidation values. Despite an aerospace and travel industry ravaged by the pandemic, I believe airport concessions are a safe investment with a predictable profit stream over time, albeit with one gigantic covid bump in the road.

CAAP is structured as a holding company with airport concessions in seven markets: Argentina (50% of “normalized’ profits), Italy, Brazil, Armenia, Uruguay, Ecuador, and Peru. At first glance, CAAP appears to be an equity stub on a mountain of debt struggling to break even due to covid. However, CAAP is more accurately a portfolio of private equity investments with non-recourse debt and a government backed liquidation value many multiples of its current market cap. We are getting numerous “shots on goal” to a significant upside recovery with strong downside protection if things get worse. To the upside, I believe even with a lag in vaccinations, CAAP can return to prior profitability by YE2023. 8x 2023 EBITDA of $500MM yields $18 per share, which compares to European airport peers trading 10-14x “normalized” EBITDA. To the downside, in the highly unlikely event that all CAAP’s concessions fail, CAAP entered 2020 with $3.0B of intangible assets from concession rights, which roughly corresponds to the value of the concessions’ initial fees and capex. If the concessions are terminated, either by CAAP or the governments, I believe CAAP would be entitled to a break fee of roughly 1.2x book value, which net of $1.0B in consolidated debt yields a $16/sh. liquidation value.

Finally, a word on CAAP’s geographic exposure. The perils of Argentine and emerging market stock investing are not lost on me. CAAP operates in some dicey areas with less than stellar reputations, and its 50% weighting toward Argentina is a clear negative. I am comfortable with these risks for three main reasons. First, beyond Argentina, CAAP is well-diversified and the odds all the concessions would fail is remote. Second, even if Argentina were to fail, using the same 8x EBITDA multiple, the rest of the business is worth roughly $8/sh. and CAAP would be entitled to an Argentina break fee worth over $3/sh. Third, despite fears that Argentina’s socialist president would nationalize the airports, he instead recently extended CAAP’s concession and provided financial support. The recently signed extension is publicly available and implies a $2.0-$2.5B DCF valuation, or $13-$16/sh. The reality is airports are one of the safest assets a country can open to outside investment. If the governments want to attract foreign investment, as almost all emerging markets do, they need to be fair to airports.

Business Operations Review

Our tax preparations are underway. I will be reaching out to partners as they finalize.

As always, please feel free to contact me with any questions.


Chris McIntyre

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