After discussion of our views and philosophy on capital allocation for the previous two letters, this time we will give an update on companies in the portfolio. Despite most pundits forecasting a slowing economy in 2023, we see many of our portfolio companies continue to make progress in their strategic plans and improve earnings and balance sheet strength. Below are highlights and updates for recent developments within the portfolio.
We’ll start with Borr Drilling Limited (BORR), an owner of offshore jack-up rigs, who recently entered into a new contract for its rig “Ran” at $150,000 per day for an initial term of 200 days with an option to extend to 460 days if oil is discovered. When we initiated the position in Borr, the day rate to hire an offshore rig of the specifications that Borr owns was roughly $130,000 per day. While the day rates for offshore rigs can be volatile in the short term, we believe the recent improvement in rates, as evidenced by Borr’s new contract, shows our investment thesis playing out. When we first invested in Borr we saw that there was a significant undersupply of offshore jack-up rigs available for use, limited capacity to manufacture more rigs in the short term, and increasing demand for offshore oil production, especially among the state-owned oil companies in the Middle East. We remain constructive of our thesis and expect to see day rates incrementally increase as new contracts are executed.
Similarly, there have been positive changes at Rocky Mountain Chocolate Factory, Inc. (RMCF) (“Rocky Mountain”). In 2022, Rocky Mountain appointed a new CEO (Rob Sarlls), a new CFO (Allen Arroyo), and a new VP of Sales and Marketing (Andrew Ford). All three have substantial experience in the food manufacturing and food service industries which we believe will contribute to the development of the company’s strategic direction and improve operational execution. Our research team recently had a conversation with Messrs. Sarlls and Arroyo and discussed their goals of improving existing store sales, improvement of the distribution network through both company-owned fleet and third-party logistics providers, and a rationalization of the number of SKUs the company manufactures to improve production efficiency. We believe all three goals are sensible and achievable and have a high degree of confidence that the newly installed senior management team will be able to execute its plans. In addition to the company’s operational improvements, Rocky Mountain recently settled its multi-year standoff with AB Value Partners and Bradley Radoff (collectively, the “Dissidents”). The settlement agreement includes a two-year standstill (until the 2025 annual general meeting) during which the Dissidents cannot run a proxy contest, and have the right to appoint one director to the board. While we are unhappy with the significant cash cost of the various disputes between the Dissidents and the company, we believe that settlement provides the best path forward for Rocky Mountain and will allow senior management and the board to focus on strategic and operational improvements that will drive long-term shareholder value.
In the fixed-income portfolio, Under Armour, Inc. (UAA) recently appointed Stephanie Linnartz as its President, CEO, and a member of its board of directors, effective February 27, 2023. Ms. Linnartz is currently the president of Marriott International, Inc. (MAR) and lead its multi-billion dollar digital, brand, loyalty program, and partnership transformations including development of meaningful partnerships across major professional sports leagues and significant changes to the company’s digital platform. Performance over time is the ultimate arbiter of ability, but we believe Ms. Linnartz’s experience with strategically positioning consumer brands, using digital channels to grow revenue and customer engagement, and developing international partnerships will benefit Under Armour and assist the company in its goal of reestablishing its place among premium sports and leisure wear brands.
Finally, two of our team members recently attended an investor day hosted by American Axle & Manufacturing, Inc. (AXL) at the Las Vegas Motor Speedway in Las Vegas, Nevada. During the investor day, American Axle presented its vision to maintain its 10% market share as the company, and world, transitions from internal combustion engines to vehicles powered by electric engines and components. The transition to EV brings about more than just a change in the energy that creates vehicle propulsion, it also changes the performance capabilities of the vehicle for the better and presents an opportunity to redesign the longstanding layout of vehicles’ component parts. American Axle’s products, like its E-Beam and 3-in-1 electric engines (engine, inverter, and gearbox in one neatly packaged unit), capitalize on this transition and provide the company with a window to establish itself as the world’s leading provider of electric vehicle propulsion technology. The company’s in-person investor day gave our research team a fantastic opportunity to see what its technology can do during test-drive and ride-along exhibitions and to understand more about the nuts and bolts of the products it makes. We continue to view the company positively and believe it will participate meaningfully in the transition to electric vehicles while generating sufficient cash flow to meet its obligations on its outstanding debt.
Given the time limitations we place these letters (we don’t believe our clients want to read an Anna Karenina-length letter every couple of weeks), these are only a few examples of happenings within our portfolio companies. That said, we look forward to providing more updates over the course of the year and give you a glimpse into the level of detail with which our research team reviews and monitors each company.
As always, feel free to reach out to MIAM if you would like to learn more or discuss a particular company or idea.
The MIAM Research Team
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