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Notes from the MIAM Research Desk

February 22, 2023

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In this note, we will continue to highlight recent developments in the portfolio. Our research process demands that we perform a detail-oriented analysis of each company prior to adding a position to the portfolio. However, the work doesn’t stop there. Our team continuously monitors each company and measures real-time changes against the investment thesis that is developed. With each change, we assess whether the company’s actions are in line with management’s previous commitments, in line with our investment thesis, and ask ourselves whether the change necessitates an adjustment to our thesis and target price. Below we highlight recent developments and, where possible, provide context for the development in comparison with our expectations.

Our updates will continue with PBF Holding Co. LLC (PBF) and PBF Logistics LP (PBFX). PBF is a US-based refiner of crude oil and PBF Logistics provides logistics services for refined hydrocarbon products. On November 30, 2022, PBF Holdings announced that it completed the acquisition of PBF Logistics (including taking on PBF Logistics’ outstanding debt) and on January 3, 2023, announced that it would retire the $525 million of outstanding PBF Logistics’ 6.875% notes due 2023 (notes that our clients held in their portfolios). The acquisition of PBF Logistics was in line with senior management’s prior comments with regard to capital allocation, and we view the acquisition as prudent, especially in light of PBF Holdings’ cash generation in recent quarters. The PBF Logistics notes were retired on February 3, 2023, by the company at par ($1,000/bond). We redeployed in client accounts as appropriate, realizing a 7.99% CAGR for the position.

Next, we turn our attention to Service Properties Trust, Inc. (SVC). Last quarter, SVC reported improved revenue primarily attributed to business travel returning to pre-COVID volumes. In addition to a return to normalized occupancy levels at SVC’s hospitality (hotel) properties, SVC continues to sell hotel assets that are bottom quintile performers within its portfolio. This is expected to provide cash to reduce SVC debt load as well as improve the average margin for the remaining portfolio of properties. SVC’s real estate sales in 2022 were well timed with the peak of real estate prices but we do not expect every asset sale going forward to achieve similar pricing. However, regardless of the present real estate market, we view SVC’s asset sales as reasonable and use of those proceeds to retire outstanding debt as a positive for its balance sheet. In the last twelve months, SVC has paid off $1.425 billion of outstanding debt resulting in a debt-to-capital ratio of 79.9% and a trailing-twelve-months EBITDA-to-interest ratio of 1.5x.

Finally, Subsea 7 S.A. (SUBCY), a provider of engineering and construction services to the offshore drilling industry, has announced a handful of new contracts over the last few months in both its traditional and renewable business segments. These contracts are indicative of increased demand for offshore drilling services as elevated price of crude oil has incentivized investment in production accretive projects, particularly in the North Sea, Trinidad and Tobago, and the western coast of Africa. Company management recently stated that its contracted backlog contains projects with higher margins than current projects, but that margins at the peak of the current cycle will not reach the heights that were seen in the peaks of previous cycles. Increased investment in offshore energy assets is a theme that is fundamental to our investment theses for Gulf Island Fabrication, Inc. (GIFI), Borr Drilling, Ltd. (BORR), and Subsea 7. Subsea 7’s management continues to communicate a positive outlook for both margin and volume and believes that Subsea will benefit from the current upcycle later than other participants. We agree and estimate that Subsea 7’s company-wide EBITDA margin will be 14% in a normalized environment. We continue to be constructive on Subsea 7 and are closely monitoring the position as it approaches our price target.

Portfolio companies are monitored continuously, and these brief updates can only provide a snippet of the news and our research team’s knowledge of each company. That said, we hope these updates have been useful and welcome the opportunity to further discuss any particular company or idea.

Sincerely,

The MIAM Research Team

This document is published by Milwaukee Institutional Asset Management (MIAM), a division of Global Value Investment Corp. (GVIC). MIAM is the institutional investment advisory division of Global Value Investment Corp., providing investment advisory services to institutional investors including Registered Investment Advisors and Broker-Dealers. All statements or opinions contained herein are solely the responsibility of Milwaukee Institutional Asset Management. The material, information and facts contained in this report were based on publicly available information about the featured company and were obtained from sources believed to be reliable but are in no way guaranteed to be complete or accurate. This report is for informational purposes only and should not be used as a complete analysis of any company, industry or security discussed within the report. This report does not constitute an offer or solicitation to buy or sell any security, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. An investment in any security referenced in this report may involve risks and uncertainties that could cause actual results to differ from the analysis provided herein, which may not be suitable for all investors. Past performance should not be taken as an indication or guarantee of future results. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. Employees of GVIC may have positions in securities referenced in this report. ‘Intrinsic’ or ‘Appraised’ value refers to MIAM’s quantitative and qualitative assessment of the value of an enterprise. Market capitalization is a measure of the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current quoted share price. MIAM’s investment strategies generally invest in a smaller number of securities than some other strategies. The performance of these holdings may increase the variability of a strategy’s return. There is no assurance that dividend-paying stocks will reduce price variability. Value investments are subject to the risk that their intrinsic value may not be reflected in market prices. For purposes of distribution in the United States, this report is prepared for persons who can be defined as “Institutional Investors” under U.S. securities regulations. Any U.S. person receiving this report and wishing to affect a transaction in any security discussed herein must do so through a U.S. registered Broker-Dealer. Neither Global Value Investment Corp. nor Milwaukee Institutional Asset Management is a registered Broker-Dealer.

An investor should consider a strategy’s investment objectives, risks, charges and expenses carefully before investing. This and other important information can be found in the Firm’s SEC form ADV Part II. To obtain a copy of GVIC’s ADV Part II, call 262-478-0640 or visit www.gvi-corp.com. Please read the ADV carefully before investing.

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