1/ Trade war thoughts 🧵

There’s clearly an internal battle within the admin over trade policy. The desire to support blue-collar, middle America makes sense — but the current approach won’t achieve that. 2/ Ways the admin is trying to support middle America:

a) Remove trade barriers = ✅
b) Deregulation = ✅
c) Targeted tariffs for national security (border protection, domestic chips mfg, etc) = ✅
d) Eliminating deficits for philosophical reasons = ❌

Every so often, small caps go no bid and interesting opportunities surface.

Take $ENZ as example. They recently sold their cash burning clinical lab business for $105m.

The pf financials show that remainco had cash of $107m and BV of $100m as of April. sec.gov/Archives/edgar… ENZ prob burned some cash through Jul and has other liabilities but using what I believe to be conservative assumptions hard to see it having less (and prob has more) than $70m of net cash after satisfying liabilities, which would be $1.40 per share.

Stock is at $1.33 currently.

$IWG is the most mispriced business I own. If it was listed in the US, I think stock would be 2x current levels.

13x run-rate FCF isn't the lowest valuation by any means - but the cos managed partnership model has found product market fit and is starting to meaningfully inflect. IWG signed 400+ managed partnership (MP) agreements last year. ~100 are already opened. The other 300 should open in 2H of this year and 1H'24.

In 1H'23, they signed almost as many new agreements as they did all of last year and MP biz momentum continues to accelerate.

Some interesting charts from the recent Bain Global PE report: bain.com/globalassets/n…

$3.7 trillion of global dry powder $1.3 trillion of that powder was raised in 2022 alone

Always fun talking through ideas w Andrew. IMO the stars aligning for IWG in 2023. Mkt leader in a rapidly accelerating industry, cyclical upside to earnings, business mix shifting from cap heavy to cap light, low entry valuation and a potential spin/sale of their digital biz.

https://twitter.com/AndrewRangeley/status/1630198070695567360

In the Q4'21 call, CEO highlighted path to getting managed / franchised EBITDA to £200m+ by 2024: "roughly 2,000 centers at an avg of about £1 million rev per center..the drop-through is net-net somewhere in the 10% range and that's where you're getting the £200 million from."

Market timing: when the market is down 10%, typically it’s because there are compelling reasons for it to be down 10% more.

Sometimes those fears end up not materializing and the market bounces back without further pain. Even if mkt does end up going down another 10%, it will have done so bc there are compelling reasons for it to be down even more.

If you sell each time things get scary to try to avoid additional pain you’re taking on serious reinvestment risk - esp if you have a long horizon.

"Everyone is bullish"

JPM: we believe that previous lows in equity markets are likely to be re-tested as there may be a significant decline in corporate earnings, at a time of higher interest rates (implying lower P/Es and lower prices relative to the 2022 lows) GS: we don’t think the bear market is over, as the conditions typically consistent with an equity trough have not been met...we would expect lower valuations, a slowdown in the momentum of growth deceleration, and a peak in interest rates before a sustained recovery begins

$KKR established its Asia presence in 2005. Since then, it has scaled that biz to $60bn of AUM. This should continue to be a good growth market for them. It also established its infrastructure business in 2008. Since then, it has scaled it to $50bn of AUM. Brookfield is well over $100bn of AUM in infra and still growing that biz quite rapidly. Most institutional investors feel under allocated to infra. Nice growth market for them.

$IWG

We’re in lots of very small towns across the U.S. and globally, and what we’ve seen is stronger and stronger demand.

There’s been this movement toward hybrid working. It’s very permanent. And most people misunderstand it.

commercialobserver.com/2022/11/iwg-ce… They’re thinking that somehow NY and Chicago will come back. That’s not the case...large cities are actually very hard for workers to get to...takes a lot of time and money...with modern technology you don’t need to do that.

I've seen some confusion on why higher inventory balances (BS item) would lead to potentially overstated margins for manufacturers (IS item).

Most manufacturers use something called absorption costing, which entails allocating ALL costs associated with mfg a product to COGS. This means that both variable costs (materials, labor, energy) and fixed costs (rent, depreciation, insurance) are captured in COGS.

Mfgs also typically use something called average costing which means they add up all costs of production and divide by total # of items produced.

@special_cheeese It’s a wework competitor w 3k global locations. Still depressed from covid but quickly recovering as occupancy normalizes and price hikes flow through. BS looks stretched bc includes leases, but 96% of them are either terminable at IWGs option or in segregated legal entities. @special_cheeese Pre-pandemic started moving towards capital-lite model. Most new locations today have capital partners.

IWG has also been selling existing locations. In 2019 they sold the Japan biz for $420m but also continue to collect a royalty on that biz to this day while it grows.