Scales | QBE | US CPI

11 August 2023

NZ

Scales announced it is expanding its pet food division through a joint venture with Esro Food Group, an animal by-product processor with factories in The Netherlands, Belgium and Spain. Good to see some of the spare cash put into some use, expanding their better performing business arm –  funding will be provided be provided via a loan, which effectively means, if successful, the company gets a ~50% share in a business with no equity contribution.  Remain Buy.


Australia

QBE Insurance shares were down as catastrophe claims came in higher than expected, offsetting strong revenue and margin growth. The company reported that the net cost of catastrophe claims increased to $699 million in 1H23. This represents 8.7% of net insurance revenue, up from 6.2% in the prior period. QBE is forecasting 2023 constant currency gross written premium growth of around 10%, and a combined operating ratio of around 94.5%, which excludes the upfront cost of the $1.9 billion reserve transaction. Still, see value at current levels, remain BUY rated.


US
Coach parent Tapestry is buying Capri Holdings for ~$57 per share – currently trading at ~$54, so some arb to be made here if you’re looking for a quick ~5% return. The all-cash deal is being funded by debt from Tapestry — we don’t see any reason for the deal to not go ahead; the expanded company will still be much smaller than its European competitors LVMH, Kering and so on.   We don’t like any of the brands that Tapestry or Capri sell (Capri owns Versace). We don’t think “luxury populism” works. However, there is an obviously arbitrage opportunity here – $54 gets you $57 (we did well holding Activision-Blizzard for the same reason, where the risk of the deal not going ahead was a lot greater).   US CPI came in a little hot at 3.2% (“less” than expected but still an increase from last month’s 3.00%). We don’t see CPI coming down meaningfully while wage growth remains elevated — see the chart below.
Retail investor sentiment hits its 2021 meme-stock highs:

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