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GreenWood Investors’ CTT – Correios De Portugal, S.A. (CTT.LS) Investment Thesis

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GreenWood Investors LLC, a collaborative investment management firm, published its fourth-quarter 2020 Investor Letter – a copy of which can be downloaded here. A net return of 16.4% was recorded by their Global Micro fund for the year end 2020, outperforming its MSCI ACWI benchmark that delivered a 15.8% return. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

GreenWood Investors, in their Q4 2020 Investor Letter, said that their CTT - Correios De Portugal, S.A. (CTT.LS) position was 'considerably dissatisfying'. Here is what GreenWood Investors has to say about CTT - Correios De Portugal, S.A. (CTT.LS) in their Q4 2020 investor letter:

"The one area that remains considerably dissatisfying for us is the performance of CTT in the co-investment fund. While it remains frustrating, the sense of urgency remains very high for us to finish the playbook we started out to achieve. We know the reason for this under-performance and understand the market’s concerns. We also have a high degree of conviction that it will not only be rectified in the quarters to come, but that the progress achieved will be considerably surprising. Borrowing the mantra from another portfolio position we have, S4 Capital (SFOR LN), CTT is better, faster, cheaper and greener than its peers. It is cheapest in class based on EBITDA, has the fastest forwardlooking revenue and profit growth runway, has the second highest EBITDA margins in the industry, and has the highest environmental rating in its industry, according to the Carbon Disclosure Project climate change rating.

When a company is undergoing a turnaround, we believe the higher up the income statement we go, the more informative. Revenue growth needs to return to the company and this needs to drop down to a more marked improvement in profitability. While the European industry standard is to look at operating income, we believe EBITDA is more informative around the bottom of a turnaround.

Beyond a strong equity story, the company is rebuilding its strategic plan, and I could hardly be more excited to have this finalized and communicated more thoroughly to the market. Under-pinned by considerable leadership actions the company took throughout 2020 to transition commerce in Portugal online for the first time in a meaningful way, we are focused on the company becoming the e-commerce back-end of the country. E-commerce penetration per capita is significantly lower than the levels of other European peers, leaving a long runway of growth ahead. Statistics here are unusually difficult to find, but the parcel figures from 2018 point to a very long road ahead. While many in Portugal have tried shopping online, the frequency of these orders has been significantly lower. Large e-tailers have largely ignored the country up until Covid-19, which is why the company took the leadership position it did.

As announced with the third quarter results, its joint venture dott.pt had 1,240 merchants selling on its platform. Additionally, the company’s own efforts have been helping a further 1,500 vendors create their online shops while also assisting with the various other stages of the e-commerce journey. A key hire from Amazon fulfillment should help consolidate the 3rd party fulfillment offer and make it more competitive. Fulfillment has direct synergies with idle daytime sorting capacity, and will allow any vendor to shorten the order to delivery time considerably, without paying a higher price for shipping. The company has made various other investments and forged partnerships to help small and medium sized enterprises thrive in an e-commerce world. In doing so, it has not only built a Shopify-like story, but it has taken considerable market share on the Iberian peninsula throughout 2020. The merchants already on its 2 platforms would represent a top 15 Shopify market when population-adjusting the statistics. While these efforts have yet to materialize as new revenue line items for the company, they have acted as a catalyst to accelerate e-commerce growth in the country.

Now we’re not trying to imply the company has Shopify-like valuation upside, nor a global reach. But the strategic moat is becoming almost just as attractive, and it’s getting harder and harder for competition to compete with the better, faster, cheaper and greener service that mimics the equity story from a fundamental perspective. We look forward to the management team executing and communicating its progress here in the year ahead.

At the beginning of last year, we had thought that CTT would be driving a considerable amount of alpha for the fund as the turnaround took hold. Actions taken in mid 2019 by the new management team led to EBITDA being up 49.7% in the first two months of 2020. Of course, severe logistics challenges for most of its customers led to an air pocket in the second quarter, and the company reported a rough Q2. But it remained committed to delivering revenue growth for the full year. Judging by our global peers’ stock and revenue performance, this means the CTT’s stock underperformed its global peers by at least 30% looking at the Global S&P 1200 by returns and revenue.

In contrast to most stocks borrowing performance from the future, we view CTT’s pent up performance as the opposite. We have unwillingly traded trailing performance for future performance. It’s inherently unpredictable when the market will catch up with reality precisely, but we know that it will eventually. The board and management team have been investing significant time to refining & executing on a strategic priority list that we believe will resonate very well with the market. The narrative inflection point in CTT, in addition to the improving fundamental performance, we believe, will drive material alpha in the quarters ahead."

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Disclosure: No positions. The original version of this article incorrectly referred to Catchmark Timber Trust. This article is originally published at Insider Monkey.