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267694 EdinburghIT AR 2024 WEB - Flipbook - Page 14


12 / STRATEGIC REPORT / THE EDINBURGH INVESTMENT TRUST PLC
PORTFOLIO MANAGER’S REPORT / CONTINUED
Escalated issues
This feedback was followed up and expanded upon through
an engagement as part of an externally facilitated Shareholder
Perception study, with feedback being passed to the Qinetiq
Board of Directors.
Outcomes
Our conviction in the medium term outlook for Qinetiq has
increased, and we have improved confidence around capital
allocation discipline following the announcement of a share
buyback.
Conviction and Resiliency scores – both 3.
MONDI
Investment rationale
Mondi is a competitively-advantaged, vertically-integrated
producer of paper and packaging. It has a structurally lower
cost base than peers due to the location of its mills. High
barriers to entry exist in the industry as paper mills are
expensive to build/retrofit and leaves vertically integrated
players at a significant advantage. The company is well
positioned to benefit from the plastic to paper switch in
packaging. Mondi has historically generated attractive
‘through the cycle’ returns, provided consistent stewardship
of its asset base and overseen a strong balance sheet.
Areas of engagement and feedback
We most recently engaged with the management team of Mondi
around the proposed deal with DS Smith. We discussed whether
a combination with DS Smith would make sense for Mondi
shareholders and gave feedback around the importance of
maintaining the high-quality nature of Mondi’s asset base, strong
track record of capital allocation and clean financial model.
Further, asset stewardship and management’s strong track
record of capital allocation are an important ‘governance’ topic
and this feeds into both the resiliency and conviction scores.
Escalated issues
out. Weir’s market shares are strong and it is a global leader
in many of its products. The key drivers of Weir’s growth are:
1.
more rock processing at mines as ore grades are declining
globally;
2. mining equipment age and underinvestment; and
3. technological progress and need for mining companies to
meet sustainability targets will drive investment cycle.
Areas of engagement and feedback
We have engaged with the management team of Weir around
the importance of demonstrating continued strong free cash
flow conversion, and free cash flow growth. We discussed the
link between a more typically used free cash flow definition,
and the definition used by Weir in both their published
targets, and remuneration targets; and the potential benefits
in aligning these.
We have also engaged with Weir around the Environment
and Social considerations of extending the time for approval
of new greenfield mining sites globally and how this could
impact Weir’s future growth, the growth opportunity in HGPR
(high pressure grinding rolls) which result in energy savings
for their customers, and recent M&A which has enabled Weir
to build out a platform to collect data from machines to
enable condition monitoring and predictive maintenance – a
key efficiency, and safety topic.
Escalated issues
Upon meeting the new Chief Financial Officer of Weir, we
reiterated the importance around continuing to demonstrate
strong free cash flow conversion, a continued reduction in
exceptional and adjusting items, and discussed shareholder
perceptions around the use of off-balance sheet financing.
Outcomes
Our Resiliency score for Weir remains at a 3, and our
conviction score remains at a 2.
None
Outcomes
Conviction score and Resiliency score both remain at 3
following the engagement, and the subsequent announcement
from Mondi that the Board has decided the transaction would
not be in the best interests of its shareholders.
WEIR
Investment rationale
Weir predominantly sells equipment to the mining and
extraction industries and to a lesser degree the construction
industry. A significant proportion of its profits come from
the aftermarket sales, products that are consumed by their
customers and need replacing on a regular basis as they wear
Thus, for each piece of investment research, whatever the issue
an investment faces, we take a holistic approach to ensure that
we consider the most likely and potentially meaningful exposures
for a holding. It is not uncommon for some companies’ risks
and opportunities to have a longer time horizon than for our
investment focus – for example, where physical or transitional
risks arise from global warming. We therefore also consider
a company’s emerging exposures to macroeconomic and
other evolving factors. This helps us develop a view of how
competitive a group will be in three years and beyond.
Finally, we are sometimes asked about the carbon profile
of the portfolio. As a general point, we think that the profile
should naturally be below average, as our investment process