Plural Investing Q4 2024 Quarterly Letter

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To our Partners:

Plural Partners Fund L.P. delivered a gross return of 5.2% and net return of 4.9% in Q4. Our goal is to deliver returns over a five-year period significantly above that of global markets.

We are value investors. We invest in businesses that we believe are worth substantially more than the price they are trading at. We think of risk primarily as the chance of a loss over a five-year horizon and not the temporary drawdowns in stock prices that occur from time to time. We manage this risk by only investing in businesses trading at a substantial discount to a conservatively calculated intrinsic value and that we would be happy to own if the market shut for five years. We welcome stock price volatility as it often presents opportunities to invest further at even better prices. When such opportunities cannot be found we hold cash instead.

The majority of our capital is typically allocated to our six to eight best investments. We look for qualities such as attractive business economics and management teams who possess and foster a culture of high integrity, customer focus, and prudent capital allocation. Our businesses may be ‘hidden gems’ because they are small, receive little coverage, listed on under-researched exchanges, operating in unpopular industries, or offer terrific opportunities beyond short-term concerns. We develop a research edge over other investors by doing extensive primary research and utilizing quantitative tools. This edge can be significant when we are competing mostly against retail investors or the small positions of larger institutions, which is why we deliberately fish in those waters.

A one-page appendix entitled “Principles of Our Partnership” is attached to this letter. This should give you an idea of what you can and cannot expect from our partnership.

We estimate that our businesses trade for 6.8x their FCF in three years’ time and will still be growing at low double-digit rates then. These businesses generally have strong balance sheets with little or no debt, earn an average post-tax return on tangible capital of 24%, and are run by well-aligned management teams with an average insider ownership of 13%.

We were satisfied but not elated with the portfolio’s performance in 2024. While the Russell 2000 index of US small caps delivered a return of 11.5%, most of the portfolio holdings are listed internationally, particularly in the UK. Indices of the international and UK small caps returned 1.8% and -5.5% respectively in US dollar terms in 2024 1. A blended index reflecting our allocation to each country would have returned 2.1% by our estimates, significantly below the portfolio’s net return of 8.2%.

Arguably the biggest headwind to the portfolio’s return in 2024 and the last five years has been the poor performance of UK small caps in comparison to US stocks. Yet while five years is a long time, similar periods of relative underperformance have occurred in the past and reversed. Over the long run, UK and US average stock returns have historically been relatively similar. Sentiment is now so poor in the UK that even ordinary economic conditions could trigger a reversal.

Our investments in UK stocks do not reflect any top-down view or excitement about the country’s macro prospects. Instead, we continue to find exceptional opportunities to invest in companies trading far below their intrinsic value which happen to be listed in the UK. While we could reduce our investments to be less exposed to the UK economy, we think that would be a mistake given the opportunities we have found.

Below, we profile two such examples. The first is Jet2 (OTCPK:DRTGF), which trades for 7x P/FCF despite having net cash, the best competitive position in its industry, best management team, and likely low double-digit growth for years to come.

The second example is Watches of Switzerland (OTCPK:WOSGF), which trades for 13x EV/FCF despite being Rolex’s key partner in the UK and US and having a long runway for double-digit growth. The US business actually accounts for half of the company’s revenue and more of its value by our estimates, yet the stock trades at a significant discount to similar US companies.

While we have made a significant amount of money on both these investments, we believe the poor performance and outflows from UK small caps has been a headwind to better returns.

We believe an important quality in value investors is the ability to find ‘hidden gems’ in areas of the market that are unpopular and wait for sentiment to normalize. So while we do not deliberately seek out UK stocks, we do not intend to avoid them either.

We also provide an update on Seaport Entertainment (SEG) below. Seaport is a spin-off and recent investment in the fund, and the new management team have already begun making the necessary changes that we highlighted were required in our initial report.

Finally, we launched the Hidden Gems Investing Substack this quarter to more broadly distribute our writeups. If you would like to receive in-depth reports and monthly updates you can do so by subscribing here.

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Jet2 (JET2.L)

Jet2 is a UK-based package holiday business. The company is run by CEO Steve Heapy and CFO Gary Brown, both of whom have high integrity, exceptional customer focus, and concentrate on long term value creation when allocating capital. They have done an outstanding job, with Jet2’s excellent customer service and retention driving profitable market share growth from 2% to 22% over the last decade. We initially invested in the business around £5/shr, the stock trades at £14/shr today, and we think will be worth £30/shr in three years.

Jet2 has the strongest competitive position in the industry, the best management team, a long runway for double-digit growth, and substantial net cash. It also reported another strong set of results in November with profits growing by 16%, on track to beat market expectations for the fiscal year, and a positive outlook for next summer.

Despite this, the stock trades at 7x P/FCF.

We have owned Jet2 since the inception of the fund and prior to that I personally first bought shares in 2012 at £0.7/shr. And while the stock has reflected the company’s strong performance over the long run, there have been several multi-year periods where the share price has drifted. These periods typically occur because investors dismiss Jet2 as an airline and become concerned about the UK macro outlook.

Yet Jet2’s economics are very different to an airline and in our view understanding this is crucial to understanding why the company continues to succeed.

Jet2 sells package holidays for an average of £850, taking customers from the UK to primarily sunny locations across Europe. Although Jet2 operates aircraft the customer is paying for their entire holiday, and the two hour flight is only about £140 of the total package. The far bigger part is the hotel or resort that Jet2 has ensured is high quality, good value-for-money, and that you will be taken care of if any issue occurs with the flight or hotel.

In other words, Jet2’s strong customer service enables them to sell the peace of mind that you will enjoy your holiday. This makes the economics of package holidays very different to airlines.

The most successful airline in Europe over the last couple decades is arguably Ryanair (RYAAY)(OTCPK:RYAOF). Ryanair is known for low costs and poor customer service. The reality for short haul flights is that although customers complain about poor service they tend to return anyway if costs are low. In our view, this is why Ryanair’s culture and focus on low costs works even though its service is poor.

Things are very different with holidays, where the priorities are almost reversed. If a company messes up your entire holiday, you are likely never returning.

Jet2’s secret sauce is that it has the best customer service in the industry. Nearly 60% of its customers book another holiday with the company within two years, which is remarkable given Jet2 only flies to European destinations and not everyone takes a holiday every year. That customer retention number is only 40% at TUI, Jet’2 biggest competitor.

This is a huge gap which explains why Jet2 has been gaining around 2ppts of market share each year.

The most extreme example of this was during Covid. Whereas most travel companies treated customers and suppliers poorly, Jet2 refunded most customers quickly and in full. According to the UK government’s payment practice reports, in the six months to September 2020 Jet2 paid 76% of invoices within agreed terms vs 36% for TUI.

The result is that Jet2’s market share increased by half from 14% to 21% during Covid. That increased share will add around £135mm to the company’s net income this year, compared to total customer deposits of £867mm in March 2020, which suggests that treating customers well is not only the right thing to do but also good business.

We have found that investors dismiss customer service because it is qualitative. But it is the key reason why Jet2 is likely to earn £2/shr of net income this year. It earned £0.9/shr in 2019.

Watches of Switzerland (WOSG.LN)

Watches of Switzerland is a retailer and partner to Rolex and other luxury watch brands. We believe most of the company’s value lies in its relationship with Rolex, which only sells through authorized retailers like WoS who act as gatekeepers to the Rolex universe. That relationship gives WoS far superior economics to a typical retailer, a result of lengthy customer waiting lists, no online competition, and no inventory risk. WoS’s management are competent, experienced, and well incentivized, with CEO Brian Duffy owning nearly £40mm worth of stock. We first bought shares around £3.5, it trades at £5.0 today and on 13x this year’s FCF despite double digit growth. We think intrinsic value in three years will be around double today’s price. You can view our 35-page report on the company here.

WoS reported strong fiscal H1 results in December, sending the stock up 13% on the day. Revenues were up 4% in constant currency terms, split -2% in Q1 and +11% in Q2. Management also reiterated full year guidance, stated that customer waitlists remained strong, and sales of certified pre-owned Rolexes were now the group’s second-biggest brand just 15 months after launching.

While these results do not appear eye-catching at first glance, investors were surprised that WoS had not been more impacted by the broad decline in demand for luxury goods. Indeed, the stock on a day-to-day basis often moves similarly to luxury goods companies like LVMH who generate much of their profits from China or Chinese tourists.

These concerns are misplaced in our view.

Chinese tourists make up less than 5% of WoS’s sales. Investors also often cite the decline in watch prices on the secondary market, yet these represent people reselling watches they have already bought from retailers. WoS does not sell into that market in a significant way.

Instead, the company sells into the primary market and around 60% of sales are made up of waitlist brands (mostly Rolex). The waitlist cushions the impact from any cyclical decline, and these brands tend to have more affluent customers who are less impacted in the first place.

In our view, the best indicator of supply and demand is therefore the current length of waitlists and how that compares versus history. While Rolex and Watches of Switzerland do not disclose this information, we collected 3,565 messages online where customers described actual Rolex purchases. Each message included the date they received their watch and how long their actual wait time was. This data shows that supply and demand is actually healthy, and that wait times are typically higher than pre-Covid levels despite declining since the peak of the bubble in 2022.

That decline has plateaued, and with US financial markets near all-time highs and interest rates declining, WoS should at some point benefit from a cyclical recovery acting as a catalyst.

Seaport Entertainment

Seaport Entertainment was spun out of Howard Hughes in July 2024. The company is a complex group of loss-making properties primarily in Lower Manhattan that Howard Hughes invested $1.5bn into. Seaport trades for a market cap of $340mm and has net cash. Our thesis is that a couple of the stabilized properties are worth most of the market cap, while the new and aligned management team will be able to turn around several of the other key buildings. We first invested in the company in Q4 at $27/shr, the stock trades at a similar price today, and we believe intrinsic value in three years is around $55/shr. We published our 35-page thesis on the company in November here.

Seaport’s new management team have already made several significant improvements since our initial investment. The company’s most valuable asset in our view is Pier 17, which is 10 minutes’ walk from Wall St and overlooks the Brooklyn Bridge. The Pier makes money from its rooftop concert venue, restaurants on the ground floor, and three floors of office space in between. Significant improvements are being made in all three areas.

First, the company announced that from next winter the rooftop will be enclosed with a glass structure so that it can extend its successful concert series year round. Secondly, the 25% of largely unproductive space on the ground floor is being redeveloped into a new dining and entertainment space. And thirdly, 13,605 sqft of empty office space will be leased to a dinning and nightlife concept as part of a boarder repositioning of the Pier towards entertainment.

Seaport’s most problematic property, the loss-making Tin Building food hall next to Pier 17, has also seen improvements. Management are shutting down several of the unsuccessful restaurants, expanding the successful ones, consolidating back-of-house operations, and reducing the total number of staff required.

None of these changes by themselves will materially turn Seaport’s properties around, but we are encouraged by the volume and pace of the changes. We continue to believe that we are at the beginning of an entire neighborhood of Manhattan appreciating in value.

I was recently interviewed by Graham & Doddsville (begins p.34). Take a look if you’d like to learn more about our research process, Seaport Entertainment, Watches of Switzerland, or view other interviews and stock writeups.

Thank you for placing your trust in me. I feel extremely fortunate to have a loyal set of partners and your patience allows us to take advantage of the drawdowns that occur in our markets from time to time.

Many of our partners came to us through recommendations from existing ones. If you know someone who might share our long-term value approach and benefit from our insights and investing in the fund, please feel free to connect us. You can always contact me about referrals or anything else at chris.waller@pluralinvesting.com.

The dial-in details for our quarterly call are attached on the next page.

Best Regards,

Chris Waller, Portfolio Manager

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.