In spite of valuations generally out of touch with reality, it was an active year for Standard.


There’s always something to do—we were reminded of the late Peter Cundill’s motto as we banked on two textbook value investing opportunities against of backdrop of irrational exuberance in financial markets.


The first one concerns Dassault Aviation. The French manufacturer of military aircrafts and business jets remains firmly controlled by the Dassault family, who owns 62% of equity capital. Airbus comes second, with 10%. As a result, float is scanty and does not accommodate for large institutional investors to step in.

Since Dassault does not need to raise money — on the contrary, it has actively returned capital to its shareholders via mammoth share buybacks — and will never be an acquisition target, it is difficult to see what would boost its stock market valuation, apart perhaps a substantial dividend increase. This lack of obvious catalyst has also kept smaller funds at bay.

The situation, however, comes across as textbook value investing. At €87 per share, minus the €3bn in excess cash and 25% stake in defense group Thales, valued roughly €4bn at current market prices — itself at rock-bottom levels — Dassault’s market capitalization assigns zero value to its core aviation business. Such peculiarity can only command attention, especially in the wake of the mega-contract signed a few days ago with the UAE.

Entire chapters could be devoted to the massive moat surrounding Dassault, a world leader in civil and military aviation with its acclaimed Falcon and Rafale franchises, among others. The holder of a unique, sovereign, highly strategic and non-reproducible expertise, it enjoys the unwavering support of the French State through both its commercial diplomacy and guaranteed volumes of orders.

After a troubled start on export markets, Rafales are now selling like hot cakes with big wins in the UAE, Egypt, India and Greece. Customers were apparently waiting for operational engagements — like those performed in Afghanistan, Libya and Syria — to take out their checkbooks. In terms of capabilities and value for money, the Rafale handily beats its two European rivals, the Typhoon and the Gripen.

Though none of this is secret, Dassault’s valuation stalls despite a compelling history of returns and profitability, plus a full backlog that should remain as such for at least two decades. It is rare to find a profitable, extraordinary business protected by a such a massive competitive advantage and yet valued for zero. So what gives for this head-scratcher?

One can only guess, but there are different possibilities. To begin with, excess cash may not be completely available, since it could find itself gobbled up by costly R&D programs. In a like manner, despite its public listing, the stake in Thales is not entirely liquid either, as it is too sensitive to be disposed of, even partially. Finally, the defense sector is being filtered out by the ESG creed imposed on institutional investors.

That’s for the flip side. Because finance-wise, Dassault Aviation has grown annual revenue from €4bn to €6bn over the last decade, with net margins oscillating around the 10% threshold and satisfactory rates of return on capital employed along the cycle. The fortress balance sheet is another source of comfort, with current assets covering all liabilities multiple times just by themselves.

Seen from another perspective than the sum-of-the-parts assessment laid out above, Dassault Aviation has generated an aggregate of €4bn in profits over the last decade, of which €3bn were returned to shareholders. This earning power is expected to grow meaningfully over the next years and should be considered against the current entreprise value of €4.5bn, including the stake in Thales.

Led by superb CEO Eric Trappier, management carried out massive share buybacks between 2014 and 2016, shrinking the float even further, and reducing the number of shares outstanding by a fifth. This very intelligent decision, at least on paper, has yet to produce the desired effect on share price. But that should prove only a matter of time.

The Rafale platform is now mature, with still decades of operational relevance ahead of itself. As for sales of Falcons, they should pick up as soon as fears about Covid dissipate. As a result, via Standard and other family-controlled investment vehicles, we have accumulated a sizeable amount of shares as they lingered below €90.

The second textbook value investing opportunity concerns Suncor Energy. In Canada, depressed commodity prices, limited export options and bloated takeaway capacity have sent valuations of oil and gas producers spiraling down to historic lows. They now sit at a fraction of their proven reserves value, and appear heavily discounted on both the basis of their average earning power and asset quality.

Such pessimism looks unwarranted. The country hosts some of the most efficient operators in the world, many of which sporting best-in-class capital efficiency and extraction costs. On top of these economics come talented, shareholder-friendly managements, an orderly regulatory framework as well as a non-optional adherence to stringent ESG standards.

Elsewhere in the world, supply chains from the Middle East remain at permanent risk of disruption. Venezuela and large African producers such as Libya, Angola or Nigeria are structurally failed states. Russia, for its part, has been accurately portrayed by a famous U.S. senator as a gas station run by the mob. That leaves Canada with a privileged position on the global energy chessboard.

Albeit unpredictable, oil price has held out above an average of $60 per barrel, an endless pandemic and OPEC+ easing production curtailments notwithstanding. Gloomy headlines have had little impact on consumption so far, with demand near all-time highs and storage reaching ten-years lows.

In fact, the peak oil narrative has been going on for decades — either on the supply or demand side — but it seems to have nothing to envy to the peak coal narrative, which usage is itself at all time-highs despite all the bad press it rightfully deserves.

For those who hold the view that oil will last as a staple of modern civilization and a major source of energy in the future, yet do not want to bet on junior producers with higher torque but stretched balance sheets, Suncor is offering a compelling alternative. The Canadian major may not have as much upside as other leveraged names in the sector, but it sports a highly resilient business, while its valuation carries an astounding margin of safety.

With its fortress balance sheet and integrated model — from production to refining, transport, storage and distribution — the company owns a unique, non-replicable infrastructure across Canada and North America. Among its prize assets are the Syncrude and Fort Hill production sites, the 380,000 barrels-per-day refining capacity, the giant Western Canada storage facilities and the Petro-Canada gas stations network.

Upstream, the company is milking its long-life oil sands assets with over 30 years of reserves and an annual production of about 750,000 barrels per day. Oil sands have the advantage of low decline rates, low production costs and close to zero geologic risk. The cons are very high upfront investments, but at Suncor those have been amortized years ago.

With its huge feedstock access, refineries geared for heavy crude processing and dedicated, fully-owned midstream and sales channels, Suncor achieves synergies along the whole value chain, with industry-leading utilization rates and high margins. In this regard, with its assets concentrated in the world’s safest jurisdiction and limited exploration investments going forward, the company is capable of keeping its average production cash cost under $30 per barrel, and can technically break even at $35 per barrel.

Under Steve Williams’ leadership, previous management executed the highly opportunistic takeover of Canadian Oil Sands during the downturn — in fact, right at the bottom. Combined with capex roll-offs at their other sites, this well-timed acquisition should prove highly accretive over the next decades.

Now that its oil sands assets are fully developed, and that the company has acquired operatorship of Syncrude, additional synergies are expected ahead. This is leading management to forecast $53bn in funds from operations over the 2021-2015 period.

Meanwhile, their focus has shifted on returns of capital to shareholders. Under a $55 per barrel base scenario, Suncor intends to return $21 per share — $8 in dividends, $7 in share buybacks and $6 in debt reduction — to its owners over the next five years. That comes against a current share price of just $22. The opportunity did not escape insiders, who themselves have been avid acquirers on the open market.

So what could go wrong? Suncor has had chronic operational issues in the past, including fires at its Fort Hill facility; a new drop of oil price cannot be ruled out; and financial institutions, spooked by the rampant ESG mania and anti-oil narrative, may keep shunning the industry for a while.

We frame things differently, and believe that among large capitalizations Suncor stands out as one of the finest and safest contrarian investments in equity markets today. As a result, via Standard and other family-controlled investment vehicles, we have accumulated a sizeable amount of shares between $15 and $19.