Relative to the index, April was the best month in history, or at least the past 25 years.
The value of Norwegian Air Shuttle increased by close to 80 per cent during the month, but this explains less than half of the outperformance. Other significant contributors were Grieg Seafood, DNO, Aker BP and Aker Solutions. At the other end of the scale we find Protector Forsikring and Royal Caribbean Cruises, which declined by 13 and five per cent, respectively.
Norwegian Air Shuttle presented quarterly results at the end of April. The first quarter is low season for airlines in general and Norwegian presented its weakest quarter ever. Costs have run awild during the last 18 months, following strong fleet growth as well as increasing fuel prices. In addition, the company has been forced to reduce airfares in order to fill a sufficient number of seats.
We have had a long-term perspective of the share, assuming that profitability is currently at its lowest and fleet growth at its highest. When this turns, sometime during the second half this year, we expect profitability to improve. The quarterly report was a positive surprise regarding costs excluding fuel, as the numbers were five per cent better than expected.
The Norwegian Air Shuttle share skyrocketed in April due to a major shareholding notification from the London-based holding company IAG, which owns, among others, British Airways. They have acquired close to five per cent of the shares in Norwegian and are contemplating placing a bid on the entire company. We are by no means surprised by their interest. With Norwegian's fleet, IAG will own by far the largest fleet in Europe and strengthen their position in several important regions. IAG launched its own low cost long distance airline under the brand Level in 2017, but is currently lacking scale to its business. By the end of 2018, it is expected that their fleet will count only five aircraft.
IAG is making a healthy profit on its operations. Assuming that they will be able to achieve the same profitability with Norwegian Air Shuttle, IAG should be able to pay well above today's share price of 300 kroner. Initially we thought it unlikely that there would be a transaction in the short run, given the large difference between the share price and the underlying value
in Norwegian, even after its recent share price jump. However, Norwegian has received several inquiries after IAG announced its interest in the company. Norwegian has appointed financial advisers and set up an internal task force to handle the incoming inquiries, and the majority shareholder has said he won't be standing in the way of a possible transaction.
We believe IAG shares our view of profitability currently being low and growth being high, and sees this as a good timing to acquire Norwegian Air Shuttle. Furthermore, they share this assessment with other industry players. If a transaction does not happen now, the stock will decline in the short term, but we are determined not to sell on the back of this month's share increase. We are waiting for the operations and earnings per share to improve to higher levels than what we have seen in 2017 and 2018. This way, as long-term investors, we will get better paid than if there were to be an acquisition with a traditional takeover premium to today's share price.
Pareto Investment Fund A had a return of 13.8% in April and 18.3% on average for the past 5 years as per 04/30/2018.
Historical returns are no guarantee for future returns. Future returns will depend, inter alia, on, market developments, the portfolio manager's skill, the fund's risk profile, as well as fees for subscription, management and redemption. Returns may become negative as a result of negative price developments.
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