SYZ: Italian specialist finance a top contrarian play

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Italian speciality finance companies are proving to shine among the rubble, according to the head of European equities at SYZ Asset Management.

Mike Clements says while the country’s banks are still too opaque to properly assess their risk of failure, other financials – such as asset managers and loan service providers – can benefit from the beleaguered banking sector at more attractive valuations.

Italy’s recent price weakness has been fuelled by political turmoil and a struggling banking system.

He names Eurocastle, which as Italy’s leading non-performing loan servicer is expected to participate in the looking after the country’s “enormous” stock of NPLs.

Elsewhere, Anima is the largest independent asset manager in Italy, whose share price has been under pressure recently due to problems with its distribution partners, such as Monte Dei Paschi.

Clements adds: “However, at current levels we feel much of the risk is priced in and actually there is considerable upside from its developing relationship with Poste Italiane.”

Banca Sistema is another specialty finance company the group is favouring as a contrarian play.

It acquires trade receivables owed by Italian Public Administration.

Its core product, invoice factoring, purchases receivables at a discount to face value and then recovers the full amount generating an attractive internal rate of return.

“This is an overlooked and under-researched stock that has an attractive, low-risk business model,” Clements adds.

“The low valuation reflects lack of wider interest from other investors and general antipathy towards Italian financial stocks.”

He says more uncertainty is to be expected given the recent referendum defeat and as such are keeping an eye out for further individual value opportunities.

Meanwhile he believes the market is misunderstanding much of the infrastructure sector, in particular toll road providers.

Often viewed as long-duration bond proxies due to a perceived sensitivity to interest rate rises and therefore suffering recent price declines.

Yet he says this is too simplistic a view and could lead to mispricing opportunities.

“The reality is a hike in rates is unlikely to dramatically deter drivers from using toll roads and these companies will continue to generate high levels of free cash flow.

“We are currently invested in Atlantia and Snam and continue to hunt for further opportunities as sentiment weighs on the sector.”