22

nd

January 2015

Fourth Quarter 2014 Investor Letter

Review and Outlook
The Peninsula Capital Fund (the Fund) returned -4.73% net of fees and expenses in the fourth quarter of
2014, whilst the S&P 500 and the Euro Stoxx 50 returned +4.39% and -2.79% respectively.
This quarter has been the most volatile of the year. The oil sell-off intensified throughout the quarter. It
looks like the root of the problem corresponds to a structural supply / demand adjustment; on the supply
side, the US shale boom and the negative of OPEC countries to cut production could have created a
supply glut. On the other hand, oil demand has fallen triggered by an Emerging Markets slowdown and the
continued stagnation of the European economies. In the meantime, the US economy seems to be hitting
on all cylinders with manufacturing and employment performing strongly. The dollar has strengthened
against every major currency and we expect this trend to continue as the Fed prepares to hike interest
rates. Additionally, at year end we witnessed a surge in volatility coinciding with the inability of the Greek
th
ruling party to form government and calling for early elections as soon as the 25 of January. The polls say
that most probably the next Greek government will be headed by the radical leftist party Syriza that could
jeopardise the stability of the Eurozone. Finally, we expect Mr. Draghi will most likely start a QE program to
address the low inflation environment in Europe, which, in combination with a lower FX rate could be
supportive for European companies and economies.
Our top contributors for the quarter were: Murphy USA (+15.0%), Gencorp (+12.6%) and Polycom
(+8.1%). MUSA is a clear beneficiary of the oil price decline; On the one hand, they are able to lower their
gas prices at a slower pace than the fall in feedstock prices, resulting in margins improvement. On the
other, low gas prices means that customers have more money in the wallet which supports its convenient
stores sales. GY posted good results and returned to FCF generation thanks to WC containment and
margins stability. Investors are still waiting for the companys Investor Day to get further details on the
integration of Rocketdyne (acquired in June 2014). Lastly, PLCM, delivered better than expected results
with a reduction in the sales decline and uplift in margins underpinned by strict cost controls. The share
price was also supported by a USD400m buyback program announced in September.
Our top detractors were: RWE (-20.6%), QEP Resources (-20.1%) and Tubacex (-15.4%). RWEs
performance was affected by the UKs government decision of blocking the sale of the companys Oil and
Gas arm to Russian billionaire Mikhail Fridman. The sale is part of RWEs plan to streamline its operations
and improve its financial position. As we explain below in further detail, both QEP and TUB were impacted
by the oil price decline that will affect their operating results in the coming quarters.
Reduced Positions
During the quarter we exited several positions due to different reasons that we outline below:
Hess / QEP Resources: We sold both companies shares once it was clear for us that the weakness in
the oil price was not due to a short-term swing but a structural supply / demand adjustment. A lower oil
price directly impacts the companies sales, margins and FCF generation leading to a net debt increase
and thus a stock price de-rating. The negative returns originated by the sale of QEP shares were
practically offset by the gains in our HES position.
Tubacex: In line with the above, and despite the strong operating performance of the business, we sold
out the shares after adjusting our investment case to the oil price decline. We believed that oil companies
(Tubacexs main clients) were poised to start reducing capex having a negative impact in the companys
future backlog. Consequently, we are expecting a severe sales detraction and margins and FCF
generation to weaken. Finally, the highly leveraged BS does not provide enough comfort to tackle a
potential operating turmoil. We managed to exit the position with a 6.5% profit.
Commerzbank / Banco Popolare: Investing in the banking sector is not part, at present, of our core
philosophy that focuses on cash flow generating businesses, easy to understand and with healthy financial
positions. Despite these were legacy positions, we decided to hold them until the ECBs stress tests / AQR
results were released, as we believed it could be a clear catalyst to reshuffle the shares depressed
valuations ( trading at c. 0.5x Tangible Book Value). The results were very positive for both banks
eliminating the feared rights issue risk, however the prices remained flattish and we decided to sell the
shares in line with our strategic views. The overall results of both trades were: Banco Popolare (0%) and
Commerzbank (-4.3%)
Murphy USA / Polycom: We sold both positions with +71.4% and +25.8% gains respectively. The
rationale behind these sales was strictly based on price, as we considered that both equities had reached
fair valuations. We still believe that, fundamentally, these companies are delivering on all grounds and

have focused management teams that safeguard shareholders interests by implementing excellent capital
allocation policies. We would revisit the investment case if the share prices were to fall to attractive
valuations back again.
In conclusion, we are very disappointed by the Funds performance negatively affected by legacy positions
and our portfolio concentration on oil related stocks that have been changed during the quarter. We
consider that we are now better positioned to implement our redefined investment strategy and new risk
controls. Hopefully, this should enable us to deliver adequate risk-adjusted returns. We would like to thank
all our investors for their support during this tough learning period and expect to reward this patience in the
years to come. We wish you all a very happy New Year!

Sincerely,

Antonio Sainz Suelves

Managing Partner

Jose Mara Casta Echevarra

Managing Partner

DISCLAIMER: This document has been distributed for informational purposes only. Neither the
information nor any opinions expressed constitute a recommendation to buy or sell the securities or assets
mentioned, or to invest in any investment product or strategy related to such securities or assets. It is not
intended to provide personal investment advice, and it does not take into account the specific investment
objectives, financial situation or particular needs of any person or entity that may receive this document.
Persons reading this document should seek professional financial advice regarding the appropriateness of
investing in any securities or assets discussed in this document. The authors opinions are subject to
change without notice. Forecasts, estimates, and certain information contained herein are based upon
proprietary research, and the information used in such process was obtained from publicly available
sources. Information contained herein has been obtained from sources believed to be reliable, but such
reliability is not guaranteed. The investment fund Peninsula Capital, FIL may have a position in the
securities or assets discussed in this article. Peninsula Capital FIL may re-evaluate its holdings in such
positions and sell or cover certain positions without notice. No part of this document may be reproduced in
any form, or referred to in any other publication, without express written permission of Peninsula Capital,
FIL. Past performance is no guarantee of future results.