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17 October 2014

Third Quarter 2014 Investor Letter

Review and Outlook
The Peninsula Capital Fund (the Fund) returned -0.57% net of fees and expenses in the third quarter of
2014, whilst the S&P 500 and the Euro Stoxx 50 returned +0.62% and -0.1% respectively.
This quarter the equity markets have remained flat both in Europe and in the US. The uncertain situation of
Ukraines geopolitical outcome combined with the brutality of the ISIS mise-en-scne spooked the markets
in early August, rapidly recovering after Mario Draghis statement announcing he was considering a
European quantitative easing program in order to head off a potential deflation. More recently, the stock
market correction, which started after the positive development of the Scottish Referendum hinted us a
certain level of fatigue in investor sentiment. Perhaps, the 5 year old stock market rally, currently fuelled by
increasing M&A activity and continued share buyback programs, is now coming across its lofty valuations
and the fact that most probably, in its medium term future it will not only face the end of the Feds QE but
also the first interest rate hike in many years.
For the time being we remain bullish with our net long exposure currently at 85%. Even though the macro
landscape is becoming increasingly difficult to read, we still remain focused on our bottom-up analysis and
in our search for undervalued businesses. This last quarter we have been building up bigger positions in
our long-term strongest ideas (Maire Tecnimont and Westmoreland Coal), this comes as a result of our
inability to find additional value at these market multiples and our belief that our core holdings are still
significantly undervalued regarding their intrinsic value. Valuation wise we also remain confident on
Commerzbank and Banco Popolare (the only two financial institutions we carry in our portfolio) ahead of
the ECBs stress-test/AQR. Despite we expect some banks being required additional one off charges to
increase NPL coverage levels (especially Banco Popolare) we argue that, in both cases, valuation remain
too attractive to ignore at deep discounts to tangible book value. We will review both positions after the
AQR results.
Our top contributors for the quarter were: Murphy USA (+8.5%), Tubacex (+8.4%) and the Amundi Topix
Hedged ETF (+5.5%). MUSA has progressively rerated catching up with its non-justified discount to peers.
We find there is still substantial room for MUSA to keep on delivering as a low-cost and independent
gasoline and convenient store retailer. TUB posted a better than expected set of results in late July. The
market is now realizing that TUB may be able to outpace its already ambitious strategic turnaround. We
remain confident on Tubacexs management and on its ability to capture new clients for their high added
value tubes segment. The Topix ETF was our third largest contributor. Whilst being a legacy position we
have decided to hold on to it for several reasons; on the one hand the Topix trailing 13x PE multiple is the
lowest of the developed economies, and on the other, our experience has taught us that monetary policy in
the form of quantitative easing eventually triggers higher multiples. In the US, the 1.92% dividend yield is
now approximately 60 basis points below the 2.5 0% 10-year, and by contrast, the dividend yield of the
Topix is over 3x de JGB yield, and practically 90% of stocks have a dividend yield ahead of the JGB yield.
This should sooner or later motivate local investors out of government bonds and into equities. For the
foreseeable future we expect further yen weakening, earnings growth and signs of inflation in price levels.
We are sticking to it on our belief that it has now become a value play.
Our top detractors were: Maire Tecnimont (-17.9%), Gencorp (-16.4%) and QEP Resources (-10.8%). MT
and QEP were heavily affected by the steep declines in the price of crude oil. In both cases, we consider
their investment cases intact and have taken advantage of Maires selloff to add to our position. During the
past months Gencorp has remained a volatile stock. The company still screens badly, many cash flow
adjustments are needed to see its true financial performance and managements communication with
investors should improve to give better visibility. Having said this, we have retested our initial investment
case and recently held a conference call with management. We still believe GY has a compelling
investment case going forward and are sticking to our initial call.

Increased Positions
Maire Tecnimont is an Italian integrated industrial group providing engineering and construction services
in the Oil, Gas and Petrochemicals (OGP), Infrastructure & Civil Engineering (ICE) and Power sectors.
During the last two years MT has been undergoing a successful financial restructuring in the form of a
rights issue, debt rescheduling and a major business turnaround focused on building up its core OGP
business and downsizing/selling both Power and ICE.
The company has been uninvestable for many years as it suffered a rapid BS weakening after pursuing
an aggressive M&A expansion focused on the purchase of non-core businesses that were inadequately

integrated. We now think there is still much value to be found, especially in its OGP division. Since mid2012 the company has refocused towards this division, where it has enjoyed a historical competitive
advantage having considerably higher margins than its peers (Maires 6.1% vs. Tecnicas Reunidas 5.3%
EBIT margin) as they are engaged in niche projects (particularly in polyolefins and licensing urea plants
and granulation technology).
As a result of its past strategic mismanagements, shares have been beaten down and investors have
capitulated. At todays share price, we believe the market understates the underlying value of the
company. Should MT keep on delivering on its operational guidance and on its asset disposal plan, which
would enable the company return to the cash positive territory, we believe MT should not trade at a
discount to TRE as we are expecting the former to enjoy better margins. Currently MT trades at a 27%
2015 FCF yield compared to TREs 7.5%.
We find another positive in Fabrizio di Amato, its founder and current Chairman; while we could argue he
is the individual who brought MT onto its knees, we now also take into account that he is the self-made
and vigorous businessman who founded MT when he was just 21 years old and grew Maires OGP
division through acquisitions into a leading player with global footprint in the challenging Oil & Gas
engineering sector. He has a deep knowledge of the industry and we believe he has learned the lesson
well. In addition, he has reinvested in MTs rights issue proceeds he made when the company was floated
back in 2007, doubling down on the companys future.
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Westmoreland Coal is the 6 largest thermal coal producer in the US, operating 12 surface coal mines (6
in the US and 6 in Canada) which supply coal under long-term cost-indexed contracts to a stable customer
base, the majority of them being investment grade utilities. Moreover, it runs two coal-fired power
generating units located in the US.
The coal mining sector has been one of the worst performers in the commodity landscape for many years
now. Currently, it is still facing extraordinarily bad conditions due to a combination of high competition in
power generation (primarily the use of natural gas in combined cycle), plummeting coal prices derived from
excess supply and last, but not least, increasingly tougher regulations aimed at reducing carbon
emissions. This mentioned situation has led to many bankruptcies (James River Coal, Trinity Coal and
Patriot Coal to name a few). On a global basis, coal is by far the primary and cheapest source of energy,
but this competitive advantage is lost when a complex transportation infrastructure is needed.
Approximately 80% of the final selling price of each metric ton of coal is comprised by handling, rail or
shipping costs, making the location of the mining operations and that of the final customer essential in the
profitability of the business dynamics.
Westmoreland enjoys a much different situation than the one portrayed above. It operates mines that are
located intentionally near their customers thermal plants, this way, they can continuously supply coal with
a very low transportation cost to their customers. This results in a win-win situation, as the utility buys coal
at a discount from the broad coal market (50% cheaper than the natural gas combined cycle), making their
thermal plants more competitive and setting itself apart from the complex and dangerous activity of mining
their own coal. On the other hand, Westmoreland acquires a captive customer and supplies the coal under
cost-protected contracts (not being exposed to a rise or fall in coal prices) and thus, benefitting from very
stable and predictable cash flows, something unheard off in this cyclical industry. In the majority of cases
this long-term contractual structure resembles the take or pay concept making the client even more
captive.
In this depressed environment, utilities are found to be outsourcing the coal mines they own (which supply
to their own thermal plants) and coal companies are, at the same time, disposing of coal assets in order to
reduce their unsustainable debt levels. In this context Westmoreland is able to buy the coal mines it
considers attractive (under its current business model) at 3-4X Ebitda (Kemmerer and Sherritt Coal) and
subsequently incorporate them into their stable high yielding structure. With this profile, WLB is bound to
further expand their contract mining and cost-plus model, deliver on their bolt-on acquisition potential,
transform itself into an MLP and to pursue a bond refinancing to reduce its financial cost (which we
estimate in a USD40M impact). Valuation wise, the shares are currently trading at an attractive 15% 2014
FCF yield, whilst we willingly wait and see how the investment case unfolds.

Reduced Positions
Acciona is a Spanish conglomerate with a global footprint, operating businesses ranging from renewable
energies (its core business), civil infrastructures, logistics and heavy construction to water treatment,
homebuilding and asset management.

In the past years, Accionas share price has been under pressure as the market was discounting a severe
regulatory risk on its renewable assets due to the new Spanish energy reform to address the electricity
tariff deficit issue. Considering the Spanish renewable assets were run under high leverage levels,
investors feared that a significant reduction of the subsidies granted by the government could mean many
of these projects would enter into financial distress. By mid-year, the final regulation was passed and
although it still meant a strong hit, it was much less punitive to the companys cash flow than what the
initial draft had envisaged. In addition, during 2014 management carried out an in-depth strategic review,
leading to refocus its efforts on deleveraging, FCF generation and shareholder value creation. This new
strategy crystalized in the cancellation of the 2014 dividend, non-core asset disposals and a key deal with
Private Equity firm KKR by which Acciona sold a 33% stake of AEI (best-in-class international renewable
asset portfolio) with the idea of creating and subsequently floating a Yieldco in the US, which would unlock
significant value of those assets involved in the transaction. Considering all of the above, by mid-August,
we initiated a long position as we thought that the company was bound to generate a stable stream of
cash flows going forward and was trading at double-digit FCF yields.
In late September, Francisco Garca Params, the talented CIO of Accionas asset management firm
(Bestinver) announced its resignation due to discrepancies with Accionas top management. At the time,
Bestinver managed funds totaling EUR10bn and generated approximately c.15-20% (c.EUR70m) of the
companys FCF. Being a one mans show we granted him all of Bestinvers past and future success, and
thus we conservatively believed that we shouldnt count anymore on its EUR70m FCF contribution when
valuing the Group. Considering Accionas FCF was going to take a hit, we decided to exit our position at a
7% loss. We still believe management is taking steps in the right direction to streamline its core business,
and we would reconsider the investment case should the shares continue to de-rate to an attractive risk /
reward profile.

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
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Persons reading this document should seek professional financial advice regarding the appropriateness of
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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
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