Globa bal l Value ue Joi oint t Investmen stment t For orum um Liam Nunn, Investor January 2020 Marketing material for professional investors or advisers only.
Lea earnin rning g outcome tcomes Describe the four step process by which you can identify worthwhile value stocks List the 7 red questions used to avoid value traps Describe why value investing works over the long term 1
The e Value ue Tea eam Edges es In a competitive investment world, you have to have an edge… Informational Analytical Focus on value Organisational Behavioural 2
Inform formation ational al – the e impo portance rtance of s f screeni reening ng Recycle - too expensive Opportunity Set Alwa ways s start art with th the e cheape eapest st stoc ocks ks to avoi oid d style le drift ft Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 3
Analyt alytical ical – One e True e Model el Minimum ten year model Source: Schroders. 4
Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Missing Misleading Structural Profits Risk liabilities? profits? changes? into cash? Reward Financial Business ESG? stress-test? ‘ quality ’? The answ swer er to each ch question stion contribut ntributes s an element nt of risk sk and/or d/or rewa ward Source: Schroders. 5
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q1) Is the screen missing any liabilities (or assets)? ¥225 8 ¥200 16 15 (29) (48) 14 ¥175 (23) ¥150 190 177 ¥125 144 ¥100 Market cap Minority (Net Cash) Bloomberg Pension and Minority Top-up Capital gains (Financial (Associates) Our Enterprise Interest on Enterprise Value Provisions tax Assets) Value Balance Sheet Liability Asset Total Source: Schroders, September 2019, Bn of JPY. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 6
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q2) Are the screen profits misleading? – Satisfied historic profits are representative Source: Schroders. 7
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q3) Is the business likely to suffer from structural change? – Most of the business has limited structural threats – c.10% of profits come from a division that includes structurally challenged HDDs Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 8
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q4) Do the profits turn into cash? – 10 year median free cash flow/net income conversion of 95% Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 9
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q5) How would the business stand up to a financial stress-test? – Very strong balance sheet – They have net cash of Y28bn which compares to their lowest EBITDA since 2008 of Y37bn – In addition they have Y48bn in financial assets – 1.9x gross debt/lowest EBITDA since 2008 Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 10
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q6) Is it a high quality or low quality business? – 10 year return on lease adjusted capital of 13.5% – They haven't made a loss in any year for the last 12 – Two (modestly) negative free cash flow years Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 11
Missing Misleading Structural Profits into Financial Business ESG? liabilities? profits? changes? cash? stress-test? ‘quality’? Analyt alytical ical – 7 7 Red ed Ques estions tions Discovering company DNA Q7) Are there any ESG considerations? – Stakes in related businesses including suppliers and customers – Poor allocation of capital or required for Japanese corporate relationships? – Daido Steel is their largest shareholder – Fines for monopolistic behaviour in the hard disk drive business – Board is old, entirely Japanese and lacks independent experience – Share count hasn't increased for 12 years Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 12
Beh ehavi aviour oural al – all abo bout ut judgem ement ent Risk Reward Overa erall l levels s of risk k and d rewa ward d are re evalua aluated d and d balanc lanced ed Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 13
Beh ehavi aviour oural al – all abo bout ut judgem ement ent Reward ¥ (Bn) 10 year median Last year Normalised Normalised Sales 586 681 625 EBITA margin 5.7% 4.0% 5.3% EBITA 33 27 33 P&L tax rate 28% Reward NOPAT 24 EV/NOPAT multiple 14.0 EV 336 Net debt/cash 29 Other EV adjusts 18 Market cap 382 Upside 101% Source: Schroders, September 2019, Bn of JPY. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 14
Beh ehavi aviour oural al – all abo bout ut judgem ement ent Risk – Balance sheet risk very low – Most of the business has limited structural threats Risk – c.10% of profits come from a division that includes structurally challenged HDDs – Numerous ESG risks Risk k score ore 4/10 0 (where here 10/10 10 is the e highest hest risk) Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 15
Beh ehavi aviour oural al – all abo bout ut judgem ement ent 4/10 4/10 Risk Risk 101% 101% 101% Reward Reward Reward Overa erall l levels s of risk k and d rewa ward d are re evalua aluated d and d balanc lanced ed Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell. 16
St Stock ck deb ebate ate Liam Nunn Andrew Lyddon Reward Reward Risk Risk 101% 75% vs. 4/10 vs. 3/10 Nick Kirrage Simon Adler Reward Reward Risk Risk 90% 115% 3/10 4/10 vs. vs. This s is an illust strati ative ve exam ampl ple 17
Organis anisation ational al – the e va value e tea eam m archiv chive Company Archive of all companies Efficiency, iciency, learning rning, sharin aring Source: Schroders. 18
Process ocess Focus on getting better 2014 Regular Team Learning Days Development Proposed Hypothesis Large sample size All stocks Systematic process The Value ue arch chive ive allows ows us to embed d systematic tematic reflection ection and d learn rning ing into o our r proc ocess ss Source: Schroders. 19
The e Value ue Tea eam Edges es In a competitive investment world, you have to have an edge… Informational Analytical One True Model and Valuation screens 7 Red Questions to are the sole source avoid traps of investment ideas Focus on value Organisational Behavioural Quantifying risk Value archive for and reward stockpicking, portfolio construction and getting better over time 20
Lea earnin rning g outcome tcomes Describe the four step process by which you can identify worthwhile value stocks List the 7 red questions used to avoid value traps Describe why value investing works over the long term 21
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