ECP VALUE MANAGEMENT February 2019 Entrepreneurial Value Investing - - PowerPoint PPT Presentation
OK ECP VALUE MANAGEMENT February 2019 Entrepreneurial Value Investing Agenda EuropeanCapital Partners o Investment team o Investment process Investment approach Outlook Market value vs fundamental value Not all earnings are
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▪ EuropeanCapital Partners
▪ Investment approach ▪ Outlook ▪ Market value vs fundamental value ▪ Not all earnings are created equally ▪ Portfolio ▪ Our offering ▪ Fund key facts ▪ Appendix
₋ Krones ₋ Cloetta
▪ A Strong entrepreneurial DNA
Reinertz
in 2014 with the arrival of Léon Kirch
▪ Two complementary areas of expertise
approach (investment funds and segregated mandates)
under AIFMD license (CSSF regulated)
▪ 9 FTE, 12 years avg. industry experience, 7 nationalities ▪ Investment team
experience of 20 years) and 2 analysts
Luxembourg
▪ Total AUM: EUR 451.38mn ▪ ECP Flagship SICAV: EUR 66.94mn
Source: ECP. Data as at 31/12/2018.
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Alternative Investments 74% Marketable securities 26% European Equities 97% Global Equities 2% Mixed Assets 1%
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▪ Léon Kirch
Management from Solvay Brussels School and was the founding President of the Luxembourg CFA Society. Léon is one
known to clients foremost as the fund manager of the Nordea European Value Fund that he co-managed from 2002 to
entrepreneurial dynamic characterized by the launch of a portfolio management activity founded on the key concept of “Entrepreneurial Value Investing” and a strong wish to promote the merits of active management in relation to the growing success of passive investment solutions.
▪ Allan Saustrup Jensen
portfolio managers of Léon Kirch´s Value strategies. The native Dane started with Nordea Bank in 1997 where he held various positions in product development, distribution, advisory and trading. In 2005, he moved to UBS in Luxembourg and served as a portfolio manager for multi asset mandates. Prior to joining European Capital Partners in 2015, he worked with Léon Kirch for four years at European Value Partners. Allan Jensen became a CFA charterholder in 2007 and a CAIA charterholder in 2009.
▪ Gajendra Rai
Energy sector where he held different positions internationally. In 2014, he decided to give a new orientation to his career and pursued Master of Science in Banking and Finance at the Luxembourg School of Finance. He joined ECP in 2015 as an intern and, upon graduation, was retained as a full-time employee. His industrial background provides him an edge when analysing companies from those sectors.
▪ Mohamed Afifi
as an associate Auditor for one of the big four PriceWaterhouseCoopers in Egypt. In 2013 he moved overseas to enrol in the FEMIP program at the European Investment Bank to afterwards take the routes of a Financial Controller. In June 2017 he joined European Capital Partners as an Investment Analyst after finishing his Master degree in Wealth Management in Luxembourg School of Finance. He also passed level II CFA exam.
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▪ Long-term investing in marketable securities with a private equity mindset ▪ A strong alignment of interest ensured by the long-term commitment of shareholders and employees
Chairman of the Board
▪ Other Luxembourg entrepreneurs and institutions as fund’s seeders (references can be provided)
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▪ Full alignment of interest with our investors ▪ Every investor is our partner ▪ Capacity limit of 1bn EUR ensures consistency and absence of style drift ▪ Full focus on Entrepreneurial Value Investing ▪ Asset Managers and not Asset Gatherers ▪ Boutique outfit enables long term investment horizon
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50 70 90 110 130 150 170 190 210 230 250 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 MSCI Europe Net TR Index MSCI Europe Value Net TR Index Fund
Portfolio MSCI Europe Net return MSCI Europe Value Net return Turnover rate Min (P,S) / av. Asset 2008
10.30% 2009 42.40% 31.60% 34.51% 20.48% 2010 22.82% 11.10% 4.85% 15.15% 2011
33.89% 2012 22.13% 17.29% 17.17% 13.04% 2013 14.23% 19.82% 22.22% 21.42% 5 years 121.20% 88.86% 83.98%
▪ Track-record from the Nordea European Value Fund co-managed by Léon Kirch from Jan. 2002 to 7 July 2014. ▪ Source: Bloomberg, net of fees performance from 31 December 2001 to 7 July 2014. Please note that past performance is no indication for future performance. The sub-fund referred to on this page is a constituent of Fund of a UCITS operated by a different UCITS manager and is not part of the ECP Flagship SICAV. Whilst the sub-fund might have or have had similar characteristics to that
noted that it may have been subject to a different fee structure and set of investment restrictions. ECP has reflected the data here for information only which has been derived from a commonly used industry source being Bloomberg. ECP in no way intends that the reflection of such information in this manner might in any way be designed to impinge on any proprietorial rights that the UCITS Manager might have in respect of the data reflected here.
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Entrepreneurial Value Investing
“Think and act as an entrepreneur” ▪ The risk of an investment is tied to its fundamentals not to its stock price ▪ Golden rule: Understand companies’ business ▪ Fundamentals of the business are translated into a Firm’s intrinsic value “Margin of safety” concept (B. Graham) ▪ Earning Power: capacity to generate discretionary free cash flow on an average year → focus on amount of cash needed to maintain the business ▪ Margin of safety: difference between stock price and its intrinsic value ▪ Target: 40% discount to estimated intrinsic value Patience will be rewarded ▪ 4-5 years investment horizon: investment case needs time to mature ▪ Active, high conviction and concentrated portfolio (± 40 individual lines) ▪ Flexibility: go where
▪ Low portfolio turnover
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Independent Investment Risk Monitoring
Idea Generation
screenings
sources
Due Diligence & Valuation
analysis
Power Value
safety +/-40%
Portfolio Construction
Conviction
Quality
Portfolio Maintenance
with companies
investment thesis
Sell Discipline
▪ Our screening is like a “fishing net” pointing our attention to undervalued quality companies
is always better than a fairly valued Quality Company
always a better investment opportunity than a stagnant Quality Company
low valuation
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Valuation
▪ FCF yield ▪ Price Earnings ▪ EV/EBIT
Profitability Growth Payout Safety
Quality
▪ Asset Utilization ▪ Capital Intensity ▪ Operating Margins ▪ FCF Generation ▪ Returns on incremental capital invested ▪ High Payout ▪ Low recourse to external financing ▪ Low Debt ▪ Low cyclicality
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▪
: Signed in Dec. 2017 ▪ Collaboration with ISS Ethix for
▪ ECP views ESG as a risk factor, not a performance driver on its own
negatively impact the Earnings Power of a company
▪ ESG works as an additional layer of information for decision-making ▪ Integration in the Investment Process as a 1st step of the fundamental analysis ▪ 2 main topics considered
Controversial weapons
Mass destruction weapons (nuclear, chemical, biological) Conventional weapons (non-detectable fragments, blinding laser weapons, anti- personnel mines, cluster munitions, incendiary weapons, depleted uranium ammunition)
Norm based research
Human Rights Labour standards Environment Anti-corruption
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ESG Analysis Proxy Investigation Financial Statements Industry Structure Value Chain Product Lifecycle Operating Environment Management Adjust Financial model based on the findings of each steps Assess key risks and value drivers of the Business
A roadmap to determine Earnings Power Value
Build Financial Model
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▪ As central banks start to withdraw from quantitative easing and interest rates move up with the US taking the lead, valuations start to matter again: this is happening now. ▪ Value historically performed best when the valuation gap between growth and value was the highest: this is happening now.
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▪ Europe has been an unloved asset class in 2018 as investors have been fleeing political turmoil. ▪ European companies have been growing their earnings and valuation multiples are undemanding. ▪ On Brexit and Italy, we remain convinced that reason will prevail. ▪ Weak EUR supports growth in Europe.
Cumulative fund flows
as a percentage of AUM
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▪ 75% return potential in our portfolio. This is the highest return potential for our portfolio we have seen in the last 4 years. ▪ 14 companies have left the portfolio during 2018. Almost all were sold on our estimate of fair value. A testiment that over time the market will recognize the value we see in companies. ▪ 14 companies with strong fundamentals have entered the portfolio during 2018. Several of them have been bought during the last few months. Our investment process is designed to find companies significantly mispriced in the market. This happens more often when volatility is high and the market has a too short term focus.
Source: ECP, Data as of 31/12/18
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Source: Bloomberg
▪ Markets already improved noticeably since January 1st as some of the prevailing investor pessimism appears overdone. ▪ One swallow does not make a summer, but many risks have been priced in our portfolio: normalization of central bank policies, tariffs, loss in economic momentum, Brexit, Italy,oil … ▪ The combination of low valuation, neglected investment cases, cash flow generative businesses and solid balance sheets are a good starting point for our portfolio in 2019. ▪ We have been using the unique opportunity to add names where « babies have been thrown with the bath water » : Atos, Superdry, … Performance YTD as of 21/2/19 ECP – Flagship European Value class A +8.11% MSCI Europe Value TR +8.73% Atos SE +16.17% Fresenius SE & CO KGAA +18.26% Hugo Boss +19.88% Jeronimo Martins +24.18% Subsea 7 +19.96%
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▪ Median company is lowly valued, profitable and conservatively financed
100.00 110.00 120.00 130.00 140.00 150.00 160.00 170.00 180.00 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 NAV TP
30% 75%
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GAAP earnings Manager earnings Cash earnings
What multiples are based on ▪ Accounting regulation dictate behaviour ▪ Large use of non-cash provisions of past account entries ▪ Some real cash costs must be capitalized What CEOs are paid on ▪ Extensive and free use of adjustments ▪ Incentives to put real costs below the operating line ▪ So-called extraordinary items are quite ordinary What ECP is based on ▪ We adjust for cyclicality ▪ We adjust for investments required to run the business ▪ We adjust for non-cash charges, restructuring and pension liabilities ▪ Warren buffet 1986 letter to shareholders explains it best
amortization, and certain other non-cash charges less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume”.
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Schaeffler AG Elekta Leoni
No current position for ECP ▪ Cash earnings underperform reported earnings ▪ Significant growth investments in times of cyclical headwind ▪ Uncertain return on growth investments +125% for ECP clients* ▪ 2015/2016 margin collapse due to non-underlying items and growth investments masking performance of underlying business ▪ Cleaning the GAAP earnings for excessive growth investments and capitalized R&D costs showed healthy cash generation +70% for ECP clients* ▪ Self-created problems mitigated by self-help solutions ▪ Strong order book and cyclical tailwind ▪ Underlying cash flows positive when GAAP earnings are cleaned for excessive non-recurring items and excess capacity investments
*return measured on initial investment
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(*) Annualised data. Source: Bloomberg, weekly data, net
no indication for future performance.
Strategy (net) MSCI Europe NR Index MSCI Europe Value NR Index Total return since inception 9.86% 16.22% 9.80% Total return 3Yrs Rolling 6.42% 14.52% 17.50% Total return 1 Yr Rolling
Total return YTD 5.93% 6.19% 6.18% Standard deviation 3 Yrs Rolling (*) 13.58% 13.39% 14.53% Sharpe ratio 3 Yrs Rolling (*) 0.16 0.35 0.39 MSCI Europe NR Index MSCI Europe Value NR Index Tracking error vs. index 5.38% 6.91% Active share vs. index 91.1% 94.8% 1 Yr Beta vs. index 0.96 0.89
5% 15% 25% 35% 45% Dec-2014 Jun-2015 Dec-2015 Jun-2016 Dec-2016 Jun-2017 Dec-2017 Jun-2018 Dec-2018
MSCI Europe Net TR Index MSCI Europe Value Net TR Index ECP European Value A EUR
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Industrials 21.88% Consumer Discretionary 16.60% Consumer Staples 15.13% Health Care 11.82% Financials 9.72% Information Technology 8.79% Energy 8.57% Communicati
3.98% Materials 2.95% Cash & Others 0.56%
By Sector
Large Cap (> EUR 10Bn) 35.06% Mid Cap (EUR 2-10 Bn) 44.52% Small Cap (< EUR 2Bn) 19.80% Cash & Others 0.61%
By Market Cap (*)
EUR 44.94% GBP 22.71% DKK 11.17% SEK 9.05% CHF 6.07% NOK 6.05%
By Currency
Top 10 holdings Industry Market cap Country Weight Novo Nordisk AS B Health Care Large Cap Denmark 4.2 Publicis Groupe SA Communication Services Large Cap France 4.0 Caixabank SA Financials Large Cap Spain 3.8 Unilever NV Certif of Shares Consumer Staples Large Cap United Kingdom 3.7 Novartis AG Reg Health Care Large Cap Switzerland 3.6 SAP SE Information Technology Large Cap Germany 3.4 Europcar Group SA Industrials Small Cap France 3.3 Subsea 7 SA Energy Mid Cap United Kingdom 3.1 Tecnicas Reunidas SA Energy Small Cap Spain 3.1 Loomis AB Industrials Mid Cap Sweden 3.0 Total 35.2
Source: Bloomberg, ECP. Data at a given date, may evolve over time (*) Large Cap: > EUR10bn; Mid Cap: EUR 2-10bn; Small Cap: < EUR 2bn)
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Investment Funds
domiciled SICAV
share classes available
constraints (legal, prospectus, internal)
Segregated Mandates
negotiated SMA
tailor-made based on investor’s needs
depending on mandate size
What really matters is the applied investment approach not the vehicle Stay Informed with ECP!
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Legal Form UCITS compliant, Luxembourg SICAV Management Company European Capital Partners (Luxembourg) S.A. Investment manager European Capital Partners (Luxembourg) S.A. Custodian Banque de Luxembourg Administrator European Fund Administration S.A. Auditor Deloitte Audit NAV frequency Daily ECP Flagship European Value Share class A EUR I EUR C EUR ISIN Code LU1169207518 LU1277321912
LU1768645753
Investor focus Retail Institutional
Retail
Inception date 08/08/2015 (*) 28/08/2015
28/02/2018
Management fees (max.) 1,50% 0,80%
0.90%
Performance fee
6 on 7 Registered in LU, DE, CH, SE, FR, NL LU, DE, NL
(*) Transformed from an AIF launched on 01/01/2015
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▪ 61 companies with daily liquidity above 500 k EUR and ▪ Market cap between EUR 100mn and EUR 26bn
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Source: ECP’s proprietary screening model.
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▪ Designing, manufacturing, selling and servicing bottling and packaging industry ▪ Intralogistic supplier for food an beverage industry
▪ Market cap: EUR 2.7bn ▪ Revenue: EUR 3.9bn ▪ EBITDA margin: 9.1% ▪ Net debt/Ebitda: -0.4 ▪ #employees: 15 000 ▪ Service: 20-25% of revenue
West Europe 27% Middle East/Africa 15% USA 15% APAC 14% South America/Mexico 12% Others 17%
Main Markets
Source: company’s data
▪ Growing population
▪ Expanding Middle Class
Class by 2030
▪ Bottle designs are more and more tailor- made
machines
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Source: company’s data
ESG analysis
Proxy Investigation
Financial Statements
profitable Industry Structure
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Value Chain
Product Life Cycle
Operating environment
Management
▪ Sound Company
▪ Long-term value compounder
and distribute wealth to shareholders
return on capital
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▪ Attractive valuation and visible catalysts
increase margins towards 8% EBT
28% to 22% from better execution of business with significant self-help drivers
without much additional capital required
▪ Valuation
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▪ 37 companies with daily liquidity above 500 k EUR and ▪ Market cap between EUR 50mn and EUR 22bn
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Source: ECP’s proprietary screening model.
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▪ Manufacturing and marketing a broad range of strong local confectionary brands with long heritage ▪ Categories are: confectionary, chocolate, nuts, pastilles, chewing gum, pick & mix
▪ Market cap: SEK 10bn ▪ Revenue: SEK 6.3bn ▪ EBITDA margin: 15% ▪ Net debt/Ebitda: 2.4 ▪ #employees: 2 500
Sweden 34% Finland 21% Netherlands 14% Denmark 7% Norway 6% Germany & UK 5% Others 13%
Main Markets
Source: company’s data
▪ Everybody has Munchy Moments ▪ Strong brands require shelf space among retailers ▪ Attractive non-cyclical market with low growth ▪ Improving capacity utilization of factories ▪ Self-help cost efficiencies ▪ ± 2% of revenues provide margin/growth optionality
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Source: company’s annual report 2017, Data monitor and Mintel
ESG analysis
Proxy Investigation
business
Financial Statements
Industry Structure
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supply chain
Value Chain
both add and reduce operational volatility Product Life Cycle
acquisition of Candyking in 2017
Operating environment
Retail (Cloetta, Unilever, Mondelez)
Management
▪ Stable business / Strong consumer brands
generations
beyond their means
leverage and turnaround
▪ Improved positioning
restructuring increased profit margins
M&A to grow. A strong balance sheet came into play.
more efficient marketing budget and more brand investments. Selective M&A can be expected.
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▪ Attractive valuation and visible catalysts
utilization and lift operating profit by SEK 100mn
marketing planning will be spend on organic growth without negative effect on profit margins
rewarded by lower valuation discount versus peers
▪ Valuation
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