Globa bal l Value ue Joi oint t Investmen stment t For orum - - PowerPoint PPT Presentation

Marketing material for professional investors or advisers only.

Liam Nunn, Investor

Joi

• int

t Investmen stment t For

• rum

um

Globa bal l Value ue

January 2020

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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

The e Value ue Tea eam Edges es

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In a competitive investment world, you have to have an edge…

Informational Organisational Analytical Behavioural

Focus

• n value

Inform formation ational al – the e impo portance rtance of s f screeni reening ng

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Alwa ways s start art with th the e cheape eapest st stoc

• cks

ks to avoi

• id

d style le drift ft

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Recycle - too expensive Opportunity Set

Analyt alytical ical – One e True e Model el

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Minimum ten year model

Source: Schroders.

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Discovering company DNA

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.

Risk Reward Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Q1) Is the screen missing any liabilities (or assets)?

Discovering company DNA

Source: Schroders, September 2019, Bn of JPY. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

15 14 16 8 (29) (48) (23) 190 177 144 ¥100 ¥125 ¥150 ¥175 ¥200 ¥225 Market cap Minority Interest on Balance Sheet (Net Cash) Bloomberg Enterprise Value Pension and Provisions Minority Top-up Capital gains tax (Financial Assets) (Associates) Our Enterprise Value Liability Asset Total

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Q2) Are the screen profits misleading?

Discovering company DNA

Source: Schroders.

Missing liabilities? Misleading profits? ESG?

– Satisfied historic profits are representative

Structural changes? Profits into cash? Financial stress-test? Business ‘quality’?

Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Q3) Is the business likely to suffer from structural change?

Discovering company DNA

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– Most of the business has limited structural threats – c.10% of profits come from a division that includes structurally challenged HDDs

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Q4) Do the profits turn into cash?

Discovering company DNA

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– 10 year median free cash flow/net income conversion of 95%

Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Q5) How would the business stand up to a financial stress-test?

Discovering company DNA

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– 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

Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

Analyt alytical ical – 7 7 Red ed Ques estions tions

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Q6) Is it a high quality or low quality business?

Discovering company DNA

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– 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

Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

Analyt alytical ical – 7 7 Red ed Ques estions tions

12

Q7) Are there any ESG considerations?

Discovering company DNA

Source: Schroders. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

– 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

Missing liabilities? Misleading profits? Structural changes? Profits into cash? Financial stress-test? Business ‘quality’? ESG?

Beh ehavi aviour

• ural

al – all abo bout ut judgem ement ent

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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.

Reward Risk

EBITA margin 5.7% 4.0% Upside 101%

Beh ehavi aviour

• ural

al – all abo bout ut judgem ement ent

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Reward

Source: Schroders, September 2019, Bn of JPY. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Reward

Market cap 382 Net debt/cash 29 Other EV adjusts 18 EV 336 EV/NOPAT multiple 14.0 NOPAT 24 P&L tax rate 28% EBITA 33 27 33 5.3% Normalised 625 ¥ (Bn) 10 year median Last year Normalised Sales 586 681

Beh ehavi aviour

• ural

al – all abo bout ut judgem ement ent

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Risk

Risk k score

• re 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.

– Balance sheet risk very low – Most of the business has limited structural threats – c.10% of profits come from a division that includes structurally challenged HDDs – Numerous ESG risks

Risk

4/10 Risk 101% Reward

Beh ehavi aviour

• ural

al – all abo bout ut judgem ement ent

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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.

101% Reward 4/10 Risk 101% Reward

St Stock ck deb ebate ate

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This s is an illust strati ative ve exam ampl ple

Risk

4/10

Reward

101%

vs.

Risk

3/10

Reward

75%

vs.

Risk

3/10

Reward

90%

vs.

Risk

4/10

Reward

115%

vs.

Andrew Lyddon Nick Kirrage Simon Adler Liam Nunn

Organis anisation ational al – the e va value e tea eam m archiv chive

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Efficiency, iciency, learning rning, sharin aring

Source: Schroders.

Company Archive of all companies

Process

• cess

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Focus on getting better

The Value ue arch chive ive allows

• ws us to embed

d systematic tematic reflection ection and d learn rning ing into

• our

r proc

• cess

ss

Source: Schroders.

2014

Regular Team Learning Days Proposed Hypothesis Large sample size All stocks Systematic process Development

The e Value ue Tea eam Edges es

20

In a competitive investment world, you have to have an edge…

Informational Organisational Analytical Behavioural

Focus

• n value

Value archive for stockpicking, portfolio construction and getting better over time Valuation screens are the sole source

• f investment ideas

One True Model and 7 Red Questions to avoid traps Quantifying risk and reward

21

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