market folly

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Nigel Waller and Andrew Goodwin of Oldfield Partners who pitched longs of Kansai Electric (TYO:9503) and E.ON (ETR: EOAN).


Nigel Waller & Andrew Goodwin's London Value Investor Conference Presentation

Waller and Goodwin usefully suggested that disruption happens in four different way. Firstly, technology gets investors excited sometimes creating bubbles around new technologies. Investors over react and drive the price of the disrupted stocks too low. The market drives disrupted stocks to valuations that make no sense unless the technological change is very significant, swift and permanent.

A second area of disruption is caused by product cycles. It can affect all industries, but it is particularly prevalent in the pharma sector. The market gets excited about new drugs and over-pessimistic about those that are facing patent cliffs.

A third type is caused by new competition. The market tends to favour the disruptor and focuses its ire on the incumbent. The fourth area of disruption is caused by economic cycles, both large scale macro-economic cycles and smaller scale capital cycles that some sectors are particularly prone too.  As contrarian investors they try to take advantage of these cycles to buy companies when they are cheap.


Long Kansai Electric (TYO: 9503):  In March 2011, Japan suffered a large earthquake that led to the Fukushima nuclear disaster. Prior to Fukushima there were 54 reactors in service providing 30% of Japan’s energy needs. Afterwards all the reactors were taken off line.  Kansai Electric was hit particularly hard because half of its energy production came from nuclear.  Investors exited the stock.

Oldfield Partners started to buy in March 2015 at around 1100 Yen per share. At the time the Japanese market analysts were completely bearish and none of them thought the return to service of the nuclear reactors was likely. Market analysts in Japan are risk averse as that is the only way they have survived the long-term bear market. The Oldfield team became convinced that Japan could not satisfy its energy demands without the nuclear reactors. Despite some local resistance, Japan is slowly bringing its nuclear reactors back online. Kansai now have 4working reactors reducing their reliance on thermal and reducing fuel costs.

Kansai shares are up 60% from Oldfield’s buy price. They feel shares still offer good value as Kansai think that eventually 7 of its 11 reactors will come back on line. Operating profits could increase a further 50% from here.Japanese energy markets are deregulated. Kansai is the lowest cost producer and could enter new regions to grow its market share.


Long E.ON (ETR: EOAN):  The market has been worried that technological and regulatory changes will disrupt E.ON. Since 2010 Germany has been trying to shift from thermal to renewables. The Fukushima disaster led Germany to do a U-turn on its nuclear policy and to set a target for closing its nuclear power stations by 2022. An additional negative for potential E.ON investors was that solar energy was being heavily subsidised.

Oldfield Partners started buying E.ON in Sept 2015 and has an average price of 7.24 euro.  The nuclear operations are in run-off. In terms of returns 65% now comes from the regulated business. E.ON has completed its de-gearing.

In 2018 E.ON announced an asset swap with its big competitor RWE. RWE is going to take E.ON’s renewables and E.ON will get RWE’s regulated business. The asset life of the renewables is probably 25 years whilst the regulated assets have an asset life of around 100 years. That is a good swap and E.ON will have 80% regulated assets. The synergies of the combined business are significant at 600-800m euros. There is a 5% dividend that can grow.

Be sure to check out the rest of the presentations from the London Value Investor Conference 2018.