Notes From London Value Investor Conference 2018

The 2018 London Value Investor Conference recently concluded and we've got notes from each speaker's presentation.  Click the links below to go each speaker's pitch.


London Value Investor Conference 2018 Notes


- Dawid Krige (Cederberg Capital): Long Kweichow Moutai (SHA):600519) & Dong-E-E-Jiao (SHE:000423)

- Nigel Waller & Andrew Goodwin (Oldfield Partners): Long Kansai Electric (TYO:9503) & E.ON (ETR:EOAN)

- Ben Preston (Orbis): Long Peabody Energy (NYSE:BTU)

- Nick Kirrage (Schroders): Long Standard Chartered (LON: STAN)

- Mark Asquith (Somerset Capital): Long Pacific Textiles (HKG:1382), Sunny Friend (TPE:8341), Cia Hering (BVMF:HGTX3) 

- Alex Wright (Fidelity Special Situations): Long Pearson (LON:PSON), Bunzl (LON:BNZL)

- Stephen Mitchel & Bryan Pilsworth (Foyston, Gordon & Payne): Long Transcontinental (TSE:TCL) & Walgreens Boots Alliance (NASDAQ:WBA)

- Adrian Warner (Avenir Capital): Long HCA Healthcare (NYSE:HCA)

- Stephen Anness (Invesco Perpetual): Long National Oilwell Varco (NYSE:NOV)

- Alvaro Guzman & Fernando Bernad (Az-Valor Asset Management): Long Buenaventura (NYSE:BVN)

- Jonathan Boyar (Boyar Value Group): Long Axalta Coating Systems (AXTA), Acushnet Holdings (GOLF), Madison Square Garden Networks (MSGN), Franklin Resources (BEN), Howard Hughes (HHC) 

- Mark Pearson (Arcus Investment): Long Asanuma Corp (TYO:1852)

Dawid Krige Long Kweichow Moutai & Dong-E-E-Jiao: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Dawid Krige of Cederberg Capital who pitched longs of Kweichow Moutai (SHA:600519) and Dong-E-E-Jiao (SHE:000423).


Dawid Krige's London Value Investor Conference Presentation

Dawid co-founded Cederberg Capital in 2011. From 2005 to 2011 he was at Mondrian Investment Partners where he was a portfolio manager and China specialist. Cederberg are concentrated, fundamental, bottom-up, quality investors focused on China.

Frauds in China exist but they can be avoided. Fraud is not endemic. The recent China Hustle film presents a misleading and overly negative view of Chinese companies.

China is catching up with the US and will overtake it. In terms of STEM graduates - Science,Technology, Engineering, Mathematics – US 5% Vs China 38%. Global Patent applications: US 19% Vs China 43%. Unicorn unlisted start-ups with a valuation of more that $1bn: US 45% Vs China 43%. Yet China only accounts for 4% of the MSCI world index whilst the US is 50%. Over the next 20 to 30years China is going to become 20% to 30% of the MSCI. It will take share from the US.

Long: Kweichow Moutai (SHA: 600519):  Last year Kweichow Moutai overtook Diageo as the world’s largest spirits company. The company is over 300 years old. It spends very little on marketing. Moutai is a national drink and is offered to visiting politicians and dignitaries. It has 99% brand awareness in China. It’s essentially a monopoly with 70% of the spirits market. Its margins are almost 3x Diageo’s. ROIC: 30%. In the last 10 years it has grown at 30% per annum. At a PE 21x 2019 it trades on a similar PE to Diageo but with much more growth.


Long: Dong-E-E-Jiao (SHE: 000423):  Dong is a traditional Chinese medicine company that makes nutritional supplements. The supplements are over-the-counter products that are made from natural ingredients and therefore don’t face regulation. Cederberg think of the company as a luxury consumer goods company and not a healthcare company. The brand has a history that goes back over 2500 years. It has 70% marketshare and 98% brand awareness. It trades on a PE 14x 2019.

Krige said that whether the product works or not is not that important because of its cultural significance. If your parents and your parent’s parents have used it, you are likely to use it.  The biggest risk is from a change in distribution that could happen due to the challenge from e-commerce.


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

Nigel Waller & Andrew Goodwin Long Kansai Electric & E.ON: London Value Investor Conference 2018

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.

Ben Preston Long Peabody Energy: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Ben Preston of Orbis who pitched a long of Peabody Energy (BTU).


Ben Preston's London Value Investor Conference Presentation

Peabody is the world’s largest publicly listed provider of coal. Coal mining had a particularly tough time in 2015/6. At one point almost half of US coal was being produced by companies that had filed for bankruptcy.  Peabody produces 200m tons of coal per year mostly in the US which it mostly sells to power stations. A lower volume of coal is produced in Australia but that is where Peabody makes most of its money from export markets, particularly China.

After the commodity markets peaked in 2011 Peabody found itself with too much debt. It filed for bankruptcy in 2016 and spent a year sorting itself out. The shareholders were wiped out. The re-incarnation has lower capex and debt interest payments. Whilst production is down, free cash flow is up. As Peabody are not opening new mines the money is flowing back to shareholders. There is a very high FCF yield at 25% on a trailing basis.

Since the commodity crash coal production has declined. In addition, China has been trying to tackle its pollution problems by moving away from coal. This has been good for the environment but does not keep Chinese people warm. China relaxed the new clean air policy in 2016. There is a conflict between the E and the S of ESG (environment, social, governance). Tackling air pollution has led to more demand for high quality coal because it is more efficient and pollutes less. Peabody’s coal is high quality.

Peabody is cheap because investors are worried the price of coal will fall back again. Mr Market is convinced it will but if it doesn’t Peabody will do well.


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

Mark Asquith Long Pacific Textiles, Sunny Friend, Cia Hering: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Mark Asquith of Somerset Capital Management who pitched three longs: Pacific Textiles (HKG:1382), Sunny Friend (TPE:8341), and Cia Hering (BVMF:HGTX3).


Mark Asquith's London Value Investor Conference Presentation

Mark Asquith is the lead manager of the Global Emerging Market Small Cap and EM Small Cap Strategies.

Long: Pacific Textiles (HKG: 1382):  It’s been a savage environment for textile companies. Competition between brands and from Amazon has depressed prices.  Environmental regulations create barriers to entry as few can afford to meet the benchmarks for water, air and heat treatment. Also, there are barriers to entry that are driven by customer expectations: lead time 7-45 days, quality, ESG. Few can meet these. The number of textile enterprises has reduced dramatically in the last 10 years.The market is concerned about growth, tariffs and a stronger Renminbi.  Pacific Textiles is trading at PE 10x, ROE 30%, FCF 10%.

Long: Sunny Friend (TPE: 8341):  Sunny Friend is a waste management company in Taiwan. They have incineration and liquidation waste disposal facilities. It’s a compounder rather than a deep value stock.  In Taiwan, they have 35% market share in medical and 16% in industrial waste.  They have barriers to entry because no one wants a waste management plant in their back yard (NIMBYism). There are also customer switching cost and permits. These protect their Taiwanese business but make it difficult for them to break into the Chinese market. China is a potential growth market (currently <20% of sales).  Sunny friend is not classically cheap, but it does have good free cash flow yield and generation.

Long Cia Hering (BVMF: HGTX3):  Cia Hering is a Brazilian clothing brands company. It has been having a hard time including losing control of its point of sale. The shares fell 80% from 2012-2015.  Somerset bought their stake in 2015/16 when new management replaced the old. The new management have rebranded the product range and invested in point of sale.  Many of their competitors have gone under. Consumer confidence is picking back up.


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

Nick Kirrage Long Standard Chartered: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Nick Kirrage of Schroders who pitched a long of Standard Chartered (LON: STAN).


Nick Kirrage's London Value Investor Conference Presentation

Deep value has had ten of the worst years of under-performance verses growth on record. Most investors are invested in franchise stocks not deep value. They are over-exposed to growth.

Long: Standard Chartered (LON: STAN):  Nick Kirrage’s partner, Kevin Murphy, pitched Standard Chartered at last year’s conference. Since then it’s down 11%. They’ve liked banking for the last five years. They’ve been early and have been adding to existing banking positions. STAN’s valuation reflects a fear of emerging markets. It’s a unique franchise in emerging markets and is one of Kirrage’s and Murphy’s largest positions.


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

Alex Wright Long Pearson & Bunzl: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Alex Wright of Fidelity Special Situations Fund who pitched two longs: Pearson (LON:PSON) and Bunzl (LON:BNZL)


Alex Wright's London Value Investor Conference Presentation

Long: Pearson (LON:PSON)  Wright said that Pearson was the most exciting stock in his portfolio. His Special Situations Fund purchased shares in 2017, the shares are up around 35% since then. The stock performed poorly between 2015 and 2017 losing about 60% of its value. Analysts are negative on Pearson with 3 buys and 9 sells, the most sell recommendations in the FTSE 100. Low unemployment in the US has pushed college enrollments down. Also, Amazon and marketplace sellers have challenged text book publishers by providing a more effective platform for re-selling second-hand text books.

Pearson is a complex business that primarily sells text books and online resources for education. It is primarily US focused. The company is misunderstood by the market. Education is a structural growth area. Pearson has 40% market share in their core market. Education is changing from being textbook/ analogue in delivery to being online/ digital. The cost of delivering digital education is preventing competition from other players and giving Pearson a competitive advantage. They are twice the size of their nearest competitor.  Digital will go from 50% to 80%. The digital model is access not ownership, more like Spotify or Netflix. It will stop competition from course material resellers. Over time digital will reduce the cost base and create a simpler business - £300m cost savings by 2020. Pearson could become one of the highest quality companies in the FTSE 100.

Long: Bunzl (LON: BNZL):  Bunzl is a global distributor and outsourcer making things like plastic forks, coffee cups, and cleaning products. The US is their major market.  EV/ sales has fallen from 0.85 to 0.7 since 2015. Investors fear that Bunzl’s business will get disrupted by Amazon. Amazon does sell most of the products that Bunzl distributes.  Amazon won’t eat Bunzl’s lunch. Bunzl does not compete primarily on price. Their customers use them because they are a one stop shop. They supply Walmart stores in the US with till rolls, cleaning products and light bulbs. Walmart is their largest customer. Costa is another big customer who Bunzl supply with coffee cups. They are better than Amazon at delivering reliably on time. They offer their customers bespoke solutions that Amazon don’t. 

Investors have also been worried about Bunzl’s reliance on single use plastics, the negative environmental impact and the potential for regulation. Bunzl is beginning to address this issue.  Where they have the use of recycled products and wood products have led to higher profit margins.  Bunzl can grow by acquisition. Wright noted that analysts on the sell side find it hard to model businesses that grow by acquisition.


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

Stephen Mitchell & Bryan Pilsworth Long Transcontinental & Walgreens Boots Alliance: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Stephen Mitchell and Bryan Pilsworth of Foyston, Gordon & Payne who pitched two longs: Transcontinental (TSE:TCL) and Walgreens Boots Alliance (NASDAQ:WBA).


Stephen Mitchell & Bryan Pilsworth's London Value Investor Conference Presentation

Long Transcontinental (TSE:TCL):  It's Canada’s largest printing company and an emerging N.A packager. It’s a high-quality company that is not broken but it is going through a change process.  The company is well lead by Francois Olivier (President & CEO) and Isabelle Marcoux (Chair). They have been astute at getting out of declining businesses quickly, for example, they exited the textbook market. The remainder of the printing business achieves high margins.

TCL is better and cheaper than peers. For example, it is more profitable than its competitor, Quad.  Unlike printing, packaging is a growth market. The US market is worth $25bn and is growing 2-3%per year. Transcontinental’s printing know-how is transferable to packaging. TCL entered the packaging market in 2014 and by 2017 it had acquired 7 plants. In 2018 it acquired a further 21 new plants with a US focus from Coveris America.  TCL are now No. 7 in packaging in the US. They are No. 2 in cheese packaging.P/E 11.5x (2019); EPS $2.4; EV/EBITDA 7x (2019)


Long: Walgreen Boots Alliance (NASDAQ: WBA):  The shares are cheap because it’s rumoured that Amazon is going to enter the pharmacy business.  70% of prescriptions are recurring. 85% of prescriptions are generic.  People with recurring prescriptions may chose Amazon home delivery. Pharmacies may lose foot traffic which will impact brick and mortar store sales.

Walgreens is the largest retail pharmacy, health and daily living destination across the US and Europe. Market Cap $63bn. Global sales of $118bn, over 13,200 stores in 11 countries. Over the last 10 years, sales and EPS growth of 8%. Average ROE of 16%.  Two reasons why pharmacy/ store networks have a moat against Amazon.  1. Convenience: 70% of seniors chose pharmacy over mail order due to convenience.  2. Compliance: Managed Care Operators (MCOs) need pharmacies to ensure proper patient drug usage.  So far chains have taken share at the expense of mail order and independents.

High margin beauty products provide an opportunity to improve front-of-store sales and expand margins. Customers like in-store demonstrations before purchase. On-line sales are only 8% but growing.  Walgreens already has an omni-channel offering - a multi-channel sales approach – and a mobile offering. The mobile channel has 88m users in the US. Half of digital sales come through mobile. 50% of users use an app in-store. 20% of users are 55 years or older.  PE 10.3x CY 2018; ROE 19.8% CY 2018; Net debt / EBITDA 1.5x; dividend yield 2.5%.


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

Adrian Warner Long HCA Healthcare: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Adrian Warner of Avenir Capital who pitched long HCA Healthcare (NYSE:HCA).


Adrian Warner's London Value Investor Conference Presentation

Prior to founding Avenir Capital in 2011 Adrian Warner worked in private equity.

Long: HCA Healthcare (NYSE: HCA):  HCA is a private hospital provider in the US with 179 hospitals, 38K staff, 47K beds. It has a strong  financial track record of growing revenue and margin stability. Margins have averaged 19% for over  20 years. It has leveraged 5% annual revenue growth into 15% annual EPS growth.

The bulk of the industry is not-for-profit hospitals or state/ local govt owned. Only 20% of hospital are for-profit in the US. In terms of inpatient costs per day for-profit hospitals have 24% lower costs, than not-for-profit. HCA is the dominant hospital provider in the for-profit sector with x2 the market share of the nearest competitor, Tenet Healthcare (THC). HCA’s scale and geographic focus provide a competitive advantage. It focuses on large urban markets which allows a greater focus on high-end subscribers. It has also focused on the sunbelt states which have large elderly populations.

Its industry leading capex allows it to attract the best physician groups. Its competitive advantage is demonstrated by long-term margin superiority, 19% Vs 10% for the industry average.  The hospital sector is expected to grow at around 6% per year. Even though there is a lot of regulatory noise, the Republicans failed attempts to pass health care reform in 2017 - with a majority in both houses - shows that radical change in the sector is unlikely.

HCA has grown through acquisition. The CEO believes the pipeline for potential acquisitions is good. Weak competitors provide M&A opportunities. HCA has bought back 20% of its shares since 2013.  EBITDA 7.7x; PE 10.7x; FCF yield 5.5%.


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

Stephen Anness Long National Oilwell Varco: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Stephen Anness of Invesco Perpetual who pitched a long of National Oilwell Varco (NYSE:NOV).


Stephen Anness' London Value Investor Conference Presentation

Oil stocks have sold off because of the fear of the challenge from electric vehicles and new supply from US shale.  Going back to the 1950s, Energy stocks are trading at a 40% discount to their average price to book value.  The death of oil has been exaggerated. Battery technology has been slow to develop and is not about to replace oil. Batteries are not good at storing energy compared to oil. Petrol is a 50x better store of energy than the best lithium-ion batteries.

Cobalt is a critical component for the cathode. Current production of 130Kt per year is sufficient for only 5.4m vehicles. If all the potential cobalt mines were opened that would allow only 12m EV vehicles in 5 years’ time.  The move to battery power creates serious security issues because 60% of the world’s supply of cobalt is located in one country, The Democratic Republic of Congo.  Because of the growing demand for cars generally, even if a quarter of those were EVs by 2025 – a high estimate - there would still be demand for a growth in ICE vehicles. ICE car sales are therefore likely to rise in the coming years.  Only 20% of oil demand comes from cars anyway. Trucks 24%; other transport (aircraft, ships) 12%; Industry 28%; power 5%.

Oil consumption is still rising whilst net reserves are falling. Increased demand will come from China, Latin America, India. Last year was the worst year for conventional oil discoveries since 1940. In the recent downturn the industry has reduced capex by about $700bn.

National Oilwell Varco is a US based company. Stephen Anness’s fund started purchasing NOV shares in late 2016. The shares trade at a similar price today.  It would be difficult to build an oil rig without using NOV products. It has 70% market share in some areas.  NOV has a strong balance sheet. They have been free cash flow positive for 14 of the last 15 years.  FCF averaged 11% per year over 15 years.  NOV is seen by analysts as an off-shore business. NOV’s off-shore revenues have collapsed from $21bn to $7bn and they have made some on-shore acquisitions. Today, two-thirds of its revenues come from on-shore. The change has not been recognised by analysts.


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

Alvaro Guzman & Fernando Bernad Long Buenaventura: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Alvaro Guzman and Fernando Bernad of Az-Valor Asset Management who pitched a long of Buenaventura (NYSE:BVN).


Alvaro Guzman & Fernando Bernad's London Value Investor Conference Presentation

Alvaro Guzman was Francisco Parames' partner at Bestinver 2003-2014.

Long: Buenaventura (NYSE: BVN)  Mining is not a good business. ROCE is low across the cycle.  There are potentially some negative stock specific issues: Buenaventura has all its assets in Peru. It is family owned. The stock is up x4 already.  But if you are going to invest in mining copper is not a bad place to be. Population growth, urbanisation, industrialisation and growth in disposable income will lead to more demand.

Copper use in China is only 30KG/ capita Vs 100KG/ capital in the West. There is a long way to go.  Copper production is getting structurally harder. On a global basis, BVN has the 3rd largest copper mine and the 4th largest reserves. It’s a low-cost mine, open pit and highly mechanised.  A 20% stake in the Cerro Verde mine is worth the entire EV of Buenaventura. You get Buenaventura’s gold assets for free.

Guzman disagrees with Buffett’s negative view on gold as an asset for investment. Owning gold is a good insurance policy at a time when governments and institutions are trying to drive inflation higher.BVN’s management team is unusually good in the mining industry. No capital increases; they hate debt; they own more shares than anybody else; they have successfully negotiated a period of hyperinflation; they are good capital allocators.


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

Jonathan Boyar's London Value Investor Conference Presentation 2018: AXTA, GOLF, MSGN, BEN, HHC

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Jonathan Boyar of Boyar Value Group who presented five long ideas: Axalta Coating Systems (AXTA), Acushnet Holdings (GOLF), Madison Square Garden Networks (MSGN), Franklin Resources (BEN), and Howard Hughes (HHC).


Jonathan Boyar's London Value Investor Conference Presentation

Long: Axalta Coating Systems (AXTA):  Axalta is the world's 5th largest coatings company. Berkshire Hathaway own a large stake. It’s the no. 1 player in refinish (re-painting autos after accidents). Refinish accounts for 50% of their EBITDA and is the crown jewel. They have turned down two takeover offers. The company appears to be for sale, but they are waiting for the right offer. They are buying back shares. They are currently trading ats ubstantially less than an acquirer would pay at EBITDA 10x 2019. This type of company usually gets bought out for 13x to 15x.

Long: Acushnet Holdings (NYSE: GOLF) Acushnet designs, makes and sells golf products. It is a great consumer franchise. It’s not in a major index. It has minimal sell-side coverage. It generates 40% of revenues from consumer products. It’s a potential takeover target. Nike has left the golf product business.

Long: Madison Square Garden Networks (MSGN):  It’s a broadcasting company that was technically the parent from the spin out of Madison Square Garden (MSG). At the time of the spin-out it was carrying a lot of debt (5x levered). They have now reduced that to 3x. Once Disney, Fox and Comcast conclude their M&A activity one of them might be interested in bidding for Madison Square Garden Networks.  The market believes that cable operators might drop the channel. This is unlikely because sports are too important to cable subscribers and advertisers. The shares are cheap at FCF 7x.

Long: Franklin Resources (NYSE: BEN):  Franklin is an Investment management business. They are buying back a lot of stock. The family owns 40% of the company. If the shares get cheap enough the family might buy it outright.

Long: Howard Hughes Corporation (NYSE: HHC).  The real estate is difficult to value and the company is largely ignored by most investors. It is not in a major index. The CEO recently purchased a warrant for $50m that will expire worthless if the stock does not go up.


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

Mark Pearson Long Asanuma: London Value Investor Conference 2018

We're posting up notes from the 2018 London Value Investor Conference.  Next up is Mark Pearson of Arcus Investment who pitched a long of Asanuma Corp (TYO:1852).


Mark Pearson's London Value Investor Conference Presentation

Mark Pearson co-founded Arcus Investment in 1998.Value investing in Japan has under-performed for 10 years. The coming decade is likely to be exceptionally good. Value gets stored up not destroyed.  Defensive and high-quality companies are surprisingly expensive. In his long/ short fund, the gap between expensive shorts and cheap longs is the same as it was in the internet bubble of 1999/2000.

Long: Asanuma Corp (TYO: 1852)  Asanuma is an Osaka based construction company. Construction companies in Japan have been through the wringer and have begun a tentative recovery since 2010. They are still in the early stages in terms of revenue growth.  Since 2010 Asanuma’s net debt has been transformed into net cash (16bn Yen of debt in 2010 to 27bn Yen of cash today). PE 6x. There is no analyst coverage.  The construction sector has been one of the slowest to recover in Japan. New building is still at a low level but at the very least there will be maintenance and refurbishment work.


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

London Value Investor Conference Notes 2017: Parames, Roden, Channon & More

Below are notes from the recent 2017 London Value Investor Conference.  Each link takes you to that speaker's presentation.  Enjoy!


London Value Investor Conference Notes 2017

Francisco Garcia Parames (Cobas Asset Management): Long Teekay Corp and Teekay LNG

Stuart Roden (Lansdowne Partners): His talk on investing

Gary Channon (Phoenix Asset Management): Long Easyjet

Steve Romick (FPA Funds): Loan to Sears Canada

Nick Train (Lindsell Train): Long Diageo

Django Davidson (Hosking Partners): Talk on the consumer

Kevin Murphy (Schroders): Long Standard Chartered

Alex Wright (Fidelity Special Situations Fund): Two long ideas

Michael Keller (Brown Brothers Harriman): Long Wendel SE

Jonathan Boyar (Boyar Value Group): 4 long ideas

Ben Preston (Orbis): Long Samsung SDI

Charles Heenan (Kennox Asset Management): Long Texwinca

Joe Bauernfreund (Asset Value Investors): Long Wendel

Ronald Chan (Chartwell Capital): Long Far East Consortium

Rhys Summerton (Milkwood Capital): Long John Menzies

Filip Weintraub (Skagen Funds):  Long Taiheiyo Cement

Francisco Garcia Parames Long Teekay: London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Francisco Garcia Parames of Cobas Asset Management.  He pitched long Teekay Corp (TK) and long Teekay LNG Partners (TGP).


Francisco Garcia Parames London Value Investor Conference Presentation

Whilst at Bestinver 1993-2014, Parames’s returned 15.7% per annum in his Spanish equity fund, equivalent to 2,279% compounded compared to 410% for the Spanish index. In 1997 he also began to manage an international portfolio, which returned an average 10.6% per annum versus 2.9% for the MSCI World Index. He left Bestinver due to a difference of opinion over whether to take on more capital. He felt that at $10bn euros the fund had become too big.

Temperament is more important than IQ for success in investment management. He qualified this by saying that you manage risk by knowing what you are doing. Studying companies in depth is important – if you don’t it will lead to mistakes. You can reduce risk by buying assets that have gone down a lot in price.

His approach to valuation is to buy good businesses trading on less than 10x earnings. He looks for companies with high returns on capital. He said that one of the things he wished he had learnt earlier in his career was to invest in better quality companies. Joel Greenblatt’s Little Book That Beats the Market helped him to develop this side of his game and to avoid value traps.

A distinctive feature of Parames’s style is that he actively changes the size of his positions in companies. The names in his portfolio do not change that often but under the surface there is a high turnover of money. All things being equal, if one stock in his portfolio goes up by 20% and another goes down by 20% he moves money from the winner to the loser.

In terms of sell discipline, he only sells when there is something better to buy. “We almost never go to cash.” The current market is on the expensive side but it is not in a bubble.


Long Teekay Corporation (NYSE: TK) and Teekay LNG Partners (NYSE: TGP)  

Teekay is his first shipping investment in 27 years of investing. It is the main investment in the new Corbas fund – about 9% of the portfolio. Teekay is a family owned company. He trusts family owed companies to keep watch on management and over his career about 80% of the investments have been in family owned businesses. Shipping is cyclical, leveraged, tends to have low returns and can be a lousy business.

Teekay Corporation currently receives $40m in payments per annum from its subsidiaries but before the collapse in the oil and gas price it received much more. The largest subsidiary, Teekay LNG Partners, is expected to return to paying the parent company $100m a year as it did in 2014 and 2015. Given these cash flows Parames’s thinks that Teekay Corporation is worth $19.5 per share (it is trading around $6.40).

Teekay LNG is the key to the valuation. It is trading at 5-6x FCF. It is leveraged 50-60% of assets - lower than most other shipping companies that are in the 70-90% range. Compared to most other shipping businesses LNG companies work on very long-term contracts with companies like Shell and Total. Free cash flows will increase every year for the next 10 years and are predictable. He expects an IRR of 18% per annum.

Parames noted that it was the first time in his career that he had seen a stock’s price fall 75% with no change in the earnings estimates.


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

Stuart Roden's Presentation at London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Stuart Roden of Lansdowne Partners.


Stuart Roden's Presentation at London Value Investor Conference

Stuart Roden and Peter Davis managed Lansdowne’s flagship long/ short equity fund, The Developed Markets Strategy, until the end of 2014. Since then he has taken on the role of Chairman.

He does not regard himself as a value investor or a growth investor - he is eclectic.  He likes to focus on situations that involve change typically at an industry level rather than a company level.

Investment managers need to have an appetite for risk and be able to cope with loss. Most of Lansdowne’s employees have First Class degrees but he said that sometimes very academic people particularly from a science and maths background cannot deal with uncertainty.  It’s partly due to not being used to things ‘not working out’ but also because they may not have experienced enough set-backs in life. “The stock market can make a fool of you for quite a long time.” Fund managers need common sense as well as brains and managers need to understand that they may be wrong. You can’t control events and things are going to happen that you are not ready for – you will be shocked at times.  If you can’t deal with that level of uncertainty it can make you emotionally unstable.

At Lansdowne, they encourage their portfolio managers to get four things right. Firstly, you need a creative idea. Secondly, strong analysis. Thirdly, risk management and correlation control to make sure that you are not missing a risk that runs throughout the portfolio. Fourthly, monitoring. He likes Barton Biggs’s advice on portfolio management: ask yourself is this the portfolio you would build today? His role was often to be ‘questioner in chief’. He watched out for thesis creep. Do the reasons why you wanted to buy a stock in the first place still hold true? Do you need to change your view? If you can’t change your view you won’t make it as a fund manager.

He values imagination pointing out that they made a very successful investment in Amazon by thinking creatively about the way Amazon would look in 3-5 years. This was not a momentum trade but instead required long-term thinking. They were only able to make the investment because they did not hold a static view of Amazon’s valuation.

If you can find two people who complement each other partnerships work very well in investment management. He said three people was too many. He was very lucky to have worked with his partner, Peter Davis. There was something about their partnership that worked, they were very different people, their emotions were different, Davis was optimistic whereas he was looking over his shoulder the whole time to see what might go wrong – a combination of confidence and humility. There was also an age gap that avoided them becoming competitive. Good partnerships require respect and mutual admiration.

Given the state of the markets, if he was opening a fund today it would be a long/ short fund and not a long-only fund. In the past 16 years when a lot of Lansdowne’s shorts have been in indices rather than single stocks the markets have tended to go up. Today all their shorts are in single names. Shorts are easy to find because there are so many businesses being hurt by disruption. When he first started he was often confident that they could hold equity investments for at least 5 years but today he feels that has shrunk to 3 years. There is so much uncertainty – not just in interest rates and valuations.


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

Gary Channon Long Easyjet: London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Gary Channon of Phoenix Asset Management who pitched a long of Easyjet (LON: EZJ).


Gary Channon's Presentation at London Value Investor Conference

Phoenix is a UK focused fund that since inception in 1998 has returned 12% annualised vs the 4.9% for the UK benchmark.

Long: Easyjet (LON: EZJ) 

There is an intrinsic human desire to travel. GDP per capita and the cost of travel drive the overall market. Air travel has been doubling about every 12 years. Yet airlines have been terrible businesses except for Southwest Airlines in the US. The Southwest model has been copied by both Ryanair’s and Easyjet’s founders.

It is often assumed that Ryanair and Easyjet are competing. Ryanair is thought of as the low-cost producer and to be more effective than Easyjet. Channon argued that the two airlines have different strategies and are not competing. They do not fly the same routes – there is only 4% overlap. This is not an accident but a deliberate strategy. Easyjet takes customers from convenient airport to convenient airport. Ryanair is low cost - inconvenient airport to inconvenient airport. Both companies produce a similar return on capital.

Easyjet has a moat which is underappreciated by the market. The moat is derived from the slots it owns. The slot is the right to take off and land at a certain time on a certain day. The slots are regulated by quasi-legal international conventions referred to as Grandfather Rights. The slots belong to the airlines not the airports. A slot can provide pricing power if it is at a sought-after airport where demand outstrips supply. The lack of runways in the UK and Europe and the failure to build new ones guarantees a shortage of supply. Because of the value of slots airlines tend to be against the expansion of runways while the owners of airports tend to be supporters.

The slots provide a barrier to entry as people’s propensity to switch airports is limited. Only 20% of passengers are prepared to add an extra hour to their travel if they are on a short-haul European flight. Easyjet’s real competitors are those who fly the same routes from busy airports - mainly British Airways and Air France but certainly not Ryanair. British Airways and Air France are not strong competitors to Easyjet because they have structurally higher costs due to pension schemes, staffing costs and culture. This creates an environment in which Easyjet will keep expanding, gradually taking the flag-carriers business.

Channon estimates that three-quarters of Easyjet’s business is protected by a slot-constrained moat. This provides pricing power and high returns.

The opportunity for Phoenix to invest in Easyjet came about because of Brexit. Channon said he thought Brexit was a non-event for Easyjet. It does not change the competitive landscape and Easyjet will get a European license. Phoenix bought their Easyjet stock 9 months ago. Channon said he would not buy today but would wait for the price to fall below £10 per share (the stock is trading at around £13.80).


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

Nick Train's Presentation at London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Nick Train of Lindsell Train.


Nick Train's Presentation at London Value Investor Conference

Even though Train regards himself as a value investor he has changed his investment style considerably in the last 20 years. He quoted Michael Lewis:

“Graham and Dodd investors are people who place a very high price on having the last laugh… “     

“….in exchange for that privilege they have missed out on a lot of laughs in between.”  

Train missed the TMT boom in the 1990s, not owning any technology stocks.  He missed both the boom and the bust but the experience left him feeling dissatisfied. As a traditional value investor, he felt that he had been ill equipped to analyse and deal with an historic, world changing and enormously value creating technology shift. He felt his traditional value investor’s mindset had blinkered him and revealed some limitations. The value discipline had led him to spend too much time looking at cycles and not enough time looking out for trajectories. He had been waiting for years for reversions to the mean that did not happen and not enough time looking for self-reinforcing trends. He felt he had missed the whole point of what creates long-term equity value.

Today he believes the single most important thing that they can do is to extrapolate long term trends. Cycles are irrelevant. Today he likes to invert Howard Marks’s well-known quote:

“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.” 

He gave global whisky shipments as an example of a re-enforcing trend that has continued to grow over the last 100 years. There is no sign of cyclicality or reversion to the mean and he says he expects the trend to continue for the next 30 years. Similarly, he noted that £1 invested in the UK Engineering Industry in 1900 would have grown to £2283 today while £1 invested in the UK alcohol Industry would have grown to £243,152. Again, he expects this trend to continue and it is a reason why Lindsell Train have a large investment in Diageo.

It’s far better to lock into the value creating trajectories and leave the tricky cyclical-type trades alone. The stock market is better viewed as a trajectory rather than a series of potentially ruinous ups-and-downs.

Value investing with its focus on cyclicality can make us too prone to cynicism and pessimism. Optimism is hard but if you hold on to those investment trajectories you will benefit from looking on the bright side.

Everyone has their favourite Buffett quote. Train said that the one that resonates most for him is that the best holding time is forever. “My starting point is that I’ve made a permanent/ semi-permanent commitment to a franchise and I am prepared to ride through the fluctuations.” If the trajectory that we are trying to capture turns out to be misplaced or the company cannot deliver on what we are hoping for that’s a reason to sell. The other reason he would sell is if the balance sheet is deteriorating to such an extent it is threatening the survival of the company.


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

Django Davidson's Presentation at London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Django Davidson of Hosking Partners.


Django Davidson's Presentation at London Value Investor Conference

Django Davidson is a portfolio manager and founding partner of Hosking Partners where he works with Ex-Marathon Asset Management investor, Jeremy Hosking. Before that Davidson worked at Algebris.

Hosking Partners refer to themselves behavioural investors. He noted that once people form an opinion they do not like to give it up. We get a rush of dopamine when people agree with us. Having people agree with you is the crack-cocaine of the middle-aged dinner party circuit.  Sticking to your guns is a widely perceived social good. Humans attach a huge premium to ideas they already have.

Davidson warned that the belief in Buffett style quality compounders/ franchise stocks in the investment world has taken on something close to religious dogma. The huge outperformance of quality compounders particularly since the financial crisis has led Davidson to take an outsiders view. Shareholder returns for many quality compounders have been very good over the last 5 years while their revenues have gone down - Kellogg’s, Coca-Cola, Pepsi, Colgate Palmolive.  The margins of quality compounders have been on a continuous three-decade rise but if the underlying moat premise works the revenues should be rising and they are not.

The danger is that the customer is not coming back as often as they used to. Jeff Bezos says that power is shifting from the company to the consumer. Technology is empowering the customer challenging companies to change. According to Bezos the best way for companies to respond is to put all their energies into creating a great product and put less effort into shouting about it through marketing. The old model is shareholder centric whilst the new model is customer centred.

The old shareholder focused companies used to be the only ones that could afford TV advertising. Now two-thirds of the screen times of under 25 year olds is spent on hand-held devices. When they do watch TV, they self-select their own channels. Linear TV is being propped up by an aging demographic. Today new businesses can reach their customers through social media and YouTube at a fraction of the cost. Often, they have better products to sell.

Why are customers leaving the old brands? Are the brands staying relevant in a multi-channel world? How will these brands react to people ordering their shopping through Amazon Alexa? What will the industry have to spend to retain customers? Are companies gouging their customers by providing low quality, high priced goods? Franchise investing appears to be a warm and cosy place, but is it?

Investment ideas: Long AIG Tarp Warrants (expiry 2021); Long: Michelmersh Brick (LON: MBH)


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

Steve Romick's Presentation at London Value Investor Conference

We're posting up notes from the 2017 London Value Investor Conference.  Next up is Steve Romick of FPA Funds.


Steve Romick's Presentation at London Value Investor Conference

Since inception in June 1993, Steve Romick’s FPA Crescent Fund has returned 10.4% annualised Vs 7.0% for the MSCI World Index.

A few stocks drive the index at any one time. Contrary to popular belief you don’t need to hold the golden stocks of each era to win at investing. You can win by avoiding the losers. His fund typically underperforms in bull markets but outperforms by more in bear markets. Stocks are expensive today and he is finding it hard to find good investments. He outlined an example of how he has been putting some of the fund’s money to work outside of the equity market.

The fund has provided a loan to Sears Canada. The company is facing the same pressures as many other retailers and may go bankrupt at some point. Given their tenuous finances the loan has been secured against inventory, receivables, and real estate. He estimates that the liquidation value is about 1.7X the loan value. Romick expects the loan to produce an IRR of 11% no matter what happens to Sears.


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