small-cap investing summit - adrian saville...•facilitators, enablers & enhancers give...
TRANSCRIPT
Small-Cap Investing Summit
Economic Opportunities & Investment Ideas in South Africa
@CannonAssets Adrian Saville Founder & Chief Investment Officer, Cannon Asset Managers
Our Business
Established 1994, owner-managed since inception
• alpha-generating, high conviction, value investment philosophy emphasizes quality
• 21 employees: 6 investment & 7 internal operations
• R3bn AUM
• Institutional clients incl. ABSA, Accenture, Clientele Life, Oppenheimer Memorial Trust,
Investment Solutions, Macsteel, Transnet Pension Fund, UPS & Verso
• Peregrine shareholding (2013) with group AUM R82bn
Cannon’s Investment Results
Cannon Asset Managers and McGregor BFA
1261%
806%
0
200
400
600
800
1000
1200
1400
2000 2002 2004 2006 2008 2010 2012
Cannon All Equities Market
Fundamental
Analysis
Quality &
Risk
Construction
Return
Expectations
Data Cleaning and
Analysis
Value measured by
our own PE, DY, P-
Book, P-Sales, CAPE
Fundamental
analysis (Graham
Net-Net, Sonkin ratio,
PEDY toolkit)
Backward and
forward looking
Forensic tool
(Benford)
Fundamental Score
Bankruptcy & Chuck
Years to buy back
Environmental,
Social & Governance
Qualitative risk
overlay
25 Management
events in 2013
Valuation (PE, P-
Book, PER)
Horizon (three years)
Fundamental
protection (quality,
cash power, balance
sheet)
Super-sector risk
rules
Alpha weights only
Maximum two entities
per sub-sector
Momentum (catalyst)
250
Sell
Discipline
Influences: Benjamin Graham, David Dreman, Anthony Bolton, Bob Haugen , James Montier & John Neff
Negation of VQR
Valuation triggers
Real-time decision
making
+ Good businesses
= Excellent prospects
25 – 35 Number of Stocks
Attractive Prices
A Fundamental, Repeatable Global Process
Top down not about forecasting – this is a fool’s errand
But economic architecture & industrial makeup key influences
• Survival
• Sustainability
• Quality & prospects
Overlooking this elevates the chance of “permanent destruction of capital”, the
single greatest investment risk
Unashamedly & Unequivocally In Search Of Intrinsic Value
From Left Behind
Adapted by Cannon Asset Managers (2012) from Angus Madisson (2008)
0
1000
2000
3000
4000
5000
6000
7000
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000
Pe
r ca
pita
in
co
me
($
pe
r p
ers
on
in
20
00
pri
ce
s)
Africa (sub-Saharan)
World
To Leading Edge
IMF data (2013); African Statistical Yearbook (2014)
• Consequence of advanced world structural decay
• Coupled with African structural reform
-4
-2
0
2
4
6
8
19
80
19
85
19
90
19
95
20
00
20
05
20
10
20
15
Real GDP Growth (%)
World
Advanced Economies
Sub-Saharan Africa
Commodity Prices &
New Demand
Debt Relief & Sustained
Debt Improvement
Economic Management
& Policy Platforms
Africa’s Demographic
Dividend
Rising Economic
Mobility
3.9
3.2
2.7
1.8
0.0
1.0
2.0
3.0
4.0
5.0
<30% 30%-60% 60%-90% >90%
% c
ha
ng
e G
DP
(a
nn
ua
l a
ve
rag
e)
Debt-to-GDP Ratio
Africa's Debt-to-GDP Ratio (%) from 1990 to 2010
1990 57.1
1995 66.7
2000 50.7
2005 30.4
2010 32.6
Five Forces
Saville and White (2013)
African Competitiveness Report (2011); World Competitiveness Report (2006-2013)
94.0
96.0
98.0
100.0
102.0
104.0
106.0
108.0
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13
Sub-Saharan Africa Competitiveness Score (2006/07 = 100)
Insitutional Strength
Competitiveness Score
Five Forces Commodity Prices &
New Demand
Debt Relief & Sustained
Debt Improvement
Economic Management
& Policy Platforms
Africa’s Demographic
Dividend
Rising Economic
Mobility
Saville and White (2013); United Nations (2012)
0
200
400
600
800
1 000
1 200
19
50
19
60
19
70
19
80
19
90
20
00
20
10
20
20
20
30
20
40
Siz
e o
f w
ork
ing
po
pu
latio
n (
millio
n)
Africa
China
India
Europe
North America
• Population growth
• Labour force participation rate
• Productivity gains
Five Forces Commodity Prices &
New Demand
Debt Relief & Sustained
Debt Improvement
Economic Management
& Policy Platforms
Africa’s Demographic
Dividend
Rising Economic
Mobility
Saville and White (2013); McKinsey Global Institute (2010)
30%
40% 45%
73% 79% 82%
70%
60% 55%
27% 21% 18%
India Africa China Europe LatinAmerica
NorthAmerica
Urb
an
Po
pu
latio
n -
-- R
ura
l P
op
ula
tio
n
Five Forces Commodity Prices &
New Demand
Debt Relief & Sustained
Debt Improvement
Economic Management
& Policy Platforms
Africa’s Demographic
Dividend
Rising Economic
Mobility
Five Forces Commodity Prices &
New Demand
Debt Relief & Sustained
Debt Improvement
Economic Management
& Policy Platforms
Africa’s Demographic
Dividend
Rising Economic
Mobility
Herman Singh Future Advisory (2013); McKinsey & Co The Lions of Africa (2011); The Economist (March 2013)
“316mn new mobile phone subscribers signed up since 2000”
“112 day road trip Dakar to Cape Town only 9 had no
smartphone signal”
0
2 3
7
10
18
24 25
31
0
5
10
15
20
25
30
35
2004 2005 2006 2007 2008 2009 2010 2011 2012
Countries with 3G Services
The Impact On Economic Growth
IMF (2013); analysis by Cannon Asset Managers (2013)
50
100
150
200
250
300
2000 2002 2004 2006 2008 2010 2012 2014 2016
Real GDP (2008 = 100)
China
India
Nigeria
United Kingdom
United States
IMF (2013); analysis by Cannon Asset Managers (2013); Capital Economics (2012)
Rebasing (2013)
• GDP +40%
• Deficit 2.5%
• Debt-GDP 15%
The Impact On Economic Growth
50
100
150
200
250
300
2000 2002 2004 2006 2008 2010 2012 2014 2016
Real GDP (2008 = 100)
China
India
Nigeria
United Kingdom
United States
Established evidence of structural shifts & drivers (economic, social and political)
Unique economic prospects, underpinned by wide margins and elevated ROEs
In this, an unequivocally important driver is rising connectedness in the form of enhancers
of TCIP:
• Trade flows
• Capital movements
• Information and knowledge streams
• movement of People
Translates into investments into Facilitators, Enablers & Enhancers of TCIP:
• Infrastructure (ELB)
• Skills (Adcorp)
• Trade (OneLogix) and trade finance (Sasfin)
Investment Implications
Great Investments Start With Value
• Economic growth does not dictate great investment results
• Great investments flow from paying a good price for a good business(value)
• Facilitators, Enablers & Enhancers give examples of great businesses at good prices
Ita Bel
Ger Fra
Spa Ire
3.9 4.1 Swi
Den Net 5.1 UK
Can NZ
US Swe
SAf Aus
0
2
4
6
8
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Real Economic Growth (%) and Real Equity Returns (%): 1900-2010
Dimson, Marsh and Staunton Triumph of the Optimists (2012)
Founded 1930 & listed 1951
Total solutions provider in materials handling & appropriate modular process plants
• innovation and in-house capability
• supply of equipment and technology with “world-class partners”
• Initially a net-net
• Market cap R1,450mn
• CA = R1,407mn and CL = R851mn with R470mn cash
• No long-term liabilities & equity built out of retained earnings (R572mn of R601mn)
Facilitators, Enablers & Enhancers: ELB Group
Cannon Asset Managers, ELB Annual Report (2013); ELB Interim Report (2013); Management meetings (2013)
• Price-earnings 11.4x and price-book 1.8x (2345cps)
• ROE 19.2% and Fundamental Score 5
• Inside ownership & management position
• Share buy backs (8.9mn of 33.0mn)
• Income before tax ROE target 30% (32%)
• Consistent cash conversion
• 30% revenue from SSA
• ARDBEL
Facilitators, Enablers & Enhancers: ELB Group
Cannon Asset Managers, ELB Annual Report (2013); ELB Interim Report (2013); Management meetings (2013)
Founded in 1975 as South Africa’s first recruitment advertising agency & today is the largest
workforce management group on the African continent
• recruitment, training, psychometric assessment, payroll management & BPO
• 3,000 permanent employees & 93,000 managed contractors
• blue collar, white collar & BPO, training and services
• Africa (Capital)
• India (34.6% Nihilint)
• Australia (Paxus & LSA)
Facilitators, Enablers & Enhancers: Adcorp’s Road To ROAM
Adcorp annual reports (2012; 2013); sharedata.co.za; www.adcorp.co.za
Adcorp annual reports (2012; 2013); sharedata.co.za; www.adcorp.co.za
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2010 2011 2012 2013
Asset Turnover (x)
Target (x)
4.6
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2010 2011 2012 2013
Return on Sales (%)
Target (%)
27.6
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
2010 2011 2012 2013
ROAM (ATO x RoS) (%)
Target (%)
RoS x ATO = ROAM
4.0 6.25 25.0
4.5 6.50 29.3
4.6 6.00 27.6
Facilitators, Enablers & Enhancers: Adcorp’s Road To ROAM
Adcorp annual reports (2012; 2013); sharedata.co.za; www.adcorp.co.za
Evidence of sustainable advantage:
• WACC = (R586mn * 7.4%) + (R1,609mn * 10.4%) / (R2,195mn) = ~9.6%
• ROCE = 13.3%
• ROCE > WACC by 3.1% per annum since 2007
Facilitators, Enablers & Enhancers: Adcorp’s Road To ROAM
6.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2010 2011 2012 2013
Asset Turnover (x)
Target (x)
4.6
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2010 2011 2012 2013
Return on Sales (%)
Target (%)
27.6
20.0
22.0
24.0
26.0
28.0
30.0
32.0
34.0
2010 2011 2012 2013
ROAM (ATO x RoS) (%)
Target (%)
Adcorp annual reports (2012; 2013); sharedata.co.za; www.adcorp.co.za
Valuation based on current fundamentals
• Earnings Multiple 13.5
• NAV Multiple 1.6
• Sales Multiple 0.4
523 592
716
957
1315
1483 1545
1638
1862
2065
158 195 237 224 196 272
196 196 209 237
0
500
1000
1500
2000
2500
3000
3500
4000
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
NAV (cps)
HEPS (cps)
Average Current Price (cps)
Current Valuation (cps)
Facilitators, Enablers & Enhancers: Adcorp’s Road To ROAM
Adcorp annual reports (2012; 2013); sharedata.co.za; www.adcorp.co.za
Valuation based on ROAM 25.0%
• Earnings Multiple 14.2
• NAV Multiple 2.2
• Sales Multiple 0.5
0
50
100
150
200
250
300
350
400
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
HEPS (Based on ROAM 25%) (cps)
HEPS (cps)
Fair value lifts from 3500cps to 4600cps
Facilitators, Enablers & Enhancers: Adcorp’s Road To ROAM
Facilitators, Enablers & Enhancers: OneLogix
• SADC logistics & specialised transportation
• Routes back to 1988 & listed 2000 (main board 2013)
• Botswana, DRC, Malawi, Mozambique, Namibia, South Africa, Zimbabwe & Zambia
• Revenue growth 29% p.a. over ten years with consistently strong cash flow
• Passenger car imports +8% in 2012 versus +2% for world
• Interim results operating profit +34% and core HEPS +35%
• PE 9.5x and DY 3.3% (since 2010)
Africa Economics Focus (February 2013) and Onelogix annual reports
0
20
40
60
80
100
120
140
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
R'm
n
Operating Income
CFO
Thank You
Small-Cap Investing Summit
Economic Opportunities & Investment Ideas in South Africa
@CannonAssets | [email protected] | cannonassets.co.za
Adrian Saville Founder & Chief Investment Officer, Cannon Asset Managers
This presentation has been approved by a member of Cannon Asset Managers (Pty) Ltd ("Cannon Asset Managers ") and should not be considered as an offer or solicitation of an offer to sell, buy or subscribe to any investment products, securities or any derivative instrument or any other rights pertaining thereto (“financial instruments"). This presentation is intended for use by professional and business investors only. This presentation may not be reproduced without the consent of Cannon Asset Managers.
The information and opinions expressed in this presentation have been compiled from sources believed to be reliable, but, neither Cannon Asset Managers, nor any of its directors, officers or employees accepts liability from any loss arising from the use hereof or makes any representations as to its accuracy and completeness. Any opinions, forecasts or estimates herein constitute a judgment as at the date of this presentation. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance. This information is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company and its subsidiaries. Cannon Asset Managers is not agreeing to nor is it required to update the opinions, forecasts or estimates contained herein.
The value of any securities or financial instruments mentioned in this presentation can fall as well as rise. Foreign currency denominated securities and financial instruments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price or income of such securities or financial instruments. Certain transactions, including those involving futures, options and other derivative instruments, can give rise to substantial risk and are not suitable for all investors. This presentation does not have regard to the specific instrument objectives, financial situation and the particular needs of any specific person who may receive this presentation. Investors should seek financial advice regarding the appropriateness of investing in any securities, financial instrument or investment strategies discussed in this presentation.
Cannon Asset Managers (or its directors, officers or employees) may, to the extent permitted by law, own or have a position in the securities or financial instruments (including derivative instruments or any other rights pertaining thereto) of any company or related company referred to herein, and may add to or dispose of any such position or may make a market or act as a principal in any transaction in such securities or financial instruments. Directors of Cannon Asset Managers may also be directors of any of the companies mentioned in this presentation. Cannon Asset Managers may from time to time provide or solicit investment banking, underwriting or other financial services to, for or from any company referred to herein. Cannon Asset Managers (or its directors, officers or employees) may, to the extent permitted by law, act upon or use the information or opinions presented herein, or research or analysis on which they are based prior to the material being published. Cannon Asset Managers may have issued other presentations that are inconsistent with, and reach different conclusions from, the information presented in this presentation. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them.
Cannon Asset Managers is an authorised financial services provider by the South African authority, the Financial Services Board under licence number FSP736. This
publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without
the prior written consent of Cannon Asset Managers. Cannon Asset Managers does not allow the redistribution of this presentation to non-professional investors and
cannot be held responsible in any way for third parties who effect such redistribution.
Cannon Asset Managers (Pty) Ltd Registration Number 2000/025176/07 is an authorised financial services provider under licence number FSP736. Cannon Asset
Managers (Pty) Ltd, PO Box 70997, Bryanston, 2021, South Africa, +27-11-463-3140.