Equity Research

Philip Morrish & Angie Kay

Intellisys Intelligent Analysis Limited

Equity research is a powerful tool to help investors understand a company, its management, its marketplace and its business and share price potential

It is core to many of the other financial functions being discussed this weekend e.g. trading, investment management, corporate finance

The dynamics of the research marketplace changed because of the recession and near collapse of the global banking system

The best equity research uses a range of data sources and valuation methods to evolve a realistic case for action and a justifiable target share price

To be a good analyst you need skills, tenacity and a sense of humour!

Key Learning Points

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About us

The role of research

Regulation and compliance

The equity research marketplace

Equity research fundamentals

Valuing a company and predicting target price

Fusion analysis

Could I be an equity analyst?

Any questions?

Agenda

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* founder, director and co-owner of Intellisys

* director of Cogency Chemical Consultancy Limited

* Junior Warden of the Worshipful Company of Environmental Cleaners in the City of London

* 30-year City career in investment research, institutional broking and market-making

* number one ranked analyst in the Chemical and Waste Management sectors

* pioneer in using structured modelling across multiple metrics for financial analysis - ‘fusion analysis’

* only UK based provider of fusion products

Philip Morrish

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* director and co-owner of Intellisys

* freelance fundraising, marketing and training consultant to the voluntary sector, academy trust director and vice chair of governors at Reading School

* four years post graduation as investment analyst in Edinburgh

* three years as investment services product manager in Melbourne

* two years as development director in Manchester

* twenty years self-employed in a consultancy role

Angie Kay

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A niche equity research house with global distribution specialising in contracted research for UK small and mid-market companies and recognised as the only UK provider of ‘Fusion’ analysis

Intellisys Intelligent Analysis Limited

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Research is of interest to all stakeholders, not just investors e.g. government/legislators, the industry sector, management, employees, communities

A variety of types of research and researchers are required to support sound decision-making in financial and business environments e.g. economists, business analysts, fixed interest analysts, equity analysts

There is more than one avenue for your talents!

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Research

* Financial Services and Markets Act 2000

• Financial Services Authority (FSA)

• Self-regulation with joint monitoring by FSA, Bank of England (BoE) and HM Treasury

* Financial Services Act 2012

• Regulation and supervision returns to BoE

• Prudential Regulatory Authority (PRA) – banks, building societies, credit unions, insurers and major investment firms

• Financial Conduct Authority (FCA) – asset managers and independent financial advisors

UK Regulation andCompliance

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BUYside

SELLside

Corporates

Indies

Equity research marketplace Mk1

Historically, investment banks and company brokers retained teams of analysts and flooded asset managers with research, in the hope of receiving compensation via dealing commission (effectively paid for by their clients) on resultant trades

In May 2014, the FCA ruled that sell-side organisations now had to separate dealing commissions from research costs, charging these separately as fees, and that asset managers could only spend clients’ money on ‘substantial research’ not day to day news

As a result, the sell-side began contracting, laying off analysts and outsourcing research to countries like India, Chile and Singapore, where labour costs are lower

Market dynamics

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Some analysts were recruited to the buy-side, though total expansion was limited as it increased fixed costs to the business

Others set up their own independent research operations

The trend is spreading: global equity research budgets are said to have dropped from $8.2 billion in 2007 to $4.8 billion in 2013 and could drop to just $3.4 billion by 2017 (Frost Consulting, May 2014)

This has created a perfect opportunity for independent research houses to expand their market share: their research is paid for by the companies they cover and distributed widely across global platforms, reaching many more investors than company brokers and Investor Relations teams can reach on their own

Market dynamics

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Players Primary Research Clients Primary Distribution Focus

Global Large cap companies in any region

Own institutional clients for a research fee plus commissions on any trading they execute

Regional Large cap companies in own region

National All sizes of company but especially mid-caps

Independent Micro, small and mid-capsbelow radar of national firms

All institutional and retail investors via global distribution via the web, Bloomberg, Thomson Reuters, Factset, S&P Capital IQ etc

Sell-side

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BUYside

SELLside

Corporates

Indies

Equity research marketplace Mk2

Equity notes are structured to provide investors with salient information to help make an informed decision

Must cover key criteria of:

• Financial performance / outlook

• Share valuation

• Timing

* May or may not include a recommendation

* Hand-out: Intellisys note on cloudBuy, 3 October 2014

Equity Research Fundamentals

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Typically 2 – 3 years

Valuations based on forecasts

Share activity and performance

• Reason for note• Forecast changes• Valuation impact

The equity note

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Business Profile

Historic P&L

Historic Balance Sheet

Cash Flow Statement

Revenue profile

Shareholders

Disclaimer/Risk warning

The equity note

Key approaches are Peer Group Benchmarking

EV/Sales, EV/EBITDA, EV/EBIT, P/E, P/NAV, Yield

Exit Multiples EV/Sales, EV/EBITDA, EV/EBIT, P/E, P/NAV

Cashflow biased DCF, EVA/MVA, CFROI

Hybrid approach Economic Profit Added

Valuing a company and predicting target price

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* Analytical approach combining three traditional methodologies into one:• Fundamental analysis

• Technical analysis

• Behavioural analysis

* Three primary proponents worldwide:• USA - V. John Palicka

• Australia – Dean Morel

• UK - Philip Morrish

Fusion Analysis

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* Day Trader reports• Circa 1,000 companies on UK Main and AIM markets

• Metrics indicate opportunities for short term trading

* Value Indicator reports• Circa 600 companies on UK Main and AIM markets

• Metrics indicate potential for longer term growth

* Measuring Management Quality (2MQ) sector reports

* Macro Economic reports

* Company Research reports

Intellisys Fusion Reports

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www.intellisys.uk.com• Day Trader and Value Indicator daily Fusion reports and

Company Research

www.chadleyhousetraining.co.uk• Fusion Analysis by Paul Meadows

• www.fusioninvesting.com• Fusion Investment & Analysis from Dean Morel

www.amazon.co.uk • Fusion Analysis: Merging Fundamental and Technical

Analysis for Risk-Adjusted Excess Returns V. John PalickaCFA CMT

For more information…

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conduct due diligence on companies and industries by researching, reading financial statements and market data and meeting with company management

analyse financial information, e.g. company results, profit and loss, balance sheet and cash flow statements to determine how an organisation is positioned to deliver for investors

keep up to date with market developments, new investment products and all other areas that can affect the markets

consider how wider economic and other events might affect the performance of companies you research

monitor the financial news using specialist media sources

build financial models, make projections and draft and write research reports

meet with and make recommendations to head of research or fund manager, including articulating the risk or payoff for each recommendation

ensure that all compliance regulations are met

Typical job descriptionAn analyst will…

Key skills and attributes for becoming an analyst:* Finance/maths/statistics/economics/accounting degree* Other subject knowledge relevant to your preferred industry* Relevant work experience/internships undertaken during

your degree* Strong IT skills, especially in MS Excel and MS Word* Self-confidence, resilience and a sense of humour! Plus:* Start/gain CFA Level 1 qualification as soon as you can* Read widely on economic and financial matters every day* Write about companies and economic trends that interest

you and get them published

Is this the career for me?

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Any Questions?

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www.intellisys.uk.com

@intellisysUK

@philipmorrish

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Contact