OVERVIEW WHAT’S INSIDE - Hinde Capital€¦ · com internet stocks, is nothing new. But if we...

OVERVIEW WHAT’S INSIDE

OVERVIEW

OUR MAIN INVESTMENT IDEA Intu Properties plc

INVESTMENT INSIGHTS

WHAT HAPPENED? Market & Sector analysis

HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (NOVEMBER 2017)

APPENDIX I THE WAY WE THINK

APPENDIX II HOW WE THINK

Inside this edition of the UK Dividend Letter you’ll find:

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AUGUST 2017ISSUE 36 - NOVEMBER 2017 WWW.HINDESIGHTLETTERS.COM

Bravo ‘Reg’!

Mark Carney, the Bank of England Governor, finally raised UK interest rates by a whopping 0.25%,

reversing his cut last year post-Brexit. So it’s net-net in his tenure, no change. The market interpreted his actions and statement that further rate rises will be few and far between. Despite the Retail Price inflation index at 4% and wage pressure building by the day, central bankers worry more about ‘how our economy will cope’ without sub 1% interest rates. The market snoozed on, the FTSE share index and the 10-year gilt continued to flatline, while the sterling currency and short-term money rates eased somewhat. Volatility in most financial markets continues to tread water at multi-decade lows.

Unless, of course, you are looking at ‘Cryptocurrencies’ that have been on a tear in 2017. These relatively new, or very new, ‘digital currencies’ have become more mainstream in the last few months. Quite what’s driving this is unclear. Maybe it is the lack of much movement in the established financial markets,

“IF YOU’RE ‘STUPID’ ENOUGH TO BUY BITCOIN, YOU’LL PAY THE PRICE ONE DAY” - JAMIE DIMON

2 HINDESIGHT Dividend UK Letter

which are fragilely pinned at high valuations by zero interest rates that have forced speculators to look elsewhere.

Mike Novogratz, the legendary ex-Fortress macro trader, claims that: “Digital currencies are going to be the largest bubble of our lifetimes,” and his new fund is betting the ranch on: ‘Bitcoin and ether’ by the sound of it. ‘If it moves, I want to trade it,’ is often the macro trader’s mantra. The more it trades, the higher it goes and the more people want to get in, which is the classic sign of a bubble.

Driving up prices far greater than their real value, whether it is tulips, South American ‘fertile’ land, railroad stocks or 2000 dot-com internet stocks, is nothing new. But if we have learnt anything from these ‘bubbles’, it is that they often go further than you can imagine in your wildest dreams. There are fortunes to be made and lost, both up and down. The very smart investors make money in the huge run-up in prices, and then profit again as 95% of ‘new’ things plummet to zero. Others stubbornly miss out or get in too late and lose their shirts. But, money aside, bubbles that are led by ‘new inventions’ often bring the benefits of this revolutionary technology, some of which will be taken for granted in years to come.

In the Investment Insights section, we will go into more depth about the world of cryptocurrencies, blockchain technology and Initial Coin Offerings (ICOs). We want to understand the mechanics of these businesses, not just with a view to profiting as a believer or disbeliever, but also to understand how, or if, these potential inventions will benefit us and our children in the future.

We believe that the seed for ‘digital currencies’ and blockchain technology was sown as a result of the 2008/9 Great Financial Crisis, which for the most part did not endanger the world like a world war. Arguably, very few people lost fortunes. Many people who could never afford to buy a house in the US in normal times were led in to the sub-prime debacle tragically. But banks took the losses for the most part, while Greece, Spain and Ireland saw some tremendous housing crashes, true boom to busts.

THE COMPANY

Mark Mahaffey

Ben Davies

Aalok Sathe

HindeSight Publishing which runs HindeSight Letters is a unique blend of financial market professionals – investment managers, analysts and a financial editorial team of notable pedigree. The co-founders of Hinde Capital, Ben Davies and Mark Mahaffey, a successful alternative investment management company joined forces with the financial journalist David Stevenson best known for his regular columns in the FT Weekend, Money Week and numerous other global media titles to deliver something different in the financial newsletters segment – simply put it’s a reliable newsletter version of a managed fund.

Our writers actually run money, not just write about it, so they are the right mix of book smarts and street smarts. Truly a team of individuals that make up a formidable pool of knowledge, wherever the investing landscape shifts to.

CONTRIBUTORS

CO-FOUNDER & CFO OF HINDE CAPITAL

CO-FOUNDER & CEO OF HINDE CAPITAL

ANALYST

Source: cointelegraph.com

ISSUE 36 - NOV 2017 3

But both faith in the system and trust in the middleman, often financial institutions, was lost. Most are aware of the

central banks ‘belief’ that the only way to save the system (banks) is to print money and lots of it, but all of the people can’t be fooled all of the time. If we lose faith in the ability of our governments, the central banks and the banks to provide us with a stable currency ¬– not only the money that is being printed by the grizzillion, but also the trust to hold our money and process our transactions, carefully and cost effectively – then Bitcoin and its blockchain technology are a potential temptation for all. Trust, which has for centuries been overseen by a middleman, could be replaced by the trust of Cryptography in future, and a currency that, while being ‘virtual’ and ‘digital’, is limited in theory by the original supply limit in the Bitcoin programme preferred to government fiat money.



The company has struggled since its high more than two years ago, having fallen over 44% and 67% in absolute and relative terms. This shopping mall developer and operator has performed so poorly that it is now trading below its 2009 lows. On a short-term basis, it is trading at its trough relative to the broader market and has meaningfully underperformed its closest rivals.

It is important to understand that property companies usually trade with reference to the EPRA NAV (an adjusted book value). The most recent figures show that its EPRA NAV was approximately 403p, significantly above the market price around 210p. Historically, there have only been two previous occasions when the shopping giant has traded at such a vast discount, which occurred in late-2002 and 2008. This demonstrates the severity of the current situation, but with a supportive cash flow, investors should take advantage of these distressed prices.

INVESTMENT IDEA #1INTU PROPERTIES PLC

BY MARK MAHAFFEY

Intu Properties plc is a Real Estate Investment Trust (REIT) that focuses on the development and management of shopping malls across the United Kingdom and Spain. The trust originates from Transatlantic Insurance Holdings plc, which was founded in 1980 by Sir Donald Gordon. This was, in fact, an offshoot of Liberty Life Association of Africa, which was a leading investor in life assurance businesses formed by Donald in 1957.

Over the years, there have been a series of changes that began in 1992 when the group divested out of its life assurance interests and merged with Capital & Counties, a leading real estate developer. As a result, it listed on the London Stock Exchange in 1992. In 2010, the group went through another demerger, relinquishing itself of its Capital & Counties Properties group, at which point it became known as Liberty International. The company later renamed itself Capital Shopping Centres Group.

After a further rebranding in more recent times, it has gone on to own, or part-own, 18 shopping centres in the United Kingdom and now Spain. It is listed on the London and Johannesburg exchanges. Currently, Intu Properties is led by David Fischel and is a constituent of the FTSE250 (having been relegated from the FTSE100 this year), employing over 2600 individuals. The company is free cash flow positive, generating £616m in revenues and has a market capitalisation of just under £3bn.

The demise of the high street and mismanagement at the company itself has created significant instability for its share price. Having fallen considerably since 2015, we believe that the mall operator is now ripe for a contrarian recovery.

CO-FOUNDER & CFO OF HINDE CAPITAL

Price (£)Turnover (£mm)Net Income (£mm)Market Cap (£mm)Fwd P/E RatioDividend Yield (%)Payout Ratio (%)Total Debt to Total Equity (%)FCF to Market Cap (%)ROIC (%)

211.7594.9182.7274413.86%-99.6%-3.6%

INTU PROPERTIES PLC

Intu Properties Performance

ISSUE 36 - NOV 2017 5

Demise of the High Street / Attack of Online Business

There has been much talk about how Britain’s high streets are entering their death throes with their inevitable deline accelerated by the overpowering threat of e-commerce. Retailers are under siege and some say that there is nothing that can be done as consumers take to the internet to find the best prices, fuelled by what many have considered to be a tough economic climate. Experts believe that between 2020 and 2030, half of the UK’s existing shop premises will have disappeared, with 100,000 shops closing and leaving only 120,000 on the high street, as it is predicted that e-commerce will account for around 40% of all UK retail sales.

Mark Twain was once reported as saying “the reports of my death have been greatly exaggerated”. Similarly there have been many outlandish suggestions that the UK retail market is over. While internet shopping is here to stay

and retailers need to appreciate that and use it to their advantage, mall owners need to understand the changing need of ‘shoppers’.

Changing Landscape

The overall landscape for shopping operators is morphing at a rapid rate due to the changing world that we live in. Presently, there are a range of global trends that are converging, forcing operators/developers to transform the role that these large organisations play in their consumers’ lives. Traditionally, shopping malls have been defined as one or more buildings that form a group of shops which house merchandise that can be observed by visitors as they walk from one unit to another.

1. An aging global population and rapid increase in urbanisation. As this urbanisation accelerates, we are seeing that more people live in smaller spaces and, as a result, are always looking for public spaces in which they can conduct their social affairs.

2. Secondly, we are seeing a big global change as the middle class across the world is growing and, as a result, increasing the need for a more engaging shopping experience.

Today, shopping malls are more than just about shopping and must cater for a wide variety of individuals. Instead, customers are looking for a full-blown experience and want to be entertained, going well beyond the mall's original remit. Many of the changes that are occurring are due to:


3. Finally, as mentioned earlier, the rapid progression of e-commerce and technology has started to reshape consumer expectations. This is forcing stores to rethink their function within society and shift them towards a more auxiliary and entertaining customer experience.

With all the changes happening through the trends described above, shopping malls, including those run by Intu, are under attack with their online counterparts better servicing their client base. Realistically, these operators will never be able to compete with the alternative providers and it is clear that they really should not try to. Instead, they are aware that they should work in conjunction with these platforms to offer a broader proposition. This will enable them to move away from the existing commoditised experience that they provide.

Negative Consumer Confidence

The acceleration in negativity on the high street has coincided with falling consumer confidence, which as been dropping since 2015. This has not been helped by the uncertainty created by the Brexit vote. Given the weak situation within the UK political scene, the potential for further chaos is not helping investors to improve their stance on the economy and the retail sector.

Intu Has Been Its Own Worst Enemy

With pessimism rife across the retail industry, Intu Properties has not helped itself by only investing a minimal amount in the quality of its malls over the years, as it has focused on acquiring new properties. From 2010 to 2014, the company purchased the Trafford Centre (Manchester), Broadmarsh (Nottingham), Midsummer (Milton Keynes),

Merry Hill Centre (Derby) and Sprucefield Park (Northern Ireland).

By 2017, Intu’s portfolio was said to be valued at over £10bn across all of its locations:

A major proportion of its shopping portfolio are rundown and need restructuring. Even after announcing the details of a renovation programme, the lethargic manner in which the management team is implementing these plans has seen the mall operator fall behind many of its peers, leading to severe criticism.

A lack of geographic diversification has seen Intu’s underperformance widen, as it is this very factor that has helped its peer group to weather the uncertainty within the United Kingdom. With 95% of its exposure focused on the British Isles, there is a significant correlation to the general sentiment across the country

ISSUE 36 - NOV 2017 7

Intu: a consistent operator

Despite all of the negative news surrounding the retail industry and Intu Properties’ situation, it is important to understand that it is still in a leading position within the UK, having become the largest owner, developer and manager of prime shopping malls. It is the only nationwide shopping outlet to provide customers with both a brick & mortar and online digital shopping experience. The operator is a pure play mall owner and has a unique insight into customer trends and demands within the UK shopping and leisure industry. One of its key objectives is to connect the requirements of retailers with that of their customers in order to deliver a compelling shopping experience.

With BHS going out of business in 2016, many feared

that this would leave a major void in Intu’s rental intake. However, it is now clear that demand for retail space has outstripped the situation. It is, therefore, vital to acknowledge that despite all the destructive rhetoric, the company has still managed to guide itself through this difficult period. The management team has consistently achieved a high occupancy rate and helped to revive their net rental income growth over the past two years, with analysts expecting a third consecutive year of expansion.

Failures Accepted / Changes Are Already Underway

It is very important to understand the severity of the situation at Intu and the dire operational state that their malls were allowed to reach over the past few years. Fortunately, management has accepted their failings and announced that over the next three years, they will spend £600m on developing their existing sites, halting all UK-based acquisitions while spending approximately £1bn over a 10-year period on their investment pipeline. The frustrations that have been vented by parts of Intu’s investor base are very reasonable. However, it is important to underline that planning and restoration will take time given the group’s extensive property portfolio. But they are finally moving in the right direction.

As you can see below, there are momentous plans in place to convert all of the rundown shopping complexes into fully kitted malls. Projects in Watford and Broadmarsh have already began and are progressing quickly, with completion on track.

With the company in permanent decline since 2015, we believe that most of the bad news is now baked into the valuations at Intu. It enters the HindeSight dividend portfolio trading at a substantial discount to its true adjusted book value. With several damaging factors now priced in, Intu offers a 6% dividend yield that is protected by its status as a REIT and the fact that it is Free Cash Flow positive. With the demise of the high street and physical retail operators overdone, we are certain in our thought process that Intu Properties is at an inflection point and ready for a recovery.


The modernisation plans also demonstrate that Intu are looking to reconfigure themselves and offer auxiliary experiences with the addition of spas, gymnasiums, children’s entertainment and pop-services, having realised that it needs to work in partnership with its online counterparts. With a growing middle class, Intu has already started to introduce higher level dining (DF Mexico, The Alchemist, Jamie’s Italian and pop-up food trucks), as it has come to fruition that malls are becoming an integral hub within people’s lives. The management team has started the process of diversifying their retail tenant mix as they have bought into the theory that smaller independent stores will help to create an element of surprise around their properties, generating greater footfall. While crafting these surprises around their malls, Intu are looking to create specific luxury and children’s zones (Legoland, Nickleodeon and Snow Factor) as the team believe these changes will go a fair distance in overcoming the issues of commoditisation. This will satisfy the consumer’s need for leisure and entertainment, which many yearn for as we live in a more urbanised world.

Consumer Confidence will bounce with more

Despite consumer confidence being negative, we believe that the general public will quickly understand that the situation is not going to be as financial draining as first feared once the UK government starts to announce the details of our partition from the rest of Europe. This, in our opinion, will act as a soft catalyst for the retailer sector to revert higher.

A greater level of news flow will reduce the opacity surrounding the situation and help everyone plan for the future. Xenophobia is the name applied to the concept known as the ‘fear of the unknown’ and this would be the most appropriate way to describe the UK’s current situation. In 2018, this unknown factor will be removed. Any sign of an outcome that is better than expected (e.g. Soft-Brexit) will immediately help to restore confidence back into the market and, in turn, aid the operator’s recovery.

Movement into Spain and India

Intu has fared worse than its closest rivals, as the company lacks the revenue diversification that has helped its main competitors to weather the uncertainty within the United Kingdom. Intu Properties has a 95% exposure to the British Isles while its peers, such as Hammerson, have their risk spread across a variety of regions, including France and

ISSUE 36 - NOV 2017 9

Ireland, while also having more premium outlets in their portfolio.

They have realised the importance of this factor and started to focus on other regions. Just over 5% of their total rental income comes from Spain, with their first regional acquisition happening in 2015. Management have gone on to acquire two more properties (in Puerto Venecia and Madrid) and announced plans to develop a property in Malaga by 2021. All of the ventures in Spain will feature the unique Intu brand and instill confidence within its investors. Intu’s focus on building its Spanish assets has been a surprise to many, as the country was considered off limits over 5 years ago. However, Spain has proven to be resilient and many experts believe it is overdue a cyclical increase in consumer spending.

The company has also set up a branch in India called Prozone Intu, with three live projects in the state of Maharashtra that focus on residential and retail developments. By 2021, it is expected that the Intu’s total portfolio value will have a 10-15% exposure to the rest of the world through its Spanish and Indian ventures. This will add solidity to the REITs financial performance going forward and help it to better manage future upheaval. While adding strength through diversification, Intu will transition from being UK-focused to becoming a more global brand. Expanding its geographic footprint will help it to generate new sources of revenue and recapture its prior success.

Interest Rate and Economic Cycle

One of the biggest worries that investors have had about Intu and its performance is how it will react in a rising rate environment. This is another factor that has kept valuations suppressed.

Management have gone some way to try and allay these fears, stressing to investors that they have very little fixed-rate bond exposure. Therefore, a UK interest rate hike would have minimal effect on cash flow and earnings. REITs are most sensitive to the economic cycle, but given that most of them (led by Intu Properties) are already trading at substantial discounts, it would take a monumental event to force them down further.

Seasonality Factor

According to our research, seasonality is a significant factor that drives the movement of most stocks. August to November is seasonally a poor period for Intu. After these few months have passed, the stock tends to trend higher over the next six months. It should, therefore, be no surprise that the festive period is generally good for mall owners.

Analysts’ Corner

The best time to invest is when there is significant pessimism around a particular stock. The analyst community clearly cannot make up its mind. Well-known within the research community, Intu has been attributed with an average target price (TP) of 264p, which represents an upside of over 28%, from current levels.

Summary

Intu has become one of the dogs of the UK market, having fallen over 44% since 2015 for several reasons. Despite all the fears surrounding the stock, it is moving into the 21st century with a strong renovation and diversification strategy in place. Its solid dividend is protected by Intu’s strong FCF generation. With a significant downside risk accounted for, Intu Properties is a solid contrarian opportunity within the UK equity universe.

Intu properties recovery = Renovated Properties + Better product & tenant mix + Auxillary Services + Technological platform


It is worth scrolling down this website to see the hundreds of coin issuances and some of their interesting names! The ‘cryptocurrencies’ have similar structures. They are created or ‘mined’ by computing power, solving difficult algorithms, and they are ‘finite’. Almost 17 million bitcoins had been mined by October 2017, but the rate of mining is now decreasing fast. Bitcoin’s limit of issuance, written into the original programme, is 21 million coins, which at its current declining rate will be reached between 2110-40. We presume that the creation of bitcoin through ‘mining’ was to have relevance to the extraction of precious metals from the Earth’s core, a scarce and finite supply. This is in strict contrast to the seemingly unlimited ability of central banks to print fiat money. When Satoshi Nakamoto mined the first bitcoins in January 2009, he embedded the text message, ‘The Times 03/Jan/2009 Chancellor on brink of second bailout for banks’, into the coinbase of the block. It would appear he thought the time had come for a new system, both in terms of peer-to-peer transactions and also in a scarce unprintable currency.

But just because something is scarce doesn’t mean it has value. Only my wife and I seem to give any value to my four-year old’s rare and scarce nursery paintings.

Bitcoin is the best known of the new ‘cryptocurrencies’ (of which there are up to 2000 in existence, as of late-2017), having been established in 2008/9. The unknown inventor Satoshi Nakamoto authored a paper, entitled Bitcoin: A Peer-to-Peer Electronic Cash System, before releasing an open source downloadable code. This was, in effect, a digital payment system with no central control or administrator.

INVESTMENT INSIGHTS

“Bitcoin is a worldwide cryptocurrency and digital payment system”

ISSUE 36 - NOV 2017 11

Value is often a function of the time taken to ‘produce’ something. The early use of objects, like shells for ‘currencies’, where a diver might collect ten shells a day on average, would give us a starting point. One day’s diving salary = ten shells, and so on. I have always believed the starting point for any discussion on value, including money, is the worth of one man’s daily labour rate. One of the scarcest metals in the Earth’s crust is gold, a result of asteroid bombardment millions of years ago. The current production cost of gold across the world, on average, is approximately $1100/ oz. This is not far off the actual price of gold at $1275/ oz today but throughout history, the price of gold has traded far higher than the extraction cost. Bitcoin’s production ‘cost of mining’ can be measured in the cost of buying a computer and the electricity used up being a bitcoin miner. In the early days of Bitcoin, ‘mining’ could be done on a laptop. The download of the Bitcoin software was straightforward and ‘mining’ was

the process of verifying bitcoin payment transactions and putting them into a block and solving the algorithm. Think of the algorithm as a computerised Sudoku puzzle that can be ‘solved’, and where the difficulty can be increased over time by adding more columns and rows. The Bitcoin miner receives reward money for solving the block and also a small fee (in Bitcoin) on all the transactions. Today, mining Bitcoin is big business. The cost of the computers, electricity and heat dispersion, as well as the rent of the warehouses, are all crucial to the profitability of the ‘mining’ operation. Recently, the press have made many references to the vast electricity used in ‘mining’, leading to warehouses being moved to where the electricity grid is cheapest with natural cool air, like Mongolia, as well as the electricity used to process the actual transactions. Clearly, some truth lies out there, but on what scale, and does a currency that requires ridiculous amounts of electricity to function even before its widespread use really seem a good plan?

Source: https://coinmarketcap.com


A rack of Bitcoin miners at Bitmain’s facility in Ordos, Inner Mongolia.

Mongolia, as well as the electricity used to process the actual transactions. Clearly, some truth lies out there, but on what scale, and does a currency that requires ridiculous amounts of electricity to function even before its widespread use really seem a good plan?

It has scarcity value, as only 21 million Bitcoins will ever be ‘mined’, in theory. It has a production value and is currently in demand by many who hope to make a fortune out of it. But is it a ‘currency’?

The well-known economists’ definition of a currency includes a unit of account, store of value and medium of exchange. I’m not sure we have got there yet. Does anyone receive their salary/day rate in Bitcoin, apart from a Bitcoin miner?

Do you know of many people who regularly buy things using Bitcoin?

For all the problems with our current fiat money, the theory was reasonable that a central authority would produce enough currency to keep up with population growth. Gold was always particularly good at demonstrating that its yearly production was roughly an additional 1.5% of the world gold stock (as gold was not being ‘used’ up like oil), which was similar to the world population expansion.

Source: buybitcoinworldwide.com

Source: Digiconomist.net

ISSUE 36 - NOV 2017 13

If central bankers created money at 2% to match the expansion of the population, who produced their fair share of goods, the prices of goods should be fairly constant. Unfortunately, we know the history of indebted monarchs, through to today’s money printing central banks, where it has proved far too tempting to produce far more money than we need in order to try to inflate away the world’s debts.

Whether Bitcoin is a true currency is debatable. If the demand increases as ‘the population’ demands it, then the price will rise because it is scarce. The inflation rate of Bitcoin is dropping fast.

When we look at the number of transactions that are being done worldwide in Bitcoin currently, it seems odd that Bitcoin has risen 7-fold this year, yet the transactions haven’t kept up.

Bitcoin transactions per day

Part of the problem could be that the Bitcoin network is not coping well with increasing volumes, with confirmation times taking far longer (which is the reason why it was decided to have a split from Bitcoin to a new currency called Bitcoin cash in August of this year, with larger

block sizes from 1mb, 1mb to 2mb then 8mb and then potentially more). In 2014, the fees that were needed to confirm a transaction were pennies and getting a transaction confirmed in the next block was 10 minutes. In 2017, the average transaction fee has risen to $4 and the average confirmation time was over an hour. Mastercard and Visa can process up to 3,000 transactions per second, so Bitcoin has some way to catch up. Maybe Bitcoin just isn’t scalable. Of course, these huge payment companies lose millions in fraud with their much less secure systems. Does there have to be a trade off between transaction volume and security; surely we can close that gap?

Others might argue that although transaction volumes are not increasing with the market price, the transactions USD value is growing in line with the Bitcoin price and the estimated USD transaction values daily as a % of the Market Cap, and this is very stable.

But maybe the lack of increase in transactions is due to ‘hoarding’, which is a well-known economic term for when people believe their money will buy more goods in the future. So, has Bitcoin become a digital investment or a digital speculation, rather than the peer-to-peer transaction currency it was potentially meant to be?

After all, who needs a currency that can drop 50% and bounce 100% in the matter of days. Digital currencies like Bitcoin are stored in digital wallets, which are either connected to the internet or unconnected in ‘cold storage’. The digital coins or units don’t actually sit in the wallet, even though the wallet records as such. All


Source: Blockchain.info

Source: Hinde Capital / Blockchain.info

Source: Hinde Capital / Blockchain.info


that’s in the wallet is a set of keys, public and private. These provide ownership proof to enable the user to ‘spend’ the Bitcoins that are available to be spent in the network. The Bitcoin software had solved the problem of double spending digital units with a double entry accounting system that meant all units had to be accounted for at all times somewhere in the network. In fiat money, the person who has the note in his hand is the only person who can spend the money and claim to be the owner. In digital currency land, the owner of the right set of public and private keys can claim ownership on the ‘owned’ Bitcoin and can spend it. We should look at the public key like a bank account number, which can be written on an invoice harmlessly, and the private key like a PIN.

The private key (PIN) number of a Bitcoin account is obviously far longer than your typical four-digit bank PIN card; hence, it is far more secure from a hacking attack, especially from a multiple entry testing attack.

It’s the old story of big numbers – a million seconds is 11.6 days, but a billion seconds is 32 years. Most of us have had a three-digit padlock at some time and forgotten the combination. Whether we have tried to unlock it by testing out combinations or not, we are aware that the number of combinations is 1000 and we might get lucky long before that.

With digits 0-9, there are 10 choices, so the number of possibilities is just 10^3 (10 to the power of 3) = 10*10*10= 1000 as we include 000.

Depending on the choice and the number of choices, we can easily calculate the possibilities. If we use a four-letter alphabet code, we have 26^4 =456,976. But if we use lower and upper case, we can get 52^4= 7,311,616.

My bank called me last Christmas to tell me that a person with my debit card and PIN was trying to extract money from ATM machines in the Philippines. I was told that my card had been cloned and that a hacker’s system had managed to turn off the three PINs then closed security function, and so they were just digitally testing all 10,000 in a fraction of a second. Maybe we should move to alphabetical PINs?

Today, the average desktop computer PC, without any specialised hardware, can search approximately 100,000 keys per second.

By increasing the choices available and the number of choices in the sequence, we can make some very large possibilities indeed. Base64, a common system for binary encryption, uses 26 uppercase letters, 26 lowercase letters, 10 numerals and 2 more characters like “+” and “/” to transmit data. Bitcoin and many other cryptocurrencies use Base58, which is Base64 without some of the characters that are frequently mistaken, such as 0 (number zero), O (capital o), l (lower L), I (capital i) and the symbols “+” and “/”.

Despite the belief that computing power is increasing constantly, possibly doubling every 18 months, according to Moore’s Law – that whatever we do, the computer will catch up – it is still a time-consuming task to test every sequence possibility. Adding to the sequence will keep making it too far in the future, no matter how fast computing power gets. While the private keys’ length and sequence ensures security, there is always the theoretical possibility of the private key being hacked through the wallet or in a note file on the laptop (if it is kept there). Many people resort to “paper wallets”, i.e. writing it down on paper and then putting it in a safe place. Like PINs, the more you chose to hide it, the more you might succeed. If you forget or lose your bank PIN, you can request another one after proving your identity. Unfortunately, with Bitcoin, if you lose your Bitcoin private key, you lose all your ownership to those

Source: coinmarketcap.com

Source: Etherscan.

Source: Wikipedia

ISSUE 36 - NOV 2017 15

Bitcoin. There is no one to ask. This is the downside of a distributed, decentralised ledger that is unregulated and unpoliced. Since 2009, Satoshi Nakamoto, whoever he maybe, has mined over a million Bitcoins but there is no record of him having spent any. Could it be that he has lost his Bitcoin private key?

There have been some well-known examples of Bitcoin hacking, such as Mt Gox’s collapse in 2014, but as this has not happened on a regular basis, we must assume that the digital wallets are reasonably secure and many of the loopholes for computer fraud have been eradicated by the constant updates to Bitcoin software. These updates in the form of BIPs (Bitcoin Improvement Proposals) have to be voted on and agreed before implementation. But we still read stories about an Ethereum programmer potentially locking out holders of $280m worth of Ether currency, possibly permanent because of a coding bug!! Banks have had their problems, mis-sold us mortgages and PPI, and overcharged us for fx conversions, but they rarely say, ‘We have deleted your money by mistake and its gone for ever.’ Historically, in the world of Cryptography, code and cipher breaking, from its origins in ancient Greece (Crypo=secret, graphy=writing) to the WWII Enigma codes, distribution has been the main weakness and the key (to deciphering the code). But in the mid-1970s, the problem was effectively solved. Many mathematicians had been working on the problem over the years, including our own GCHQ, but the patents and credit generally goes to discoveries by Diffie, Hellman, Merkle and a key exchange of that name, and the RSA system by Rivest, Shamir and Adleman.

The ability to publish a public key, encrypt a message by using your own private key (and public key), which does not need to be transmitted, and send it ‘encrypted’

so it could only be read by the intended recipient, was a defining moment, not just in the world of code breakers, but also for so much of what we take for granted today. Every single email message and every online purchase is theoretically secure because of this amazing development. The mathematical world of number theory – with its infinite large prime numbers coupled with one-way functions – has given the world an ability to secure communication. Despite regular high-profile press reports about data being hacked from ‘TalkTalk’ to ‘Tesco’, our understanding from discussions with cyber experts is that data is generally very secure, unless you are lazy. Their analogy was that very few burglar alarm specialists have their house burgled. ‘TalkTalk’s IT security was apparently so weak and outdated that no hacker worth his salt even bother to break it for fear of ridicule in the hacking world.

But as the value of Bitcoin and digital wallets soar, so does the financial incentive for fraudulent hacking rises. Like expensive houses, the hackers will keep coming no matter how secure the new cryptography is. Allegedly, North Korean’s hackers are stealing millions in new cryptocurrencies, no doubt converting them back to real money immediately.

Blockchain has become such a buzzword that when the UK company On-line PLC added the word ‘Blockchain’ to its name, the share price rose 400% on the day! But what is blockchain?

It is a continuously growing list of records called blocks that are linked and secured by cryptography, according to Wikipedia. In the world of computing, records are used to being deleted or altered with no regard for history. This was one of the flaws of the modern world until, it would

Source: Mastering Bitcoin.


appear, the invention of blockchain, which was made well known by its use in the Bitcoin protocol.

The phrase, often used is ‘unalterable, decentralised within the public domain’.

Since 1862, the UK Land Registry has been recording all land and buildings ownership in the UK. Each day of transactions could be seen as the ‘block’, which is theoretically secured by the publishing/backing up of data of those records on a daily basis. Anyone wanting to change the title history of a particular land package or building would, therefore, have to go back and change every single record wherever it was held in the land, which was the same basic tenet for changing newspapers from previous decades. Imagine finding every single issue of the March 20th 1984 version of The Daily Mail.

These analogies stand us in good stead for understanding that the concept of today’s blockchain is no different, apart from the fact we are not recording daily, publishing them in print and distributing them. The blockchain that was established for the use in Bitcoin, primarily to solve the ‘digital double spending’ issue, has wide ranging benefits in the current world of computerised globalisation and trust by cryptography. As we record more and more records, from medical, financial transactions or food traceability, computer records that are structurally resistant to modification of data becomes paramount. In the blockchain used by Bitcoin, each block has a hash pointer link to the previous block, a timestamp and transaction data. The more the layers of blocks on top of each other, the harder and harder it is to alter, just like The Daily Mail’s historical issues; not completely impossible, given enough time and resources, but very improbable.While it’s clear that we need records that can’t be altered, what is less clear is who has access to them, and how do we ensure transparency of data when it is required and privacy of data when demanded? For a fee, anyone can access the UK Land Registry database. Privacy in transactions registered is often done through offshore companies. Bitcoin’s ‘open’ blockchain ledger only records account entries, with no knowledge of the account holder. In time, we will all have to decide how our medical and bank records are protected electronically in a decentralised world, if they are to be. In many parts of Scandinavia, tax returns are open and posted online. I’m not certain that is coming here anytime soon but blockchain technology, trust through cryptography, is here to stay.

Initial Coin Offerings

From The Times article about ‘Electroneum’, the latest Initial Coin Offering, which raised $40m before having to be closed ‘temporarily’ due to hacking from Russia cyber-bots. Initial Coin Offerings are the latest craze for raising money.

You’ve heard of start-up IPOs (initial public offerings) and crowdfunding (rewards or equity). Well, if you thought they were ‘highly speculative’ investments, ICOs are IPOs to the power of 10.

Instead of offering equity, Initial Coin Offerings offer ‘digital coins’ in the new cryptocurrency venture that will gain in value if the business is successful. Ethereum is the flag waver for a successful ICO that developed into a currency and investors have been rewarded handsomely so far. Unfortunately, I fear that most of them will lose all their investment money in spectacular fashion.

Many people have lost their investments in early stage IPOs where money is exchanged for an equity stake of a young business in a regulated yet speculative environment. These monies are invariably eaten up by the business long before cash flow appears and the company fails. In the very unregulated world of ICOs, the business is linked to the currency token itself. No wonder the Chinese regulators have closed this market down and world regulators are rushing to address the issue. As someone who is invariably bogged down with reams of regulatory compliance about the suitability of investments to retail and sophisticated customers, this makes a laughing stock of the whole she-bang.

Such is life in the crypto-world. Fortunes are being created out of thin air, scammers are rushing in, and regulators on both sides of the Atlantic are issuing increasingly frantic warnings that the sector is primed for a fall. In September, the Financial Conduct Authority (FCA) said ICOs were "very high-risk", speculative investments" and investors "should be prepared to lose their entire stake".

ISSUE 36 - NOV 2017 17

Just as Uber’s drivers’ Satnav technology competes with the black cab trade in central London, cryptographic technology will continue to challenge the middleman. Instead of two unknown parties being brought together by a 3rd party who is trusted by both for a large commission, many will deal direct securely. The middleman will still exist, but his margins will be cut, as well as others benefit. Such is the march of time.Blockchain technology is necessary in the new world to maintain computer records effectively, without risk of deletion or alteration, and will become commonplace in the future I’m sure.

Humans tend to indebt themselves, individually, collectively and at government levels. Being able to spend today rather than wait is a natural species trait, so we need to regularly eradicate the debt, and there’s no better way to do this than to overproduce a currency (money printing, QE, call it what you want) relative to the population expansion. Clearly, Bitcoin’s limited supply will never make it a stable currency. In the week that I have been writing this article, an as yet unpublished Bitcoin has traded from $5000 to almost $8000 and back to $6000 while its alter ego, Bitcoin Cash, has risen from $300 to $2000. It would make sense that only one of these at most can survive. Can Bitcoin or any other cryptocurrency release more than the original units that were in the written into the protocol? Believers will argue not, but surely it seems much more theoretically possible than expecting a new asteroid bombardment to increase the gold supply. Maybe there will be one crypto winner in the future, free from government oversight, that is allowed to succeed by the world’s regulators who have so far been slow to respond. Or maybe the powers will finally clamp down and Bitcoin will be remembered as a period of collective delusion, rather like Catalonian independence.

But make no mistake about it, this is a bubble. Whether there is one or a few winners in years to come, most of

them will fail and the ICO market will no doubt be the source of many ‘tulipmania’ stories. But there is money to be made in a bubble and an understanding to be had, so we will monitor it closely.

Maybe, when the world is done with ICOs and 2000 cryptocurrencies, and the fiat money system has blown up in an inflationary firestorm, the combination of secure digital transactions and gold will be the one left standing. I mention gold because it stands in contrast to the bubble world of cryptocurrency: it keeps value, it’s heavy and tangible, and although the price moves, it has been worth something for pretty much all of human history. I’d like to draw your attention to Glint, a fintech that is planning to make gold the global currency once more, with all the spending ease of modern technology. It allows users to hold gold in a savings and/or a spending account, as well as multiple currencies. You use the app to select a fiat currency or gold and then pay with a MasterCard, so wherever you are in the world you can spend in gold. That gives people the chance to transcend inflation and FX hurdles. It’s also important that the gold is yours, not an ETF or an option, but legally owned in your name and held with a secure custodian vaulter.

If everybody in the world was able to hold and spend gold as money it could revolutionise its value in more ways than one. While cryptocurrencies remain new and untested, speculation is naturally rife. But gold has passed the test of time, and coupled with the digital age of payments maybe the answer to all our needs, now and in the future.

FULL DISCLOSURE: I AM A DIRECTOR AND INVESTOR IN GLINT.

Summary

You can sign up, cost free, to become a Glint client here https://glintpay.com/

If you’re interested in investing in Glint you can [email protected]


UK MARKET VALUATIONS

PORTFOLIO UPDATE - WHAT HAPPENED?MARKET & SECTOR ANALYSIS

UK INDICES PRICE/EARNINGS RATIO PRICE/BOOK RATIO DIVIDEND YIELD(%)

FTSE 100 INDEXFTSE 250 INDEX

24.6128.32

1.872.19

4.29%3.15%

ISSUE 36 - NOV 2017 19

HINDESIGHT DIVIDEND UK PORTFOLIO # 1 (NOVEMBER 2017)PORTFOLIO UPDATE AND CONSTRUCTION

William Hill plc On the 26th of October 2017, William Hill plc paid a

dividend of 4.26p.

ITV plcOn the 26th of October 2017, ITV plc paid a dividend of 2.52p. PO

RTFO

LIO

U

PDAT

E


We passionately believe that dividends really,really matter. William Thorndike in his fascinating book

'The Outsiders- Eight Unconventional CEOs and Their Radically RationalBlueprint for Success' examined one of the most impor tant aspects of running a business a CEO must undertake: Capital Allocation. He summarised how a CEO deploys capitalin order to best utilise cash flow generated from his or her business operations. Essentially,CEOs have 5 ways of deploying capital:

• Investing in existing operations• Acquiring other businesses• Repaying debt• Repurchasing their own stock (buybacks)• Paying dividends

Dividend payments are a crucial operation in creating stakeholder wealth. It is this aspect of a business that we are so fixated by - the propensity for a company to produce and continue to grow dividends so that we may accrue wealth over a generation. But as readers will know we can't just grab stocks with the highest yield for fear that this signals some cash flow or even solvency issues for the firm. So it is with this very real threat in mind we explore only well-capitalised FTSE 350 companies.

This letter's purpose is to help inform readers on dividend investing so that they can construct a portfolio of sound UK dividend stocks based on our recommendations. Our prerequisite is that any stocks selected for this let ter

must be liquid,well-capitalised with a strong free cash flow and a progressive dividend policy.

Our System

• Every month we will provide a write up of 3 to 4 stocks untilwe create a portfolio of 25 UK dividend stocks. This will be the HindeSight UK Dividend Portfolio #1

• You wiII bealerted by subscriber email intra-month when these stocks become a buy. Timing is critical to the strategy, not only buying quality stocks but buying them at the right time

• Theentry points willthen be recorded in the next month ly in the HindeSight UK Dividend Portfolio section and the stock(s) wr itten up in full

• We will run our winners but tend to rotate every 6 months depending on specific criteria which would elevate cheaper companies into the portfolio relative to stocks that had performed

• The basis for stock and portfolio selection is derived from our quantitative systematic methodology which screens these companies using the Hinde Dividend Value Matrix, (HDVMdl), a proprietary stock-rating system

• In the section on ETPs we will highlight our invest ment philosophy and the investment process behind our stock selections. This is the b*is of our dynamic risk and money management in our portfolio con struction for you. You can also read the stand-alone Hinde Dividend Value Strategy document to see the methodology behind our stock selection.

APPENDIX I

THE WAY WE THINK

ISSUE 36 - NOV 2017 21

“We have met the enemy, and he is us.” Walt Kelly

Our key to long-term performance investing is premised on the following:

• Systematic rule-based strategy• Systematic risk and money management• Occam’s razor, aka ‘K.I.S.S.’, Keep It Simple Stupid• Consistency• Discipline

All our investment ideas are rule-based methodologies driven by systematic and quantitative models.

Hinde Dividend Value Strategy

Hinde Dividend Value Strategy seeks to generate a total return from an actively managed basket of UK dividend-paying stocks. The strategy selects 20 highly liquid, mid-to-large capitalised stocks on an equally-weighted basis, which offer the highest total return potential. The 50%

Hedge version of the strategy would then be subject to a strategic Beta Hedge*, which is designed to cover 50% of the value of the UK stock basket at all times.

The 50% hedge is maintained using UK equity benchmark indices to reduce exposure to overall market volatility, but without reducing overall total returns to the market over the long run. The Hinde Dividend Value Strategy (100% Hedge) would deploy a full beta hedge at all times.

Hinde Dividend Value Matrix ®

The strategy employs a quantitative, systematic methodology, whereby FTSE 100 and FTSE 250 constituent stocks are screened using the Hinde Dividend Value Matrix®, a proprietary stock-rating system. We use the same system to select stocks for any of our strategies, long-only, 50% Hedge or 100% Hedge. The only difference is clearly the extent of the hedge on the exposure to the overall market.

APPENDIX II

HOW WE THINK


The basic premise of the strategy is to accelerate returns by selecting relatively high yielding stocks that offer the highest potential for capital revaluation. The dynamic rotation of stocks each quarter enables us to sell stocks where the capital revaluation and dividend has been captured, and use this additional capital to invest in more undervalued quality companies. If successful, this cycle of capture and re-investment offers the chance to significantly improve the total return generated by the Dynamic Portfolio.

The basis of the stock selection process is the Hinde Dividend Value Matrix®, which is a derived process that looks at 3 crucial variables:

* Beta is the stock’s sensitivity to market movements, e.g. if a share has a beta of 1.5 its price tends to move by 1.5% for each 1% move in the index

1. Dividend Screen

The top ranking stocks will be those offering a relatively high dividend. A composite of the following criteria comprises the Dividend Rank:

• Relative Dividend Yield• Dividend Capture• Payout ratios

The Relative Dividend Yield assesses if a company pays a higher dividend than the Index it derives from (the FTSE 100 or FTSE 250). The Dividend Capture criteria explain how quickly and how much of the dividend is paid at any point in time. The Payout Ratio gives a snapshot of whether a company will be able to maintain and grow its dividend. It helps us to assess how much of a company’s revenue, profit or cash flow is paid out in dividends.

The lower the amount of dividends paid out as a percentage of profits, the healthier future dividend potential will be. History is for once a good guide as to whether companies will continue to pay and grow their dividends. A stock with an excessively high yield relative to its sector or the overall market is invariably showing signs of heightened risk to its dividend sustainability and often the viability of the company itself. The screen incorporates a limit on yield dispersions from the overall market.

The strategy is emphatically not a yield chaser. It is the Performance and Value screens that are used to assess the total return potential of a stock by analysis of how undervalued it is relative to its fundamentals, sector and overall market index.

2. Performance Screen

The top ranking stocks have the poorest relative

performance to their index over multiple time horizons.

A composite rank of the following criteria provides the Performance Rank:

• Stock relative performance ranked over multiple time periods

• Average of time periods taken to select rank of stocks

3. Value Screen

The top ranking stocks by key fundamental criteria show stable fundamentals and exhibit upside momentum growth potential. The following are some of the criteria that provide the Value Rank:

• Value - Price to Book (intangible book adjustment), Free Cash Flow metrics

• Quality - Return on Investment and Earnings metrics

• Financial Stability - Debt levels, Coverage and Payout ratios

• Volatility - Stock variance, Dividend variance

• Momentum - Sales Growth, Cash flow metrics

• Liquidity - Minimum market capitalisation relative to index, Shares outstanding

Implementing the Hinde Dividend Value Matrix ®

The FTSE 100 and FTSE 250 stocks are ranked using the Dividend, Performance and Value screens. An equally-weighted composite rank is then taken of these 3 ranks, which provides a final ranking from which a selection of 20 stocks is made for the portfolio.

The stocks with the highest ranking are compiled for the FTSE 100 and the FTSE 250. The top 10 from each index are then taken, subject to diversification rules, which entail that normally only 1 stock per sector per index can be invested in. For example, if the top 10 stocks are all mining companies, the selection process would take the first of these and then move on to select the next top stock from another sector. As long as a stock has the highest score in its sector, the fact that it has appeared in the final ranking means it is already eligible for investment. In exceptional circumstances, it may be that more than one stock has to be selected from an individual sector.

ISSUE 36 - NOV 2017 23

DISCLAIMER

This newsletter is intended to give general advice only on the importance of dividends within the equity space. The investments mentioned are not necessarily suitable for any individual, and you should use this information in conjunction with other advice and research to determine its suitability for your own circumstances and risk preferences. The value of all securities and investments, and the income from them, can fall as well as rise. Your investments may be subject to sudden and large falls in value and you may get back nothing at all. You should not buy any of the securities or other investments mentioned with money you cannot afford to lose. In some cases there may be significant charges which may reduce the value of your investment. You run an extra risk of losing money when you buy shares in certain securities where there is a big difference between the buying price and the selling price. If you have to sell them immediately, you may get back much less than you paid for them. The price may change quickly, particularly if the securities have an element of gearing. In the case of investment trusts and certain other funds, they may use or propose to use the borrowing of money to increase holdings of investments or invest in other securities with a similar strategy and as a result movements in the price of the securities may be more volatile than the movements in the price of underlying investments. Some investments may involve a high degree of ‘gearing’ or ‘leverage’. This means that a small movement in the price of the underlying asset may have a disproportionately dramatic effect on your investment. A relatively small adverse movement in the price of the underlying asset can result in the loss of the whole of your original investment. Changes in rates of exchange may have an adverse effect on the value or price of the investment in sterling terms, and you should be aware they may be additional dealing, transaction and custody charges for certain instruments traded in a currency other than sterling. Some investments may not be quoted on a recognised investment exchange and as a result you may find them to be ‘illiquid’. You may not be able to trade your illiquid investments, and in certain circumstances it may be difficult or impossible to sell or realise the investment. Investment in any of the assets mentioned may have tax consequences and on these you should consult your tax adviser. The opinions of the authors and/or interviewees of/in each article are their own, and are not necessarily those of the publisher. We have taken all reasonable care to ensure that all statements of fact and opinion contained in this publication are fair and accurate in all material respects. All data is from sources we consider reliable but its accuracy cannot be guaranteed. Investors should seek appropriate professional advice if any points are unclear. Ben Davies and Mark Mahaffey the editors of this newsletter, are responsible for the research ideas contained within. They or any of the contributors or other associates of the publisher may have a beneficial interest in any of the investments mentioned in this newsletter.

Disclosures of holdings: None relevant to any content discussed within this issue of the newsletter

This score is derived from 3 inputs that have been obtained from all the external analysts at leading institutions who are covering the stock:

1. The 12 month target price in relation to current price

2. The number of analysts covering the stock

3. The recommendation analysis, e.g. STRONG SELL, SELL, UNDERPERFORM or HOLD

This score is used to observe the other analysts’ view of the stock and is helpful when understanding the methodology that other analysts use to determine their 12-month target price. We ultimately get a blend of price targets that is based on different valuation metrics.

EAS Score Output:

1. The combined score will vary from 30-702. A stock with a lowest score of 30 shows the majority

of analysts not only have a full sell/underweight recommendation, but also a low 12-month target

price in relation to current price.3. A stock with the highest score of 70 shows the majority

of analysts not only have a full buy/overweight recommendation, but also a high 12-month target price in relation to current price.

Note:

On a standalone basis, the EAS score must be viewed in the following context:

• Equity analysts issue far more positive recommendations than negative

• If all analysts are overwhelmingly bearish or bullish, then this can signal a contrarian position be held, but this is determinate on the where the stock is valued.

However, in conjunction with the HDVM ®, we have found the score to be useful when it is high or momentum is turning higher, as this suggests that the stock offers deep value.

EXTERNAL ANALYST SCORE (EAS)

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