Quest Operation style twist - UK Quest helpline +44 (0)20 7523 8493 [email protected] Nigel...

Quest™Operation style twist - UK

Quest™ helpline+44 (0)20 7523 [email protected]

Nigel Sedgley+44 (0)20 7523 [email protected]

28th June 2012

Operation style twist: Summary and conclusions

2008-2009 all over again?

What’s new? New quarterly backtest Feb-May 2012

There are lots of similarities between events in 2008/9 and recent patterns.

During the 2008/9 trough style performance was volatile but Value ultimately dominated.

The trough in Value in 2008/9 was before the market bottom.

Value rallies tend to be short/sharp events (2-3 quarters) – if you are late, its easy to miss them.

Although the market does not look especially cheap, valuation divergence is high.

Lots of stocks are trading near their trough valuation of the last five years.

The run to safe stocks has left some valuations looking overextended – more than in 2008/9.

During times of profit and cash flow volatility you need to assess Value using stable measures:eg Quest™ market to book, EV/Sales.

Similar Value approach in Nov 08 Quest™ Newsletter delivered strong performance.

Volatility means there will be opportunities. Our screens assess the risk/reward trade off .

: Factors and composition

triAngleValue Quality

Momentum

33% 33%

33%

CFROC spread

Capital growth

Equilibrium growth

Fixed charge cover

CFROC change

Quest™ valuation

Quest™ market-to-book

EV/sales rel. LRA

Dividend yield rel. LRA

P/E rel. LRA

9m-relative trend

100/200-day switch

12m-relative range

30/90 day switch

Earnings momentum

Baskets are dynamic: They vary over time depending on what currently represents Value, Quality etc .

-15% -10% -5% 0% 5% 10% 15% 20%

triAngle

Value

Quality

Momentum

Quest™ Valn

Quest™ Mkt to Book

EV/Sales rel LRA

Div Yield rel LRA

PE Rel LRA

CFROC Spread*

Capital Growth

Equilibrium growth

Fixed charge Cover

CFROC change

9m relative trend

100/200 day switch

12m relative range

ST Indicator

EPS momentum 3m

UK large cap – 3m to end May 2012

Source: Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.

triAngle

-30%

-20%

-10%

0%

10%

20%

30%

Nov-98

May 99

Nov 99

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

500

1000

1500

2000

2500

3000

3500

4000

triAngle FTSE350

Three months ending at date show n

Earnings Momentum

-30%

-20%

-10%

0%

10%

20%

30%

Nov-98

May 99

Nov 99

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

500

1000

1500

2000

2500

3000

3500

4000

EPS momentum 3m FTSE350


Value

-30%

-20%

-10%

0%

10%

20%

30%

Nov-98

May 99

Nov 99

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

500

1000

1500

2000

2500

3000

3500

4000

Value FTSE350


Fixed Charge Cover

-30%

-20%

-10%

0%

10%

20%

30%

Nov-98

May 99

Nov 99

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

500

1000

1500

2000

2500

3000

3500

4000

Fixed charge Cover* FTSE350

Three months ending at date show n*Live triAngle factor since Feb 04. Previously Ex post backtest. 3m to Feb 04 N/A.

Quality

-30%

-20%

-10%

0%

10%

20%

30%

Nov-98

May 99

Nov 99

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

500

1000

1500

2000

2500

3000

3500

4000

Quality FTSE350


CFROC Spread

-30%

-20%

-10%

0%

10%

20%

30%

Nov-98

May 99

Nov 99

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

500

1000

1500

2000

2500

3000

3500

4000

CFROC Spread* FTSE350

Three months ending at date show n*Pre Feb 04 Avg over 5 historic yrs. Post Feb 04 Avg over 4 Historic, 1 Forecast yr.

Longer term context: triAngle quarterly backtest – updated to May 2012

Best for 3 yrs

3rd Best in a decade

9 neg quarters in a row

2nd best in a decade

3rd Worstever

Worst for 3 yrs

Equal weightings dangerous at turning points

Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.

Quarterly backtests place recent trends in long-term context – Quality has been strong, Value weak.

Value rallies tend to be short/sharp events (2-3 quarters) – 2010/11 saw 9 negative quarters in a row.

triAngle

-30%

-20%

-10%

0%

10%

20%

30%

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

100

200

300

400

500

600

triAngle FTSE Europe Index (RH)


Earnings Momentum

-30%

-20%

-10%

0%

10%

20%

30%

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

100

200

300

400

500

600

EPS momentum 3m FTSE Europe Index (RH)


Value

-30%

-20%

-10%

0%

10%

20%

30%

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

100

200

300

400

500

600

Value FTSE Europe Index (RH)


Momentum

-30%

-20%

-10%

0%

10%

20%

30%

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

100

200

300

400

500

600

Momentum FTSE Europe Index (RH)


Fixed Charge Cover

-30%

-20%

-10%

0%

10%

20%

30%

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

100

200

300

400

500

600

Fixed charge Cover* FTSE Europe Index (RH)

Three months ending at date show n*Live triAngle factor since Feb 04. Previously Ex post backtest. 3m to Feb 04 N/A.

Quality

-30%

-20%

-10%

0%

10%

20%

30%

May 00

Nov 00

May 01

Nov 01

May 02

Nov 02

May 03

Nov 03

May 04

Nov 04

May 05

Nov 05

May 06

Nov 06

May 07

Nov 07

May 08

Nov 08

May 09

Nov 09

May 10

Nov 10

May 11

Nov 11

May 12

0

100

200

300

400

500

600

Quality FTSE Europe Index (RH)


2nd best ever

Best since 2003Best ever

Worst and 3rd worst ever

Previous extremes were before mkt rally

Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials. Europe ex UK small

Worst in a decade

Worst for 3 yrs

Equal weightings dangerous at turning points

Increased volatility

Quarterly backtests place recent trends in long-term context: Feb-May: Quality best ever, Value worst ever.

Value rallies tend to be short/sharp events (2-3 quarters) – 2010/11 very negative for Value.

Europe even more extreme

2nd best ever

100

1000

10000

No

v-9

8M

ay-

99

No

v-9

9M

ay-

00

No

v-0

0M

ay-

01

No

v-0

1M

ay-

02

No

v-0

2M

ay-

03

No

v-0

3M

ay-

04

No

v-0

4M

ay-

05

No

v-0

5M

ay-

06

No

v-0

6M

ay-

07

No

v-0

7M

ay-

08

No

v-0

8M

ay-

09

No

v-0

9M

ay-

10

No

v-1

0M

ay-

11

No

v-1

1M

ay-

12

triAngle™

Value

Quality

Momentum

Market beating stock-picking tool

Company scores updated daily on

www.canaccordquest.com

Combining Value, Quality and Momentum

Quest™ metrics mixed with conventional data

Style analysis and themes

triAngle Escalator: Who’s moving up and down

Excellent 12- year track record

– 3-pronged approach improves consistency

– UK Large – 42/54 +ve quarters, +3.9% average

– Pan-Euro – 37/49 +ve quarters, +3.2% average

– UK Small – 35/43 +ve quarters, +6.2% average

– North America – 18/35 +ve quarters, -0.3% average

(Value and the Escalator dominate in the US)

Over 12 years of live experience assessing style trends.

UK large cap triAngle performance

Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials

: What is triAngle?

Equally weighted triAngle is the most consistent, but

there have been a few short/sharp value rallies

100

1000

10000

Nov

-98

Aug

-99

May

-00

Feb

-01

Nov

-01

Aug

-02

May

-03

Feb

-04

Nov

-04

Aug

-05

May

-06

Feb

-07

Nov

-07

Aug

-08

May

-09

Feb

-10

Nov

-10

Aug

-11

May

-12

FTSE 350

Top quintile

Bottom quintile

60

70

80

90

100

110

120

130

140

Jan-10

Mar-10

May-10

Jun-10

Aug-10

Oct-10

Dec-10

Feb-11

Apr-11

Jun-11

Aug-11

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Value

Quality

Momentum

History rhymes: Comparing 2007-2009 with 2010-2012

The troughV,Q neutral,Mmtm -ve

Crisis developingValue –ve, Qual +ve, Mmtm +ve

UK Largecap

Now(2010-2012)to 22nd June 2012

Then(2007-2009)

Market rallyingValue +ve, Qual neutral, Mmtm -ve


Value made an absolute low in Nov 2008, but there was lots of volatility around the trough.

Current pattern looks most like Sept 08

Performance: Global Style Matrix: Risk off again – but signs of stabilisation

Data to 22nd June 2012Source: Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.

-40% -30% -20% -10% 0% 10% 20% 30%

triAngle

Value

Quality

Momentum

Quest™ Valn


EV/Sales rel LRA

Div Yield rel LRA

PE Rel LRA

CFROC Spread*

Capital Growth

Equilibrium growth

Fixed charge Cover

CFROC change

9m relative trend

100/200 day switch

12m relative range

ST Indicator

EPS momentum 3m

UK end Nov 08-end Feb 09: Value rallied before the market

More stable value measures leading the way

Fixed charge cover: Feb-May 2009 -13%, May-Aug 2009 -7%

A sign of rotation

Quality held up

80

100

120

140

160

Mar

09

Apr

09

May

09

Jun

09Ju

l 09

Aug

09

Sep

09

Oct

09

Nov

09

Dec

09

Jan

10F

eb 1

0M

ar 1

0A

pr 1

0M

ay 1

0Ju

n 10

Jul 1

0A

ug 1

0S

ep 1

0O

ct 1

0N

ov 1

0D

ec 1

0Ja

n 11

Feb

11

Mar

11

Apr

11

May

11

Jun

11Ju

l 11

Aug

11

Sep

11

Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio

UK Value

60

80

100

120

140

160

180

200

Jan 9

0

Apr

90

Jul 9

0

Oct 90

Jan 9

1

Apr

91

Jul 9

1

Oct 91

Jan 9

2

Apr

92

Jul 92

Oc

t 92

Jan 9

3

Apr

93

Jul 9

3

Oct 93

Jan 9

4

Apr

94

Jul 9

4

Oc

t 9

4 60

70

80

90

100

110

120

130

140

150

160Value (Composite)

P/E

Price/Book

DY

DJSTOXX (RH)

Kept outperforming after the other value measures waned.M&A, just –in-time capexsupport a sustained rally

Which value measures?

2003-6

1992-4Price to book worked well (Pan Euro)

2009-11Market to book headed the Value charge

and sustained performance

Mkt troughMarch ‘09

Mkt peakFeb ‘11

80

100

120

140

160

180

Mar

03

Apr

03

May

03

Jun

03Ju

l 03

Aug

03

Sep

03

Oct

03

Nov

03

Dec

03

Jan

04F

eb 0

4M

ar 0

4A

pr 0

4M

ay 0

4Ju

n 04

Jul 0

4A

ug 0

4S

ep 0

4O

ct 0

4N

ov 0

4D

ec 0

4Ja

n 05

Feb

05

Mar

05

Apr

05

May

05

Jun

05Ju

l 05

Aug

05

Sep

05

Oct

05

Nov

05

Dec

05

Jan

06F

eb 0

6M

ar 0

6

Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio

UK Value

During times of profit/cash flow volatility you need to assess Value using stable measures:

eg Quest market to book, EV/Sales.

What is Quest™ market to book?

Total market capitalisation (equity + debt + quasi debt)

Quest™ market-to-book = ----------------------------------------------------------------------------

Estimated replacement cost of assets


● A variation on Tobin’s Q which compares market value of a company to the replacement cost of assets. (EV/Invested capital)

● Profits, sales, cash flows and dividends are all unpredictable at present.

● Valuation relative to the asset base is more stable.

● Excellent track record at market turning points.(“Time to get into the Q” note – November 2008)

Earnings yield rel. to trailing 10 yr avg

0.0

1.0

2.0

3.0

4.0

May

-01

Nov

-01

May

-02

Nov

-02

May

-03

Nov

-03

May

-04

Nov

-04

May

-05

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12

Upper qtlMedianLower qtl

Equities Cheap

Equities Expensive

Quest default valuation

-75%

-50%

-25%

0%

25%

50%

75%

Mar-

09

May-

09

Jul-09

Sep-0

9

Nov-

09

Jan-1

0

Mar-

10

May-

10

Jul-10

Sep-1

0

Nov-

10

Jan-1

1

Mar-

11

May-

11

Jul-11

Sep-1

1

Nov-

11

Jan-1

2

Mar-

12

May-

12


Equities Expensive

Equities Cheap

EV/Sales rel. to trailing 10yr avg

0.00

0.50

1.00

1.50

2.00

May-

01

Nov-

01

May-

02

Nov-

02

May-

03

Nov-

03

May-

04

Nov-

04

May-

05

Nov-

05

May-

06

Nov-

06

May-

07

Nov-

07

May-

08

Nov-

08

May-

09

Nov-

09

May-

10

Nov-

10

May-

11

Nov-

11

May-

12


Equities Expensive

Equities Cheap

Quest Mkt-to-book (ex goodwill)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

May

-01

Nov

-01

May

-02

Nov

-02

May

-03

Nov

-03

May

-04

Nov

-04

May

-05

Nov

-05

May

-06

Nov

-06

May

-07

Nov

-07

May

-08

Nov

-08

May

-09

Nov

-09

May

-10

Nov

-10

May

-11

Nov

-11

May

-12


Equities Expensive

Equities Cheap

But how much is now priced in?... market valuation charts Median valuation not far off the trough but close to the ‘new normal’

Stock dispersion is high – lots of cheap stocks and expensive stocks look dearer than in 08/09

Corporate action, policy response less likely to be as helpful this time, but less solvency risk

Prices as at 6th June

New Normal?

New Normal?

Expensive stocks have held up relative to 08

Quest market to book (yr avg)

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1.3

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

+12

Current 0.79LRA 0.90

Quest market to book (yr avg)

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

+12

m

Current 0.67LRA 0.80

Quest™ market-to-book: What is the opportunity? Level + dispersion

Europe ex UK smallUK Large capAs at May 24

16% below LRA12% below LRA

Market levelUses average market cap for the year

Dispersion

“Time to rejoin the Q”

“Who is still left in the Q?”

“Slowly moving up the Q”

“Jostling about in the Q”

CITN/ Newsletter articles“Time to get into the Q”

As at May 24

There are as many cheap stocks as summer 2009.

Quest™ market-to-book strategies 1) Buy cheapest companies on market-to-book

2) Consider pricing relative to a long-term view of asset’s productive capacity over their lifetime. Take Value AND Quality into account.

3) What if no mean reversion? – need to consider valuation relative to the ‘new normal’

Desire to avoid Value traps: Solvency, asset write downs (badwill)


Q-discount (10yr) = ------------------------------------------------------

Cyclical average CFROC / WACC


Q-discount (+12m) = ------------------------------------------------------

+12m CFROC / WACC

Value screen I: UK Quest™ market-to-book – Time to rejoin the Q?

Updated weekly on Q-files.

Our favourite screen which links Valuation with Quality – worked well in 2008

Value screen II: Trough valuations

Stocks trading with 10% of five-year trough valuation on Quest™ market to book

Ranked by

mkt cap

Priced 12th June

A potential source of ideas: Some stocks will be cheap for

a reason. Others will be genuine

opportunities

Screen also available for

EV/sales and other triAngle

metrics

Value screen III: Superscreen Criteria

Mkt to book below LRA

Quality filters (optional)

triAngle Value score

Upside on Quest and cheaper than usual

15% more upside than 10y average

A broad based value screen using the Quest website screening function

Value screen III: Value superscreen stocks

Ranked by

mkt cap27 June

Quality filters.1) Lots of

debt/quasi debt .2) Negative EPS

momentum. Signal of risk of a profit

warning?

Full screen on www.canaccordquest.com

Over-extended valuations: The other side of the Value trade

Outperformed

Lacks value support

Other risks

Compare with EV/sales

Companies which have outperformed but now lack value support

Over-extended valuations: The other side of the Value trade

26 June

If EV/sales is higher than historic (long-run average), is that justified by higher margins. If so, is that margin sustainable?

Margins – not so stable? – Danone / Procter cutting guidance

UK margin screen

Value tools: Quest™ LBO FCF yields

Corporate balance sheets supportive of a pick-up in M&A

High level screening metric of the type favoured by private equity – identifies pre-tax cash flow yield on EV.

Assesses cash flow available to prospective purchasers, after meeting its operating and capex needs but before financing costs or tax

May be compared with required rates of return to see if company initially meets its funding cost

Uses historic and consensus forecasts of EBITDA, capex and working capital needs to estimate ‘normalised’ cash flow

IRR models – 25% bid premium, 60/40 debt equity, 7% interest rate, 3-years consensus, 10-year exit multiples.

Good track record when there is a pick-up in M&A activity (first introduced by Quest™ in 2002 - Newsletter #11)

1 hist + 2 f/c years Normalised

3 yr avg EBITDA x FY 2 f/c sales = EBITDASales

3 yr avg Capex x FY 2 f/c sales = CapexSales

3 yr avg Wkg cap chg x FY 2 f/c sales = Wkg cap invSales

LBO FCF'

LBO FCF yield (%) = LBO FCF Mkt cap + Net debt + Pension liability

LBO FCF yield calculation

● LBO spreadsheet data updated weekly

M&A Hotspots

0% 2% 4% 6% 8% 10% 12% 14% 16% 18%

TobaccoSoftware & Servs

MiningPharma

Tech HardwareOil Eqt Svcs

Market AverageIndl Engineering

BeveragesPersonal Goods

Health CareGenl Retailers

Support ServicesAero & DefenceGenl IndustrialsFood Producers

ChemicalsTravel & Leisure

Electronic EqtOil & Gas Prod

Indl TransportAutos & Parts

MediaFood Retail

H'hold GoodsMobile Telecoms

Gas Water UtilConstrn / MatsLeisure Goods

Indl Metal/MiningFixed Telecoms

ElectricityAlt. Energy

Forestry/Paper

-1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0

Software & ServicesTech Hardware

MiningAutos & Parts

PharmaHealth Care

Oil & Gas ProdIndl Engineering

TobaccoElectronic EqtLeisure Goods

Mobile TelecomsPersonal Goods

H'hold GoodsMarket AverageAero & Defence

ChemicalsOil Eqt Svcs

Food ProducersIndl Metal/Mining

MediaGenl Industrials

BeveragesFixed Telecoms

Support ServicesGenl Retailers

Constrn / MatsFood Retail

Gas Water UtilAlt. Energy

Indl TransportTravel & LeisureForestry/Paper

Electricity

UK technology hotspot – 3 takeovers by North American counterpart in a year: Logica/CGI, Autonomy/HP, Misys/Vista Equity Partners

Sector has high Cash flow returns + net cash.

Top 30 US tech names have potential US$430bn of cash outside the US. Could buy top 10 European tech names twice including 30% premium.

Deal rationale varies. To save on R&D, scale – global customer base, synergies, valuation.

Global CFROC +12m Global (debt+other)/EBITDAR

UK Technology LBO FCF

Logica pre bid = 19%

6 June

The Finance Director’s dilemma

Things to look for… Areas for caution…

Attractive valuationHigher share prices may already be pricing in

recovery/takeover

Hot sectors Cold sectors – potential acquirors scared off by macro outlook

Niche products Industrial logic/synergies

Challenged business models Austerity hit companies

Ungeared (beware hidden gearing – leases/pensions)Cash not theirs (customers/pre-payments)

Year-end timing makes balance sheet look artificially attractive.

Restructuring opportunities including property release and working capital potential – typically private equity tools, but

relevant for corporate restructurings too.

Too much gearing. May still be M&A targets but risky portfolio holdings. Note: High pension need not be deal breaker,

particularly in bolt-on type deals.

Companies where capex has been sustained FCF looks artificially high because of underinvestment

LBO framework: Summary of considerations

What to do with the cash? Increase investment – Capex or M&A (just in time capex)Remain cautious – Hoard/run ungeared balance sheetReturn to shareholders – Increased dividends / buybacks

Not all good newsIncreased capex will reduce free cash flow yields/cash flow returns Beware overpayment for acquisition/integration problems

DIY private equity toolkit – LBO superscreenIdentify companies which could generate significant value either off or on-market

Pan-Euro sector LBO FCF yields inc pension

-5.0% 0.0% 5.0% 10.0% 15.0% 20.0%

Autos & Parts

Oil & Gas Producers

Fixed Telecoms

Leisure Goods

Mining

Genl Industrials

Media

Indl Engineering

Aero & Defence

Electronic Eqt

Pharma & Biotech

Forestry & Paper

Tech Hardw are

Market average

Chemicals

Softw are & Services

Indl Metals & Mining

Household Goods

Support Services

Constn & Materials

Mobile Telecoms

Genl Retailers

Personal Goods

Tobacco

Food & Drug Retail

Indl Transport

Oil Eqt Svcs & Distn

Travel & Leisure

Health Care

Beverages

Electricity

Food Producers

Gas Water Multi Util

Alt. Energy

6 June

Performance of the Q-discount screen from Nov 08-

Source:Datastream

Rel to WIEROP$

Q discount screen worked well

In 2008.

Source: Quest Newsletter

Nov 2008

Appendices

What is Quest™?

Decision support tool for equity investors

Impartial corporate financial analysis

Idea generation and idea validation

Combines conventional and proprietary metrics

‘Glass box’, not a black box

Web-based products – www.canaccordquest.com

Helping investors make money since 1996

What is Cash Flow Return On Capital?

Cash Flow Return On Capital (CFROC)

– Real (replacement cost)

– Post-tax

– Return On Gross Invested Capital

Better insight into corporate performance and valuation (takes into account all the capital used, asset life, asset mix, return of capital)

IRR calculation not A/B

(A) Gross cash flow = €10

(D) Asset life = 14 years

(B) Gross invested capital = €100

(C) Non-depreciationasset release = €15

Cash Flow Return On Capital (IRR) = 6.0%

Wealth creation Screening

Risk managemen

t tools

Value tools Performance M&A

Stocks & Products

Quest™ valuation overview

Cash Flow Returns in a DCF model

Use consensus forecasts – 2-years forward

Forecast gross cash flows – existing assets wind-down

Forecast growth rate – reversion to mean

Forecast Cash Flow Return On Assets – future investment returns (reversion to

mean)

Forecast net cash flows – implicit

Discount back using WACC for Enterprise Value

Reversion to the mean

High CFROA Low CFROA High growth

A broad-based view

Five Value factors:

Quest™ valuation


EV/sales rel LRA

Dividend yield rel LRA

P/E rel LRA

Mix of absolute and relative measures

Value

Tesco: Quest™ valuation

Centrica: Dividend yield relative to market and history

Aim to emulate the Quest™ Strategy page

Is it a good or a bad company?

High return/ growth stocks

Five Quality factors:

CFROC spread (5-year average)

Real capital growth (3-year average)

Equilibrium growth (3-year average)

Fixed charge cover (solvency FY1)

CFROC change (FY1)

Measures ability to generate shareholder value

: Quality

Tesco PLC: Cash flow returns

Tesco PLC: Invested capital and equilibrium growth

Combination of price and earnings

Five Momentum factors:

Nine-month relative trend

100/200 day switch

12-month relative range

30/90 day switch

Earnings momentum (consensus)

Mixture of long, medium and short-term measures

: Momentum

Each stock is compared to its universe

All 15 factors ranked in deciles

– 10 = ‘good’, 1 = ‘bad’

Add the five measures in each category and divide by

1.5

– Gives scores for Value, Quality and Momentum (/33)

Add together category score to get overall triAngle

score

Rank all the stocks in the universe, then re-decile

How the triAngle score is calculated

triAngle history: Value, Quality and Momentum

12 years of live triAngle history

Value works in short sharp burst – normally when valuation dispersion is high.

During the credit crunch, and in H2 2011, Quality and Momentum were the main drivers


Pan-Euro market-to-book performance

Quality filters don’t help when the market takes

off

To 23 May 2012

But, will there be a ‘dash for trash’ this time?

Q discount has lagged

behind

Or did we see it in January?

UK large cap – Impact of Miners

-15% -10% -5% 0% 5% 10% 15% 20%

triAngle

Value

Quality

Momentum

Quest™ Valn


EV/Sales rel LRA

Div Yield rel LRA

PE Rel LRA

CFROC Spread*

Capital Growth

Equilibrium growth

Fixed charge Cover

CFROC change

9m relative trend

100/200 day switch

12m relative range

ST Indicator

EPS momentum 3m

All companies

Ex Miners

UK Mining sector underperformed by 16% in the quarter. End Feb-End May 2012

Source: Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.

Pan Europe: triAngle value scores (/33)

Canaccord Genuity Quest™. Sept 2007 – May 2012. Europe (ex UK Small) universe. Sector scores are an unweighted average of company scores within that sector.

Quest Operation style twist - UK Quest helpline +44 (0)20 7523 8493 [email protected] Nigel...

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