Authorised and regulated by the Financial Conduct Authority, reference 710908 | Company number 9505284
ValuFocus ValuFocus is a selection of global companies with unique
characteristics: both a sustainable and affordable franchise. We define
an economic franchise as the ability to generate, sustainably, an economic
rent (or free cash flow asset yield) above the cost of capital. It is a rare asset
in public markets, and the more sustainable and undervalued the
franchise, the rarer the asset. ValuFocus attempts to identify these
uncommon breeds.
An unassailable, sustainable and undervalued franchise is mythical,
even though the compounding effect of a franchise is almost always
underestimated. Fortunately, economic franchises are also a target for new
entrants and competitors. Occasionally, franchises do become attractively
priced as the market may overestimate an attack from competitive forces
attempting to corner the firm into giving up excess return, or from a
general, investor-induced doubt regarding the firm’s ability to sustain the
franchise. A market-wide re-appraisal of the equity risk premium (upwards)
can help as well.
We propose a typology of Franchises in Emerging, Contentious and
Core. The latter is closest to the myth described above, but is real: it
concerns solid global companies whose compounding ability is currently
underestimated by the market, in our view. Emerging Franchises concern
newer and/or largely untested business models with the early signs and
characteristics of a franchise. Contentious Franchises are franchises under
real or expected threat. Real means that the firm is in the process of giving
up some rent to competitive forces; what is contentious here is how much
it will be able to retain and sustain. Expected means that investors
themselves anticipate a rapidly fading rent.
The full map of Affordable Franchise Owners is on page 18, preceded
by a name by name rationale for their inclusion (pages 12 to 17), and a one
page note (“Running the Numbers”) on selected names from page 19. We
intend to review ValuFocus monthly, to rotate the Running the Numbers
notes, and on an ad hoc basis, expand into detailed company reports.
Issue One – 12th June 2017
Pascal Costantini (+44) 203 058 2931 | Janet Lear (+44) 203 058 2934 | Diarmid Ogilvy (+44) 203 058 2932
ValuFocus | 2
Summary
IDENTIFYING AN ECONOMIC FRANCHISE ................................................................................................................................................... 3
THE CLASSIC EARNINGS MULTIPLE-FOCUSED SELECTION PROCESS IS NOT DISCRIMINATING ENOUGH ........................................................................................ 3
FROM A MULTIPLE-FOCUS SELECTION TO FRANCHISE ANALYSIS ........................................................................................................................................... 4
VALUING AN ECONOMIC FRANCHISE ......................................................................................................................................................... 7
WONDERFUL COMPANY, UGLY PRICE ................................................................................................................................................................................ 7
MULTIPLE DEMENTIA ........................................................................................................................................................................................................ 7
THE THREE SOURCES OF VALUE… ...................................................................................................................................................................................... 8
…AT THE RIGHT PRICE ...................................................................................................................................................................................................... 9
SELECTING AN ECONOMIC FRANCHISE ..................................................................................................................................................... 10
A TOUGH SELECTION PROCESS ....................................................................................................................................................................................... 10
A TYPOLOGY OF FRANCHISE OWNERS .............................................................................................................................................................................. 10
CORE FRANCHISE – SUMMARY ......................................................................................................................................................................................... 12
EMERGING FRANCHISE – SUMMARY ................................................................................................................................................................................. 14
CONTENTIOUS FRANCHISE – SUMMARY ............................................................................................................................................................................ 16
THE FULL MAP OF VALUFOCUS’ AFFORDABLE FRANCHISE OWNERS.................................................................................................................................... 18
RUNNING THE NUMBERS (RTN) PAGES ..................................................................................................................................................... 19
GLOSSARY.................................................................................................................................................................................................... 43
DISCLAIMER ................................................................................................................................................................................................. 44
CONFLICTS OF INTEREST .......................................................................................................................................................................................... 44
ValuFocus | 3
Identifying an Economic Franchise
ValuAnalysis pursues a two-pronged approach in its investment research: a focus on the “value factor”, complemented,
“enlightened” by a myriad of other, more analytical factors: level of rent (or free cash flow asset yield), capital consumption
and intensity, competitive advantage, fade, growth etc... ValuFocus is the tip of this iceberg, i.e. a selection of companies
which we believe will deliver an attractive risk-adjusted return, among a universe of some 800 global companies.
The classic earnings multiple-focused selection process
is not discriminating enough
We will never argue against buying low and selling high multiples,
nor will we abandon the benefits of a systematic approach to
investment analysis; combined, they usually go a long way. But an
investment strategy focused solely on multiples, by definition, is
price driven before it is analytical: the market price gives the level
of the multiple, and therefore the signal (to buy or sell). Complex
issues are collapsed into a single level of multiple, which we think
is not discriminating enough.
By way of illustration, the table (right) breaks down the “PE” ratio1
of two US and two European stocks into its two sub-components,
asset multiple and asset yield2.
1 We call it “normalised economic PE” because it is calculated with corporate
economic data, such as free cash flow rather than profits, economic capital
rather than accounting book value, and averaged (“normalised”) over a cash flow
cycle.
Source: ValuAnalysis
These four companies all trade on the same “PE” ratio, which
stands at a small discount to the market. Therefore, a standard
multiple-focussed investment process would consider buying all
four of them, on the basis that they all have a higher expected
return than the market. Note, incidentally, that we see no value in
developing a cost of capital argument here. For a start, we
calculate these ratios on an unlevered basis, and believe
furthermore that global companies using a normal level of debt
all have, broadly, the same access to capital at more or less the
same cost, such that they can all be pitched against a global
2 An accounting PE ratio is the price to book multiple divided by return on equity.
Its economic version divides a net economic asset multiple by an asset yield,
called here “normalised operating free cash flow rent”, or normalised operating
FCF divided by net economic assets.
McDonald’s American
Water Works
Astra-
Zeneca
BASF
Normalised
Economic PE
26.7x 26.7x 26.6x 26.7x
Asset Multiple 3.3x 1.2x 3.4x 1.5x
Asset Yield
(norm. FCF rent)
12.4% 4.5% 12.8% 5.6%
ValuFocus | 4
expected return, which we think is between 5% and 5.5% in real
terms.
Yet disentangling the PE ratio quickly opens a Pandora’s Box.
McDonald’s and AstraZeneca enjoy a low double-digit FCF rent
clearly above the cost of capital, in line with other consumer and
pharmaceutical businesses. They own some sort of economic
franchise, or the ability to sustain a FCF asset yield above the cost
of capital, a type that we call “Franchise Owners”. BASF, the large
German chemical company, is a notch above the cost of capital,
and the US water utility is slightly under. Again, bang in line with
the fact that these last two businesses have a high capital
intensity.
If they are so different, why are they on the same PE multiple?
In effect, a simple value approach solely based on multiples
disregards all the above analytical input; the final say here lies
with the asset multiple of the firm, i.e. the valuation. So long as
the latter is adequately pitched, i.e. is commensurate with the
current return, there is no discrimination between a 12.4% rent
business and a 4.6% rent business: the valuation equalises
everything. More precisely, there is an implicit assumption of
symmetrical fade: it is assumed that both will reach the cost of
capital at the same rate, and, therefore, the initial level of return
is irrelevant and can be ignored. The limits of the approach are
conspicuous.
From a Multiple-focus Selection to Franchise Analysis
In the classic Intrinsic Value framework originally advocated by
Benjamin Graham, the value of a firm is defined as Replacement
Value (of economic assets) + Franchise Value. The latter is a
perpetuity of “Economic Profits”, defined as a level of sustainable
“Economic Rent” less the cost of capital. The actual level of the
rent, or FCF asset yield, has therefore always been identified, in
the literature, as essential to determine the value of an enterprise.
We think that it is possible and desirable to systematise its
analysis, because we believe that the discriminating nature of the
level of rent is increasing. This could be due to a rather
unconventional succession of major global events which has had
a profound and mainly positive effect on corporate profitability:
The disappearance of inflation (1981 onwards),
The emergence of a once in a century productivity revolution
(1995 onwards),
The emergence of major new economies (e.g. China),
The collapse of the real cost of debt (2008 onwards).
As bottom-up analysts, we would not wish to take a view on the
continuation or the reversal of these mega-trends, but we do have
a view on their long-term impact on corporate profitability,
sustainability and fade rates. We believe that a number of
Franchise Owners have probably benefitted from an
entrenchment of their position, thanks to a more global footprint.
On the other hand, we suspect that (surviving) lower rent
businesses are now facing a longer period of upwards
normalisation of their rent, which puts them at a disadvantage. In
short, if after all these years of rather friendly winds, they still do
ValuFocus | 5
not produce enough free cash flow, it is legitimate to wonder if
they ever will.
Taking our examples in turn, it is clear that the level of sustainable
economic rent directly influences the strategic behaviour of the
company, its capital consumption and allocation, thus indirectly
its return to shareholders:
American Water Works, an otherwise perfectly good
company, has nowhere to go for an investor. Water
distribution is, inherently, a cost of capital business, as all the
cash generation, and more, is ploughed back into the vast
economic assets. The multiple here should simply reflect the
cost of capital, which it roughly does.
BASF is in a slightly more flexible position, being less capital-
intensive and more global by nature, but the merger between
Dow Chemicals and Du Pont suggests that the industry may
need defensive moves to consolidate its returns.
McDonald’s has lived through various fortunes historically,
but, on average, has protected its level of cash return fairly
well. It could probably be considered as the most durable and
resilient of all four, and a genuine Franchise Owner.
AstraZeneca, with the highest rent, is also a Franchise Owner,
but of a different kind; it illustrates that a higher rent does not
necessarily equal a more sustainable business. Like almost
any other pharmaceutical company, AstraZeneca is facing a
vicious spiral of price pressures which has collapsed its cash
flow margin and operating cash return, as shown by the
following two charts:
ASTRAZENECA – GROSS ECONOMIC CF MARGIN AND OPERATING FCF RENT
Source: ValuAnalysis
In a context of expensive equity markets, or low risk premium, we
believe that it is particularly important to focus on such issues as
the sustainability and resilience of the rent. In the examples
above, not only the structural economic characteristics are very
different, but the future path will be too. Some will see the pharma
industry as terminally doomed or, on the contrary, at the end of a
transformation process taking it from a high margin, high volume
business to an ordinarily competitive consumer business. Some
will expect the median return of the global chemical sector to rise
after a wave of consolidation, others will consider that the
emergence of new economics will put a lid on these returns.
Elsewhere, the business model of McDonald’s will be seen as
unsustainable, given the general drive for healthier food. None of
this suggests that these four stocks should trade on the same
multiple! The level and resilience of the rent, and therefore the
emergence, sustainability or disappearance of the franchise will
be a major discriminating factor in the context of a normalisation
of the risk premium, we think.
ValuFocus | 6
As a result, ValuAnalysis believes that the most rewarding effort is
to focus on the Franchise Owners and to investigate where the
market under or over-estimates their compounding power, their
resilience, or their ability to reinvent themselves. But, as the next
section explains, not at any cost of entry.
ValuFocus | 7
Valuing an Economic Franchise
The public stock market is not overly generous; when tapped, the barrel of stocks labelled “Franchise Owners” sounds hollow.
There is, probably, more than a trickle of medium-sized companies of this kind, but for those investors in need of liquidity
and size, this quest is a struggle: Franchise Owners are in no urgent need of capital and can just as happily live in private
hands.
Wonderful Company, Ugly Price
This is, of course, an exaggeration. A number of such companies
do require some access to public markets for various reasons;
maybe because they act as an avid consolidator (i.e. consuming a
lot of capital), or maybe because the addressable market that they
covet is too vast for their own means. And, in truth, public markets
still keep some large gems in their midst, that Warren Buffett has
not yet snapped up. On our count, certainly more than, say, 150
large companies worldwide. But possibly less than double that
amount.
Like everything else rare, the inevitable corollary is that these
companies, on average, are expensive. Sometimes exorbitantly
so. Here is a random, non-exhaustive list of twenty-odd brilliant
companies, from all regions and sectors:
Keyence (Japan) Intuitive Surgical (USA) Dassault Systèmes (France)
Coloplast (Denmark) Thermo Fisher (USA) Assa Abloy (Sweden)
Rentokil (UK) Inditex (Spain) Alphabet (USA)
Reckitt Benckiser (UK) Dentsply (USA) Medtronic (USA)
William Denant (Denmark) Givaudan (Switzerland) Smith & Nephew (UK)
Stanley Black&Decker (USA) IFF (USA) Electronic Arts (USA)
SAP (Germany)
Sadly, not a single one currently trades below 38x normalized
unlevered net FCF. That’s an expected return of 2.6% per annum
(at zero growth). Objectively an expensive price tag. Do investors
actually need to care about the price of these “good to fabulous”
companies? In no more words than needed, simply “yes”. And in a
few more, below.
Multiple Dementia
Towards the end of the 1990s, Nokia was dominating the mobile
handset market; it had a global market share of 38% of what was
probably the fastest growing sector in the world: mobile
telephony. The firm had a market capitalisation of some EUR
280bn at the peak of its glory; there are still only 14 companies in
the world today with a larger market price. In the space of the
following 12 years, this market value has been reduced by 97.5%,
to ca EUR 7bn.
Between March 1997 and July 2000, we calculate that the average
ratio of Enterprise Value to unlevered last 12 months FCF was 95x,
with the lowest number over the period being 51x. Going so far
back, these multiples might be approximate, but not enough to
prevent us from labelling them “insane”. In our view, the problem
is not so much that Nokia’s management failed to foresee
ValuFocus | 8
Samsung and Apple coming after their handset division; it is that
investors did not apply a reasonable FCF multiple in anticipation
that this might happen. Forgetting to apply a “margin of safety”,
as Benjamin Graham used to call it, is a cardinal investment sin,
we think.
The Three Sources of Value…
As for ValuAnalysis, we think that our work is cut out and we see
our corporate mission:
To use our long-tested and reliable Intrinsic Value models to
identify and select those “Good to Fabulous” Franchise
Owners;
To make sure they do not carry an unjustifiable valuation risk.
To that end, we have re-engineered the standard Intrinsic Value
model, moving from the original Replacement + Franchise
formula to ValuAnalysis’ Three Sources of Value, illustrated on the
next chart (right).
Replacement Value is the economically depreciated value of net
assets, as in the original formula. We look for efficient users of
capital, growing their capital within their means. Metrics such as
Asset turn (Revenues / Assets), Asset Age / Life and Replacement
Value as a % of Enterprise Value are all important.
Franchise Value is not a perpetuity, as in the original model, but
the net present value of a market-implied fading return. We only
look at companies that can sustainably generate an economic rent
above the cost of capital (5%). Including some margin of error, this
would translate into a normalised FCF to net economic assets
(“the rent”) of 7% or above. We look at metrics such as Operating
(after maintenance CAPEX) and Net (after full CAPEX) Rent Yield,
the growth profiles of Sales and Free Cash Flow, and EBIT stability.
Ultimately, we are interested in Franchise Value as a % of
Enterprise Value.
Growth Value is calculated as a residual (market value less
replacement and franchise values), and represents the sum of the
market’s expectations of future growth and derived “abnormal”
margins. This rate of capital accumulation is also market-implied,
and also fades to a sustainable level, around GDP growth.
THE THREE SOURCES OF VALUE
Source: ValuAnalysis
ValuFocus | 9
…At the right Price
If the expected market return / cost of capital is 5%, then the
corresponding normalised operating FCF multiple should be 20x
(1/5%), at zero growth. Taking growth in capital invested into
consideration, we think that the maximum investable normalised
net FCF multiple should be in the 25x to 28x bracket. This hurdle
is relatively severe in the current market context (say the last
decade), but quite generous over a longer time frame. We have to
accept this discomfort, as ultimately, we can calculate but cannot
control, forecast or even model the equity premium that investors
choose to use. Nevertheless, this hurdle has proved particularly
effective in the past decade, as the next chart (on the right) shows.
A systematic investment in companies valued at or below 25x
normalised net FCF is able to do considerably better than buying
into the rest of the market.
RELATIVE PERFORMANCE OF PORTFOLIOS
Source: ValuAnalysis
ValuFocus | 10
Selecting an Economic Franchise
It does not take a lot out of any ValuAnalysis model to find out that Apple is a Franchise Owner. But so is Safran, the French
plane engine maker, and here stop the similarities. Not only the intrinsic characteristics of franchise ownership are diverse
(Apple’s cash rent is in the mid-40s, Safran’s is in low double digit territory), but the market assessment, and therefore the
valuation of this franchise can be dissimilar. Franchise Owners needs a typology, failing which, the same problems as buying
indiscriminately low PE companies might resurface.
A Tough Selection Process
There is more to identifying a Franchise than just observing the
level of rent, which technically has to be above the cost of capital.
Indeed, a Franchise needs to be value accretive, but sustainably
so. Furthermore, the acquisition price needs to be right and
capital consumption needs to be shareholder-friendly. We have
designed a protracted process grouped into four main areas of
our research: Franchise, Capital Consumption and Growth,
Valuation and Risk.
We look for companies with resilience and sustainability, with
metrics such as the Operating Rent Yield, the growth profiles
of Sales and Free Cash Flow, and EBIT stability. Ultimately, we
are interested in using a hurdle for Franchise Value (see page
8) as a % of Enterprise Value.
We look for efficient users of capital, preferably growing their
capital base above market levels. The amount of Revenues per
unit of Assets, Asset Age / Life and Replacement Value as a %
of Enterprise Value are all screening items.
We have explained why we consider 25x Normalised net FCF to
be an important hurdle, not to be trespassed without due
consideration. We also look for companies where the latest
Rent Yield is higher than the sector median and the Asset
multiple is lower than the sector median.
Companies with a high risk profile, whether measured by
financial debt or higher share price volatility, are either
excluded or face tougher hurdles for inclusion. We also take
into consideration the extent of Peripheral Assets as a % of
Total Assets.
A typology of Franchise Owners
Once this is completed, we identify three types of Franchises:
Core, Contentious and Emerging. All the stocks on the lists are
genuine Franchise Owners and qualify as “investable”, i.e. clearing
all or most of the hurdles above. But the probability of
sustainability of this franchise is not the same, either intrinsically
or as priced by the market.
A Core Franchise is a franchise with little dispute, both from
competitors or from investors. Coca-Cola may qualify as the
quintessential Core Franchise. Core Franchise Owners tend to
cluster between a rent of 10% and 20%, and to be at the top end
of the valuation range that we accept. The median rent of our list
ValuFocus | 11
is 12% and the median multiple is 22x. Core franchise owners are
necessary in any balanced portfolio and, by definition, the
constituents of this list are not always very surprising.
An Emerging Franchise is still, by and large, untested. It often
stems from an unusual business model (Las Vegas Sands runs
resorts in the US and Macao), or at least not mainstream
(MEDNAX). It could be a niche business which will require a lot of
transformations to become truly dominant (Amadeus), or a
genuinely emerging business (Vestas Wind Systems). Typically,
Emerging Franchises trade on similar multiples to Core, but
generate a higher rent.
A Contentious Franchise is a franchise under threat, and, as
such, a higher risk / higher reward proposition. Uncontentious
franchises are an easy call; there are quite possibly less than one
hundred such stocks in the world, and most of them are well
identified but, in the context of expensive equity markets,
demanding in terms of valuation. Unassailable franchises are
even rarer, and therefore even more expensive. Apart from these
aristocrats, a franchise is always contentious, almost by definition,
i.e. naturally disputed by new entrants, competitors, as well as
investors. In the latter case, and usually after what could be
described as a franchise accident, investors will remain in distrust
of the firm by applying a very short fade to their future cash flow
profile. A lot of such examples can be found in the pharmaceutical
industry, with the prototype being maybe Gilead. Typically, these
stocks will trade on an optically low spot multiple, certainly lower
than Core or Emerging Franchises, and the difficulty is to
determine the level and resilience of their normalised level of
return. And so, perhaps surprisingly to some, we would classify
Apple as a Contentious Franchise, whilst Safran is a Core
Franchise.
ValuFocus | 12
Core Franchise – Summary
The ten stocks below are the selected Core Affordable Franchise of our universe. They are all “buy” recommendations in that
we believe that they offer a good risk / reward and should outperform the broader market. We feature Alfa Laval, Pfizer and
Intel separately on pages 34, 36 and 38.
ValuFocus Core Affordable Franchise Owners
Norm. Rent Norm. net FCF x Comment
Microsoft 22.6% 24.3x Microsoft has started its fade some time ago: its operating cash return was 33% a decade ago, 27.6% now. This is due entirely to a clear fall in the asset turn, whilst its CF margin has been very stable over the same. Such that the only remaining question is the rate of this fade. The current 24.3x multiple is equivalent to a fade rate above 7%, way too quick by historical standards.
Alfa Laval 16.4% 20.5x See RtN on page 34 for a full Franchise Analysis.
ABB 12.0% 25.4x We think we are being conservative in our estimation of the trend (“normalised”) FCF return, which, at 12%, is some 150bp lower than the current level of rent (13.6%). The normalised net FCF multiple is 25.4x, on the cusp of our ‘value’ entry point, but we keep it in because the company is significantly better than the sector in terms of margin stability. ABB fails on our reported sales growth screening hurdle only because of the number of divestments that have been made recently.
Roche 12.0% 18.9x Roche is an interesting Core / Contentious candidate. It has significant risks in its portfolio as some CHF 20bn of revenues are under direct threat from biosimilar competition within the next three years. But this is not new news, least of all for the company. Roche also boasts the biggest potential new product launch in 2017. Meanwhile it owns three of the world’s largest drugs by revenues. The multiple reflects the challenges, we think, and does not take any positive into consideration, an ideal starting point.
Safran 10.5% 21.7x We have written a detailed note on the company in December 2016, explaining why we think that Safran’s business model of “build and service” is attractive. The shares have moved up but we still think that they belong to the Core Franchise list. The takeover of Zodiac aerospace creates noise and might be seen as distracting for management, but we don’t see this as a good enough reason to change our mind.
Nestlé 11.9% 24.2x Nestlé is producing a rent above the sector average, both on a normalized basis and today, and yet trades at a discount to the sector on asset multiple. This combination is attractive in the context of expensive equity markets, even though the normalised net FCF multiple is at the top end of what we usually consider “investable”.
ValuFocus | 13
Norm. Rent Norm. net FCF x Comment
Pfizer 12.8% 20.9x See RtN on page 36 for a full Franchise Analysis.
Kimberly Clark 8.8% 29.1x Net returns on capital remain significantly higher than both the historical average, and what is being implied by the current valuation. With less than 20% of our universe meeting our strict 'value' criterion (less than 25x free cash flow), the fact that Kimberly-Cark does so on an normalised operating basis is somewhat of a relief, rather than a reason to be terribly excited as it misses the cut on normalized net numbers (shown here), but we think the long-term positioning and franchise is still worth investigating and holding on to. It is, amazingly, the cheapest household company that we can find…
Novartis 10.2% 22.3x Novartis, like Nestlé, is probably expected to feature in a Core Franchise list, but that is not a reason to exclude it! Objectively, CF margins are steady as a rock, as is capital intensity, resulting in an equally steady profile of cash rent around 10% on a normalised basis. In the context of expensive equity markets, paying slightly more than 22x for this is not expensive. The implicit fade of 6.3% (to the cost of capital), resulting in an average rent of 7.5% over the fade period, could even be slower, in our view.
Intel 7.0% 20.6x See RtN on page 38 for a full Franchise Analysis.
Source: ValuAnalysis
ValuFocus | 14
Emerging Franchise – Summary
Emerging Affordable Franchises tend to have a higher cash return than Core, but this is not a rule and two in our list have a
relatively low rent. We rate all these stocks a “buy” and expect them to do better than the broad market, but in a perhaps
more erratic manner than Core, given the untested nature of their business model. Experian, Hoya, Vestas Wind Systems,
and Gemalto are featured separately on pages 28, 30, 32 and 34.
ValuFocus Emerging Affordable Franchise Owners
Norm. Rent Norm. net FCF x Comment
Experian 34.6% 24.0x See RtN on page 28 for a full Franchise Analysis.
Expeditors of Washington
27.3% 23.0x A good example of the service sector filling a niche role in a globalised world and, like Gemalto, a company which does not conform to the sector norm. Sales and profitability are cyclical, and margin is the biggest driver of returns. Sales growth stalled somewhat in 2016. The multiple leaves room for expansion as operational leverage should drive profits firmly on sales recovery.
Amadeus 28.9% 28.3x The equity market may have been spooked by the fading returns since the peak of 2011, whereas we think that fading returns are normal for some emerging franchises. Besides, they appear to have stabilised, which is a good sign of control of the franchise. We use a low normalised cash margin, but the share price implies a further decline in rent, at moderate levels of growth.
MEDNAX 23.4% 21.7x Another example of fast normalising returns, not unusual for an emerging franchise moving towards maturity. The market assumes that this fade of returns is going to carry on unabated, using a fade rate of nearly 8%, which is brisk. If the firm can “beat”, i.e. delay its fade for three years, we calculate an upside of c.17%. In the context of expensive equity markets, we view this as an attractive risk/reward ratio.
Hexagon 25.2% 24.4x The attraction of Hexagon has not entirely been missed by investors. The company manages to increase margins and keep asset turn high, resulting in an upward-rising rent. It seems to us that the market is sold on the growth potential of the company, with an implied average growth rate of 6% over the fading period. This makes Growth Value the largest source of Value, as per ValuAnalysis’ Three Sources of Value analysis. But arguably, Franchise Value is too low, with an implicit assumption that peak rent has been achieved. The multiple of FCF is probably a couple of points too low for this interesting company.
Hoya 13.3% 21.6x See RtN on page 30 for a full Franchise Analysis.
Vestas Wind Systems 16.4% 19.3x See RtN on page 32 for a full Franchise Analysis.
ValuFocus | 15
Norm. Rent Norm. net FCF x Comment
Las Vegas Sands 13.4% 19.7x There are maybe some doubts about the cyclicality of Las Vegas Sands’ cash margins, which are currently high, but we feel that the multiple already anticipates some retrenchment. An “asset heavy”, long duration and off the beaten tracks’ investment, at a reasonable multiple.
Gemalto 10.5% 22.6x See RtN on page 34 for a full Franchise Analysis.
VINCI 8.7% 24.2x Although VINCI has a return marginally lower than our preferred 10% benchmark, it is an attractive stock in its sector and has shown better growth in cash flow than the market median over the past 2 years. Add to this an attractive multiple, both in terms of cash flow and assets.
Source: ValuAnalysis
ValuFocus | 16
Contentious Franchise – Summary
Contentious Affordable Franchises are equally expected to outperform the broad market, and as such we rate them all as
“buy”, but expect an occasional tough ride. These franchises are under attack or suspicion. We believe, on balance, that they
are strong enough to resist both, but the probing might feel uneasy. Apple, Kone, Mylan and Qualcomm are featured
separately on pages 20, 22, 24 and 26.
ValuFocus Contentious Affordable Franchise Owners
Norm. Rent Norm. net FCF x Comment
Pandora 41.0% 16.9x Pandora is a unique investment object, and we understand why investors would be reluctant to consider an investment in this company. Yet, objectively, margins are cyclical but on a steady trend. The company uses operational leverage extremely well, as illustrated by an asset turn moving from 100% a few years ago to 200% currently. In truth, Pandora is probably an Emerging / Contentious franchise, which cumulates a lot of uncertainties reflected in the multiple. The sensitivity of the company to operational gearing is extreme, as seen recently with its first disappointing quarterly report. It would not take much for it to go the other way, with for instance the Indian market still totally untapped, or a successful turnaround of their US business. Pandora is in our Contentious Franchise list for a reason, but we think that the low multiple and the recent share price slide compensate for a lot of these uncertainties.
Cisco 21.9% 13.4x Cisco has high returns and a low cash flow multiple which looks appealing to us, reinforced by the surprising stability of cash flow margin, notwithstanding the drop in 2010. The company also has a lower asset intensity than the market as a whole. On our models, the share price discounts a steep fade of returns towards the cost of capital and we suspect this may be too pessimistic and we look for 15% upside to the shares.
McKesson 24.2% 17.1x The level of cash margin (3%...) tells investors what the underlying true business model of McKesson is: retailing. As retailing goes, this is a pretty good one, with a net economic rent in the mid-20s, something Macy’s would presumably envy. Like a retailer, the company operates on negative NWC, but carries within it some USD 15bn of inventories, exposed to price declines and therefore inventory write-down risk. The market has found a way to deal with this risk by putting the rent on a very steep fade of 12.2% per annum, averaging roughly 16% over the fade period, rather than 24.2%. If this is indeed the “new normal”, this would imply a net FCF of ca USD 1.7bn, putting the shares on a net normalised FCF multiple of 25x exactly, still an investable level, we think.
ValuFocus | 17
Norm. Rent Norm. net FCF x Comment
Kone 42.9% 19.3x See RtN on page 22 for a full Franchise Analysis.
Mylan 15.6% 22.6x See RtN on page 24 for a full Franchise Analysis.
Gilead 23.1% 10.7x We have written extensively on Gilead, and the least we can say is that timing is not our forte… The shares trade on an optically low multiple because investors price a much lower level of FCF than currently reported, due to the loss of revenues and margins on its Hepatitis C and HIV products. Even with historical trough margins as the new norm, Gilead’s multiple is 10.7x, which is not credible. A full fade analysis suggests that the market expects a collapse in growth to an average of 8% over the fading period. This looks low to us, but possible. In addition, the market is pricing a collapse of the operating FCF return to c.18%, against 33% today, approximately equivalent to a net FCF of maybe 10% (vs 23.1% today), or ca USD 3.4bn of net FCF. Thus the stock trades in fact on (strange concept for a strange situation) a “market-implied normalised” FCF multiple of less than 25x “new” normalised net FCF.
Apple 53.2% 12.2x See RtN on page 20 for a full Franchise Analysis.
Novo Nordisk 21.1% 20.3x We have written a detailed report on the company in November 2016, shortly after its major profit warning, suggesting that this might be a good entry point into this well managed business. The shares have nicely rebounded but we remain of the opinion that Novo has enough fire- power and management expertise to protect its franchise. We put it in Contentious rather than Core because investors ought to expect more such “franchise accidents” going forward, and the fade is probably steeper now than a few years ago as a result. But the multiple is attractive in the context of expensive equity markets.
Qualcomm 15.8% 21.6x See RtN on page 26 for a full Franchise Analysis.
Source: ValuAnalysis
ValuFocus | 18
The Full Map of ValuFocus’ Affordable Franchise Owners
CONTENTIOUS, CORE AND EMERGING POSITIONED BY LEVEL OF NORMALISED NET RENT AND NET FCF MULTIPLE
Source: ValuAnalysis
ValuFocus | 19
Running the Numbers (RtN) Pages
APPLE .......................................................... p. 20
KONE .......................................................... P. 22
MYLAN ....................................................... p. 24
QUALCOMM ............................................. P. 26
EXPERIAN ................................................... p. 28
HOYA ......................................................... p. 30
VESTAS WIND SYSTEMS ............................ p. 32
GEMALTO ................................................... P. 34
ALFA LAVAL ................................................ p. 36
PFIZER ......................................................... p. 38
INTEL ........................................................... p. 40
ValuFocus | 20
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 55.6% 43.8% Last FY 11.1x 15.0x Est. Trend 25.0%
Normalised 66.2% 53.2% Normalised 9.8x 12.2x Last 10Y 37.7%
Mkt implied 20.0% Implied over CAP 11.9%
Free Cash Return FCF Multiple
The breakdown of assets is dominated by tangibles and capitalised intangibles: total R&D spend is c.5% of sales, capitalised over 7 years. Apple operates with USD 20bn of negative NWC,
treated by us as debt. The funding is simple, mostly equity with limited financial leverage. Growth Value is the largest source of value, but this is deceiving: this USD 342bn chunk
represents only 12 years of growth fading to global GDP (4.5%), averaging 11.9% per annum. The more "modest" Franchise Value is made of an equally precipitous fade: 13.9% per
annum, way above the 10% "terminal decline" mark.
Alongside its big tech peers, Apple's share price has had a
surge this year already, with investors presumably anticipating
a successful iPhone 8 launch, growth in its services business
and positive developments in Augmented Reality, redesigned
app store or HomePod smart speaker. But structurally,
investors are cautious and expect the party to end soon, as
vindicated by the 2016 cash margins under pressure, and an
economic rent on a long-term downward path for some years.
Strangely, some would say amazingly, the median Apple
investor is a pessimist; how else can one explain these mid-
single digit FCF ratios? This investment case is all about the
rate of normalisation of extraordinary returns. Apple is a
prototypical contentious franchise.
110 268
273 923
342 472
0
100 000
200 000
300 000
400 000
500 000
600 000
700 000
800 000
900 000
1000 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0
2 244
46 864
64 303
5 9435 254
0 Net =110 268
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
2.7 yrs
6.8 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 124.6 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
25.0%11.1x55.6%
Market Cap. (USDm) = 776 758
Ent. Value (USDm) = 726 511Technology Hardware and Equipment
Apple Inc. @ 154 (USD) 12 June 2017
ValuFocus List: Contentious Franchise
ValuFocus | 21
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would
fall within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
0x 1x 2x 3x
Invest. Cycles (6.8y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 66.2% │ Next 4Y: 43.3% (Implied)
66.2%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
110%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
Cash margins (first chart above) illustrate the nature of a high profile technology company: death and rebirth. In the space of a few years (2007 to 2011), Apple's margins collapsed and
recovered, a mixture of economic cycle and product development. This double-wedge effect is what the market is refusing to price continuously (see Op. Economic Profits, below),
ascribing a discount to actual Economic Profits. Margins have been stable over the last six years, but took a dip in 2016 to 33.7% as revenues took an 8% hit from primarily weaker
iPhone sales. Coupled with decreasing revenues for every $1 of economic assets expended, the OpFCF return has continued its fall from a peak in 2011 to 55.6%. And the future fading
return (fourth chart above) is a perfect continuation of this trend. There is, on top, the shadow of the company's fight with the European Commission with regard to the latter's ruling
over its Irish subsidiaries and tax structuring. But the retrospective USD 14bn potential bill is a small % of its foreign assets. More important is the potential for increase in its effective
tax rate. Inevitably, Apple will become a normal company, one day. If it is soon, it is already in the price: a 13.9% fade rate is a one way ticket to normality. If the company can manage to
slow its normalisation rate, only by a few years, let alone reinvent itself once again, the shares will re-rate by a few multiple points of FCF.
0%
10%
20%
30%
40%
50%
'07 '09 '11 '13 '15
Mrg% Norm
0%
50%
100%
150%
200%
250%
300%
350%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
30718
0
20 000
40 000
60 000
80 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 888 790
FADE RATE: 13.9%
IN % OF FADING FRANCHISE VALUE: 324.5%
Selected Alternative Investments Within Same SectorCompetitive Advantage
NCR Corporation (28x, 10.6%)
Seagate Technology plc (11.6x, 13.8%)
Western Digital Corporatio (20.4x, 16.7%)
NetApp, Inc. (22.9x, 12.9%)
Samsung Electronics Co. Lt (14.3x, 7.4%)
FUJIFILM Holdings Corpora (10.2x, 5.7%)
Konica Minolta, Inc. (12.6x, 5.4%)
Samsung Electronics Co. L (14.3x, 7.4%)
Seagate Technology plc (11.6x, 13.8%)
Western Digital Corporati (20.4x, 16.7%)
Similar FCF Ret. to Apple Inc.: Similar FCF Mult. to Apple Inc.:
Economic Margin Asset Turn
ValuFocus | 22
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 45.1% 37.8% Last FY 17.9x 22.3x Est. Trend 6.0%
Normalised 50.3% 42.9% Normalised 16.5x 19.3x Last 10Y 5.0%
Mkt implied 19.3% Implied over CAP 5.0%
Free Cash Return FCF Multiple
The asset breakdown shows the light capital usage of Kone (EUR 3bn of gross capital is small for the size of its business), which explains its high cash return. Kone does operate with
negative NWC, treated as debt rather than negative asset. It expenses about 2% of revenues in R&D, which we capitalise. The company has written down about EUR 600m of gross assets
in 2012. Its IR department explains that these assets were no longer in use. The Three Sources of Value show the asset-light nature of the business, with replacement value a mere 12%
of market value. Franchise value is half the market value, due to the high starting point of cash return. This EUR 10.8bn franchise corresponds to an average FCF yield of 19,3%, fading at
a (slow) rate of 5.5% per annum. Finally, Growth Value correponds to an average growth rate of 5% exactly, in line with the past ten years.
Kone is a prototypical contentious franchise owner. Its free
cash flow rent is high (maybe flattered by a rather inexplicable
2012 gross asset write off) and thus under permanent market
suspicion, even though the market has been rerating its shares
over the past years. There is (not unduly so) suspicion around
Kone's reliance on China, a country which represents circa 30%
of its revenues. Margins are high and have been under
pressure in 2016 and to date, with a drop in Q1 2017 operating
profit. We estimate that the current valuation could withstand
a 20% fall in gross cash flow margin, but not more. There might
be suspicion around revenue recognition as well, which uses
the more complex % of competion method for long-term
projects, but it is relatively small.
2 723
10 948
9 283
0
5 000
10 000
15 000
20 000
25 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (EURm)
0
410
1 446
899 2546
0 Net =2 723
0
500
1 000
1 500
2 000
2 500
3 000
3 500
3.9 yrs
9.6 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - EUR 3 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
6.0%17.9x45.1%
Market Cap. (EURm) = 23 251
Ent. Value (EURm) = 22 943Machinery (Capital Goods)
Kone Oyj @ 44 (EUR) 12 June 2017
ValuFocus List: Contentious Franchise
ValuFocus | 23
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
40%
50%
60%
0x 1x 2x 3x 4x 5x 6x
Invest. Cycles (9.6y each)
Hist. Fut. Avg Fut.
Kone may have seen its peak cash return
... and Future Discounted Level
Op.FCF Return: Last 4Y: 50.3% │ Next 4Y: 41% (Implied)
50.3%
0%
10%
20%
30%
40%
50%
60%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
Kone is one of these businesses operating on a "new equipment + maintenance" model: as the installed base grows, so does the tail of service contracts. The cyclicality of cash margins
(first chart above) is smoothed, as a result; note the upward trend. The historical operating FCF return (third chart above) looks rather scary, and shows in its glory how much Kone has
benefitted from the Chinese boom. But why so high? Kone appears to be stingy on capital consumption and operating costs (better margins than Schindler) and a substantial beneficiary
of operational leverage. Investors are rather sceptical about the sustainability of such a level, and we agree. The right-hand chart above shows a market-implied representation of the
future fading cash profile, which suggests that Kone has seen its historical peak return. The fade rate of 5.5% p.a. is not very steep, but the cyclical nature of Kone's cash return is deeply
anticipated. Note that Kone has a 16% EBIT corporate target, which, if achieved, would easily beat these anticipations. Scepticism around the company's achievements is not recent. The
op. Economic Profits chart, below, shows that the discounted level (orange line) is best fitted to actual achievements with a 5.5% discount rate, higher than our standard 5%. If the
current cyclical downturn is not too pronounced, Kone trades on 22.3x depressed net FCF, which is not expensive in this market.
0%
10%
20%
30%
'07 '09 '11 '13 '15
Mrg% Norm
0%
50%
100%
150%
200%
250%
300%
350%
'07 '09 '11 '13 '15
This change is due to a write down of gross assets in
2012. 300% of capital intensity is in line with
competitors.
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
1110
0
500
1 000
1 500
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5,5%
Op. Economic Profits (EURm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 21 111
FADE RATE: 5.5%
IN % OF FADING FRANCHISE VALUE: 192.8%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Atlas Copco AB (26.6x, 23.7%)
WABCO Holdings Inc. (26.1x, 14.3%)
Snap-on Incorporated (21.9x, 17.7%)
IDEX Corporation (26.2x, 28.2%)
Makita Corporation (27.7x, 7.4%)
Wärtsilä Oyj Abp (28.3x, 15.7%)
Atlas Copco AB (26.6x, 23.7%)
Schindler Holding AG (31.4x, 24.1%)
Snap-on Incorporated (21.9x, 17.7%)
Pentair plc (28.7x, 16.3%)
Similar FCF Ret. to Kone Oyj: Similar FCF Mult. to Kone Oyj:
Economic Margin Asset Turn
ValuFocus | 24
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 17.1% 14.0% Last FY 19.1x 25.4x Est. Trend 7.0%
Normalised 18.7% 15.3% Normalised 19.0x 23.1x Last 10Y 23.5%
Mkt implied 8.7% Implied over CAP 5.4%
Free Cash Return FCF Multiple
Capitalising intangible assets makes a big difference to the total asset base of this company, in common with its peer group. Note that Mylan is relatively more leveraged than the peer
group, though no liabilities are falling due until mid 2018. Our fade analysis suggests that Mylan needs to maintain returns on capital for 5 years before they fade to cost of capital
thereafter. We think this should be possible given the broad product range. Within our assumptions the split of value between franchise (driven by excess returns) and growth is very
even: management needs to maintain the profitability of the business.
Mylan has attracted negative headlines in the last six months
or so over pricing of its epi-pen product, and management was
summonded before a congressional hearing. Subsequent
press showed that the hearing raised as many questions as it
answered. We are alert to the consequent risks - hence its
inclusion in our contentious category - but feel that the
company shows enough value and stability of returns for an
investment case to be made. Normalised net returns on capital
are over 15%, a premium to the market median, and the
valuation on current net free cash flow of 25.4x is at a
significant discount to the market, which is in the 30s. We also
assume that the confusion following the intense corporate
activity of the past two years is fading away.
10 801
12 175
15 369
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
45 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0
2 023
5 308
4 257 247103
1 577Net =10 801
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
16 000
3.8 yrs
9.6 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 13.5 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
7.0%19.1x17.1%
Market Cap. (USDm) = 21 488
Ent. Value (USDm) = 38 340Pharmaceuticals (Pharmaceuticals, Biotechnology and Life Sciences)
Mylan N.V. @ 40 (USD) 12 June 2017
ValuFocus List: Contentious Franchise
ValuFocus | 25
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
0x 1x 2x 3x 4x 5x
Invest. Cycles (9.6y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 18.7% │ Next 4Y: 15.7% (Implied)
18.7%
0%
10%
20%
30%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
Gross margins have improved substantially (first chart above) over the past decade or so, and this is what is helping to drive the improvement in operating rent. Note that we normalise
this CF at a relatively high level because we believe that the aquisitions of Abbott's non US business, followed by Meda have actually consolidated the level of margin. There seems to be
some sort of ability in the company to incorporate underperforming pharna assets (Meda's margins were lower than Mylan's core) and extract a higher margin, which the market is
reluctant to recognise. We agree that Mylan's intense corporate activity does not help the analysis and probably deserves a discount, but we want to keep an open mind about the
achievements. The market-implied fade profile (fourth chart above) does not seem too optimistic, in our view, with returns expected to decline towards the cost of capital without a
period of consolidation. We have modelled this with a fairly slow fade (5,3%), but not inconsistent with other comparable businesses. The operating economic profit chart (second chart
below) suggests that investors on aggregate have never been carried away by Mylan, and have only ever paid for what they see. We would not suggest it to be any other way, but this
means that, as the company should carry on producing higher economic profits, its value should carry on appreciating commensurately .
0%
10%
20%
30%
40%
'07 '09 '11 '13 '15
Mrg% Norm
0%
20%
40%
60%
80%
100%
120%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
1377
- 500
0
500
1 000
1 500
2 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 27 674
FADE RATE: 5.3%
IN % OF FADING FRANCHISE VALUE: 227.3%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Teva Pharmaceutical Indust (17.7x, 13.6%)
Johnson & Johnson (25.4x, 13.8%)
Valeant Pharmaceuticals In (18.3x, 16.1%)
Hikma Pharmaceuticals PLC (19.3x, 13.8%)
Roche Holding AG (21.6x, 11.8%)
Merck & Co. Inc. (24.8x, 10.8%)
Shionogi & Co., Ltd. (23.4x, 12%)
Johnson & Johnson (25.4x, 13.8%)
Roche Holding AG (21.6x, 11.8%)
Santen Pharmaceutical Co. (23.2x, 10.4%)
Similar FCF Ret. to Mylan N.V.: Similar FCF Mult. to Mylan N.V.:
Economic Margin Asset Turn
ValuFocus | 26
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 13.9% 16.9% Last FY 20.0x 20.4x Est. Trend 6.0%
Normalised 13.9% 15.8% Normalised 24.6x 21.6x Last 10Y 13.6%
Mkt implied 8.1% Implied over CAP 5.1%
Free Cash Return FCF Multiple
The most noticable figure on the charts above is the economic life; 5.6y is very short and indeed suggests that QUALCOMM's franchise could be blown away at the drop of a hat, but also
could re-invent itself very quickly. Unsurprisingly, the bulk of economic assets is in capitalised R&D, which is expensed in the accounts to the tune of 20% of revenues, in line with
semiconductor manufacturers. We ascribe a life of 5 years only. The Market Value is broken down fairly equally into three constituent blocks, with Franchise Value averaging a FCF rent of
8.1% over the fade period. The corresponding growth over the fade period is 5.1%.
It would be futile for us to try and second-guess what is going
to happen to QUALCOMM, with respect to its various legal
involvements. It is however a prime Contentious candidate
because its franchise is clearly under attack, and investors on
aggregate have so little faith in its sustainability that they put
the shares on an optically low double-digit multiple of FCF,
around 15x if you use unadjusted accounting data. We are
presenting here the reverse exercise: if we assume that
markets are efficient and QUALCOMM actually trades on a
sensible but mildy attractive normalised net FCF multiple, in
what kind of cash margin assumptions would we need to
believe? In short, a collapse from 42.8% to the historical all
time low of 34% in gross CF margin.
19 445
19 927
27 907
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
90 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0 1 225
21 034
6 515284 784
253 Net =19 445
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
2.5 yrs
5.6 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 30.1 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
6.0%20.0x13.9%
Market Cap. (USDm) = 84 288
Ent. Value (USDm) = 67 361Communications Equipment (Technology Hardware and Equipment)
QUALCOMM Inc. @ 58 (USD) 12 June 2017
ValuFocus List: Contentious Franchise
ValuFocus | 27
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
40%
50%
60%
0x 1x 2x 3x 4x 5x
Invest. Cycles (5.6y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 13.9% │ Next 4Y: 13.8% (Implied)
13.9%
0%
10%
20%
30%
40%
50%
60%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
For a start, we can't help observing (second chart above) that QUALCOMM employs capital efficiently, increasing its asset turn from 80% a decade ago to 1.2x now, a commendable but
largely irrelevant achievement to fight its current woes. What is more interesting is "New QUALCOMM". New QUALCOMM is the fruit of two knowns and an unknown: the current market
value and a sensible but attractive multiple (we have chosen 22x normalised net FCF) on the one hand, and a new level of "normalised" FCF once the company sorts out its legal battles,
which we assume will have a structural cost. In reality, New QUALCOMM's FCF will itself stem from numerous items (margin, revenue level, investment etc...), but for clarity's sake, we
have normalised the gross CF margin only, to its previous trough, 34% (chart one above). This trickles through to the operating cash return (third chart above) and its "new" normalised
level, 13.9%. From here on, "new QUALCOMM" is assumed to live its life as a normal company, with a slight cyclical profile and a fade comparable to other major technology companies
(4.3%). In numbers, New Qualcomm generates between USD 1.3 to 1.5bn less unlevered FCF than actual QUALCOMM, to about USD 3bn (3*22x is indeed c. USD 69bn, the current EV).
This is the scenario that the current share price buys today. In the context of scarce turnaround stories and expensive equity markets, we think that the risk/reward ratio is not
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
'07 '09 '11 '13 '15
Mrg% Norm
Margins are
"normalised"
at 34% from
2014
0%
20%
40%
60%
80%
100%
120%
140%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
2385
0
1 000
2 000
3 000
4 000
5 000
6 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 33 667
FADE RATE: 4.2%
IN % OF FADING FRANCHISE VALUE: 168.9%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Nokia Corporation (132.3x, 1.7%)
F5 Networks, Inc. (16.3x, 35.9%)
Cisco Systems, Inc. (12.4x, 27.8%)
Ericsson (19.1x, 6.2%)
Juniper Networks, Inc. (21.4x, 9.2%)
Cisco Systems, Inc. (12.4x, 27.8%)
Juniper Networks, Inc. (21.4x, 9.2%)
Harris Corporation (27.3x, 11.2%)
Ericsson (19.1x, 6.2%)
F5 Networks, Inc. (16.3x, 35.9%)
Similar FCF Ret. to Similar FCF Mult. to
Economic Margin Asset Turn
ValuFocus | 28
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 43.2% 37.1% Last FY 18.5x 22.7x Est. Trend 4.5%
Normalised 41.0% 34.6% Normalised 20.3x 24.0x Last 10Y -2.7%
Mkt implied 21.2% Implied over CAP 4.9%
Free Cash Return FCF Multiple
We do not capitalise anything for Experian but consider that the bulk of its on-balance sheet intangibles (which we call "concessions") are economic in nature. Just over a third are
acquired customer relationships, software development and marketing related assets, a third is databases and the remainder capitalised software. The funding source is mostly equity,
with restrained financial leverage. The Three Sources of Value show the asset-light nature of the business, with replacement value at a mere 12% of market value. Franchise value is
almost half the market value, due to the high starting point of cash return, fading at a rate of 6.1% per annum to the cost of capital. Growth Value correponds to an average growth rate
Experian, like a typical Emerging Franchise owner, is not an
obvious bargain, even though it still trades at a discount to our
hurdle of 25x normalised net FCF, and at a significant discount,
therefore, to the market on this measure. Furthermore, its 10Y
historical asset growth appears negative, which is an oddity
due to the immaturity of the earlier returns which is making
the level of economic depreciation move around too much. In
reality Experian grows at GDP+, which is the management's
commitment. But Franchise Owner it is: the company has
leading market positions in credit data and analysis, a
substantial business in the US as well as in Europe and is at the
cornerstone of "big data" as far the consumer is concerned. An
attractivelly priced "emerger", we think.
2 729
11 394
8 879
0
5 000
10 000
15 000
20 000
25 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0
2 003
0
870181 67
0 Net =2 729
0
500
1 000
1 500
2 000
2 500
3 000
3 500
4.4 yrs
9.7 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 3.1 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
4.5%18.5x43.2%
Market Cap. (USDm) = 19 187
Ent. Value (USDm) = 23 005Professional Services (Commercial and Professional Services)
Experian plc @ 16 (GBP) 12 June 2017
ValuFocus List: Emerging Franchise
ValuFocus | 29
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
40%
50%
60%
0x 1x 2x 3x 4x 5x
Invest. Cycles (9.7y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 41% │ Next 4Y: 40% (Implied)
41.0%
0%
10%
20%
30%
40%
50%
60%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
Cash margins (first chart above) have risen steadily since the challenging conditions endured through the financial crisis of 2008. We normalise their level towards the higher end of this
range, in the belief that growth and above all acquisitions have made these margins more resilient. Its low and slightly improving capital intensity offers some room for manoeuvre from
any margin pressure, potentially in the Consumer Services division. Experian is not about growth and we can assume that the market will get this variable right. The market-implied
average growth rate is 4.9%, in line with management's expectations. The corresponding average operating rent is 21.2%, with an average fade rate of 8.2% per annum, which is not
characteristically low (for this qualification, you need to go below 5%). Graphically (last chart above), this means that the market is implicitly expecting Experian's operating rent to wobble
around normalised levels (41.0%) for about an investment cycle, before starting a brisk plunge towards the cost of capital. Note that we have fitted a cyclical profile here as well to check
that the current valuation could withstand some volatility in the cash return, which it evidently can. If credit data is as important as generally assumed, Experian should easily be able to
control its fade better than what is implied here, and push back its peak return well into the future.
0%
10%
20%
30%
40%
50%
'07 '09 '11 '13 '15
Mrg% Norm
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
1012
0
200
400
600
800
1 000
1 200
1 400
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 17 355
FADE RATE: 8.2%
IN % OF FADING FRANCHISE VALUE: 152.3%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Robert Half International (16.9x, 24.6%)
Verisk Analytics, Inc. (37.3x, 27.4%)
Equifax Inc. (34.3x, 27.5%)
Adecco S.A. (22.6x, 24.9%)
Capita plc (18.2x, 21.6%)
Capita plc (18.2x, 21.6%)
Adecco S.A. (22.6x, 24.9%)
Randstad Holding NV (27.2x, 19.8%)
ManpowerGroup Inc. (21.9x, 16.4%)
Robert Half International (16.9x, 24.6%)
Similar FCF Ret. to Experian Similar FCF Mult. to Experian
Economic Margin Asset Turn
ValuFocus | 30
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 16.1% 17.0% Last FY 16.3x 16.4x Est. Trend 5.0%
Normalised 12.8% 13.3% Normalised 22.2x 21.4x Last 10Y 6.6%
Mkt implied 8.0% Implied over CAP 4.9%
Free Cash Return FCF Multiple
Hoya is "asset heavy"; its asset breakdown does not include a lot of intangible assets, despite the fact that we capitalise circa 6.5% of revenues representing R&D costs expensed in the
accounts. The "concession assets" represent client relationship, probably connected to the optician retail business that they have. The Three Sources of Value chart show a typical
Japanese funding situation, which, despite some share buy backs, still carry a net cash position. We like the good equilibirum between the Three Sources of Value. Franchise Value is
made of a constant average operating FCF yield of 8.0% over the fading period (vs 16.1% as of last FY). The fade rate is 5.5%, which is relatively low.
Hoya, like Olympus or Santen among others, belongs to this
"new" type of Japanese companies successfully leveraging an
average legacy business into a more attractive bunch of assets.
"Life care" now represents two thirds of Hoya's assets, and is
driving the group. This is one of the reasons, we think, for the
re-rating of the shares. In the context of expensive equity
markets, and despite its share price at a quasi-all-time-high, we
think that the company is not expensively valued; the share
price anticipates the cyclical nature of the residual
semiconductor-related business. Because Hoya is moving away
from it, normalised returns are probably higher, today, than
our calculated 12.8%, and 22.4x normalised net FCF looks
acceptable. A cheaper alternative to Essilor, in summary.
666 846
614 924
585 398
0
500 000
1000 000
1500 000
2000 000
2500 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (JPYm)
0 5 711
223 078
501 5284 901 0
101 952 Net =666 846
0
100 000
200 000
300 000
400 000
500 000
600 000
700 000
800 000
900 000
5.0 yrs
11.7 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - JPY 837.2 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
5.0%16.3x16.1%
Market Cap. (JPYm) = 2113 172
Ent. Value (JPYm) = 1866 188Healthcare Equipment and Supplies (Healthcare Equipment and Services)
Hoya Corp. @ 5685 (JPY) 12 June 2017
ValuFocus List: Contentious Franchise
ValuFocus | 31
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
0x 1x 2x 3x 4x 5x 6x
Invest. Cycles (11.7y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 12.8% │ Next 4Y: 14.1% (Implied)
12.8%
0%
10%
20%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
It is difficult to judge exactly Hoya's future cyclical profile, as the group evolves, but we can assume that it will be slightly less pronounced that historically, thanks to the growth of the life-
science businesses. The calculated normal level of gross economic CF margin (first chart above) is at the higher end of the historical range, but because Hoya is changing its asset mix, we
are not forcing a lower normalised level. Yet, there is no disputing that margins are currently high, and for the same reason, so is the operating FCF return, third chart above. The merit
of these shares are in the valuation, we think. Most comparable companies trade on multiples of net FCF in the mid 30x, when Hoya trades on 22.4x. This discount can be put in context
on the implicit future profile of operating FCF return, fourth chart above. We are able to fit the current valuation with a marked cyclical profile, including a peak return not far from
current levels. If Hoya's management are able to execute their programme reasonably well, the future profile should be more benign than implied by current aggregate investor
sentiment. On balance, this implicit profile is an invitation to disregard the current high level of margin and put some faith in the valuation.
0%
10%
20%
30%
40%
'07 '09 '11 '13 '15
Mrg% Norm
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
60527
0
20 000
40 000
60 000
80 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (JPYm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 980 891
FADE RATE: 5.5%
IN % OF FADING FRANCHISE VALUE: 159.5%
Selected Alternative Investments Within Same SectorCompetitive Advantage
DENTSPLY SIRONA Inc. (35.6x, 13.7%)
Hologic Inc. (31.3x, 17.9%)
Varian Medical Systems, In (25.6x, 17.1%)
Essilor International SA (34.8x, 15.9%)
Medtronic plc (38.3x, 12.5%)
Essilor International SA (34.8x, 15.9%)
Hologic Inc. (31.3x, 17.9%)
Varian Medical Systems, I (25.6x, 17.1%)
ResMed Inc. (31.6x, 17.4%)
Elekta AB (34.9x, 17.8%)
Similar FCF Ret. to Hoya Corp.: Similar FCF Mult. to Hoya Corp.:
Economic Margin Asset Turn
ValuFocus | 32
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 17.7% 16.4% Last FY 16.4x 19.5x Est. Trend 6.0%
Normalised 16.3% 16.4% Normalised 19.3x 19.3x Last 10Y 11.9%
Mkt implied 9.8% Implied over CAP 5.2%
Free Cash Return FCF Multiple
The breakdown of gross assets shows a balance between tangible and intangible assets. We capitalise 2.5% of revenues expensed by the company, representing its R&D effort. In
addition, the company carries some "concession assets" representing mainly "completed development projects" and software. Vestas keeps a large amount of cash on balance sheet, of
which a small amount is restricted; non-interest bearing liabilities include, among others, warranties. Franchise Value is the largest source of value, equivalent to an average rent of 9.8%
over the fade period. The fade rate of 7.4% is not "fast" but not at the low end either, which would be closer to 5%. Growth should be GDP+ and is priced like this, too.
Vestas is a prime Emerging Franchise business. "Emerging"
because of the business in which it competes, and also
because only a few years ago (pre 2014), the company was in
losses, prior to launching its "Profitable Growth Strategy"
initiative. Vestas also displays some typical Emerging Franchise
characteristics, notably the volatility of key economic variables
such as rent or asset turn. The accounting of Vestas is intricate:
the company hedges its large US exposure (over one third of
revenues), co-invests in certain of its clients' projects and
receives pre-payments from others. None of this is
overwhelming but might demand a discount for some. Yet in
the context of expensive equity markets, a sub-20 multiple of
normalised net FCF appears attractive.
6 228
7 603
6 035
0
5 000
10 000
15 000
20 000
25 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0767
2 134
3 690166 442
874Net =6 228
0
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
9 000
3.6 yrs
8.6 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 8.1 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
6.0%16.4x17.7%
Market Cap. (USDm) = 19 647
Ent. Value (USDm) = 19 887Electrical Equipment (Capital Goods)
Vestas Wind Systems @ 610 (DKK) 12 June 2017
ValuFocus List: Emerging Franchise
ValuFocus | 33
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
-20%
-10%
0%
10%
20%
30%
0x 1x 2x 3x
Invest. Cycles (8.6y each)
Hist. Fut. Avg Fut.
Next peak return could easily match the
previous one, due to a better revenue mix.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 16.3% │ Next 4Y: 18.3% (Implied)
16.3%
-20%
-10%
0%
10%
20%
30%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
We have normalised Vestas' cash margin at 17% for the past three years, given some uncertainty on the cyclicality of this now structurally profitable business. Thus the last three years of
charts 1 and 3, above, are normalised levels rather than the real achievement of the company, which is higher. Apart from its unusual aesthetics, the asset turn chart does not yield much
information. What we like about the company is that it is a "build and service" model. The margins on the service part are about 200 bp higher, and as the installed park grows and ages,
the service portion should increase, too. This is why we are very comfortable with the future (fading) peak return of the company matching the historical peak return of 20%, before the
structural fade starts. Vestas is the world's largest manufacturer of wind turbines with a global footprint. This ought to give it a noticeable competitive advantage, which it should be able
to leverage in order to manage its level of economic franchise. The market-implied USD 7.6bn Franchise Value is based on a decidedly fading path, falling from high double digit to high
single digit in the space of a couple of investment cycles. We feel that this might be at the more conservative end, especially since Growth Value is also fairly undemanding, implying a
5.2% average growth rate.
0%
10%
20%
30%
'07 '09 '11 '13 '15
Mrg% Norm
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
679
-1 500
-1 000
- 500
0
500
1 000
1 500
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 12 308
FADE RATE: 7.4%
IN % OF FADING FRANCHISE VALUE: 161.9%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Schneider Electric SE (28.3x, 11%)
ABB Ltd. (24.5x, 13.1%)
Hubbell Inc. (21.7x, 15.2%)
Sensata Technologies Holdi (26.9x, 15.3%)
Legrand SA (36x, 11.3%)
Ametek Inc. (25.2x, 22.4%)
Hubbell Inc. (21.7x, 15.2%)
Emerson Electric Co. (20.7x, 20.3%)
ABB Ltd. (24.5x, 13.1%)
Sensata Technologies Hold (26.9x, 15.3%)
Similar FCF Ret. to Vestas Similar FCF Mult. to Vestas
Economic Margin Asset Turn
ValuFocus | 34
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 14.5% 15.6% Last FY 14.0x 14.6x Est. Trend 5.5%
Normalised 10.3% 10.5% Normalised 23.0x 22.6x Last 10Y 14.5%
Mkt implied 8.0% Implied over CAP 5.0%
Free Cash Return FCF Multiple
The different structure of Gemalto compared to its peers is illustrated with the relatively low proportion of off-balance sheet intangible assets that we need to capitalise: tangible assets
and working capital are over 50% of the invested capital, compared to nearer 80% for, say, Oracle. Gemalto is "asset heavy" and more of an industrial company, which explains its
relatively low level of rent. The market-implied franchise value is EUR 1,7bn, corresponding to an average FCF yield of 8,4%, with a fade of 7,8%, which is a bit sharp. this company is still
building up its franchise and we don't see the reason to expect such a fast normalisation of its returns.
Gemalto is perhaps a slight oddity in the Software & Services
sector in terms of its profile of returns as its products are more
niche than those of the behemoths. In our view, this is an
opportunity given the structual respositioning being
undertaken. It could be wrong to write the company off as a
payment card business, and when the acquisition of 3M's
Identity Management Business closes in the near future,
Gemalto will be a market-leader in this space. The move
towards services (currently arond one third of revenues) will
also help to boost the margin, if executed correctly.
2 260
1 641
1 230
0
1 000
2 000
3 000
4 000
5 000
6 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (EURm)
0
237
989
1 230111
39
439 Net =2 260
0
500
1 000
1 500
2 000
2 500
3 000
3 500
3.5 yrs
8.2 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - EUR 3 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
5.5%14.0x14.5%
Market Cap. (EURm) = 4 672
Ent. Value (EURm) = 5 140Software (Software and Services)
Gemalto NV @ 52 (EUR) 12 June 2017
ValuFocus List: Contentious Franchise
ValuFocus | 35
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
0x 1x 2x 3x 4x
Invest. Cycles (8.2y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 10.3% │ Next 4Y: 12.3% (Implied)
10.3%
0%
10%
20%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
The improvement in margin (left hand chart above) has offset the declining asset turn (second chart) and the operating FCF return is on the up (third chart above). This latter chart is
optically misleading, in that it suggests a sharp increase but the absolute level, in the low double digits, is still quite modest and could easily expand. Ingenico, for instance, has a rent of
double that level, in the low 20s (Gemalto is classified as "software" in the main indices, which is not entirely accurate). We suspect that Gemalto's cash rent is cyclical, and we have built
its market-implied future profile with a cyclical bent. We also suspect that investors in aggregate are unsure about the sustainability of the latest level of return, and so we have fitted-in a
peak margin assumption. The result is, in our view, a very conservative future profile, suggesting an inability to sustain a franchise. This is not the impression that we have. Gemalto is
making acquisitions in promising areas (it missed the acquisition of Morpho, though) and its competitors vary between the segments and are spread across the auto, technology
hardware, retail, media and mobile telecom sectors, which we see as an advanage to consolidate its competitive position and manage its fade. Gemalto was, historically, overpriced as
the operating Economic Profits chart (second below) shows, but this largely undue premium has disappeared.
0%
10%
20%
30%
'07 '09 '11 '13 '15
Mrg% Norm
125%
130%
135%
140%
145%
150%
155%
160%
165%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
149
- 50
0
50
100
150
200
250
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (EURm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 2 074
FADE RATE: 7.8%
IN % OF FADING FRANCHISE VALUE: 126.3%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Activision Blizzard, Inc. (26.6x, 26.7%)
Oracle Corporation (16.9x, 29.7%)
Citrix Systems, Inc. (20.8x, 16.5%)
SAP SE (34x, 18.4%)
Constellation Software Inc (36.2x, 19.5%)
Check Point Software Tech (19.8x, 69.9%)
CA, Inc. (16.8x, 26.5%)
Citrix Systems, Inc. (20.8x, 16.5%)
Oracle Corporation (16.9x, 29.7%)
Sage Group plc (26.5x, 31.2%)
Similar FCF Ret. to Gemalto Similar FCF Mult. to Gemalto
Economic Margin Asset Turn
ValuFocus | 36
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 15.5% 15.3% Last FY 20.7x 22.3x Est. Trend 4.5%
Normalised 17.0% 16.4% Normalised 19.8x 20.5x Last 10Y 7.2%
Mkt implied 8.8% Implied over CAP 4.5%
Free Cash Return FCF Multiple
Alfa Laval is asset "heavy", in that the bulk of its capital employed is absorbed in tangible assets. We identify about SEK 3.3bn of concession assets to be included in economic capital,
which represent trademarks and patents. The firm only expenses about 2.5% of revenues in R&D, which we capitalise. The liability breakdown of Market Value shows a modest but
noticeable level of financial leverage, which we prefer to a full equity funding. The SEK 35bn Franchise corresponds to an average 8.8% operating rent (op.FCF to net assets) over the
fading period. The fade rate is 4.6%, which is objectively low but not for a 130 year-old firm with entrenched market positions in areas of strategic importance (food, pharma, energy or
Alfa Laval has been running the same business, mostly
profitably for 130 years; this sustainability is the quintessence
of a core franchise owner. We are surprised that the market is
not more enthusiastic about its shares, which are trading on
22.3x last reported net FCF. Considering the steadiness of the
firm and the context of expensive equity markets, this is
almost cheap. We are not quite sure what spooks investors.
Yes, the firm is a consolidator, thus acquisitive and not afraid
of leveraging (modestly) its balance sheet. Yes, the firm is
involved in certain cyclical businesses, and yes, trend growth is
not that high. But it is a remarkable compounder and its rent
level is in a sweet spot: high enough to support investments,
not high enough to attract too many aggressive competitors.
27 420
34 760
31 324
0
10 000
20 000
30 000
40 000
50 000
60 000
70 000
80 000
90 000
100 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (SEKm)
03 330
6 140
17 1941 842 2
5 126Net =27 420
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
40 000
5.3 yrs
12.5 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - SEK 33.6 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
4.5%20.7x15.5%
Market Cap. (SEKm) = 73 069
Ent. Value (SEKm) = 93 480Machinery (Capital Goods)
Alfa Laval AB @ 172 (SEK) 12 June 2017
ValuFocus List: Core Franchise
ValuFocus | 37
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
40%
0x 1x 2x 3x 4x 5x
Invest. Cycles (12.5y each)
Hist. Fut. Avg Fut.
The market prices Alfa Laval as if it had seen
the peak of its return, which is typical of the
undervaluation of a true compounder.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 17% │ Next 4Y: 15.6% (Implied)
17.0%
0%
10%
20%
30%
40%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
Alfa Laval is probably more cyclical than some people think, and less cyclical than the charts above suggest. There is a real exposure to the investment cycle, and order books can be
reported in free-fall at the trough. But the firm has historically exhibited a good anticipation and management of the business cycle, and the large (positive) wobble in 2009 is a
misleading representation, as this was in fact a tough year for revenues and order intake, more than compensated by an aggressive NWC management. Overall, we believe that our
normalised gross cash flow margin of 17.5% (first chart) is representative of the mid-cycle profitability of the firm. Note that asset intensity is high and on the rise; a decade ago, Alfa Laval
was able to turn over 1.6x its assets per annum, a figure that has declined to 1.2x only. Overall, we think that Alfa's normalised rent is around 17%. The way in which Alfa Laval's
valuation can be expressed in a fade (fourth chart above) is typical of a compounder: the market assumes that peak returns will not be seen again. Despite that fact that a 4,6% fade rate
is slow, the pre-reversion period (before the fade starts, i.e. before the firm needs to give up some excess return to competitors or clients) is only 5.5 years and probably too short. Given
the market shares that Alfa Laval controls (30% world-wide in two of its three divisions), this pre-fade period could just as well run into decades.
0%
10%
20%
30%
'07 '09 '11 '13 '15
Mrg% Norm
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
3279
0
1 000
2 000
3 000
4 000
5 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (SEKm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 63 203
FADE RATE: 4.6%
IN % OF FADING FRANCHISE VALUE: 181.8%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Pentair plc (28.7x, 16.3%)
WABCO Holdings Inc. (26.1x, 14.3%)
Snap-on Incorporated (21.9x, 17.7%)
Wärtsilä Oyj Abp (28.3x, 15.7%)
Fanuc Corporation (29.4x, 13.1%)
IDEX Corporation (26.2x, 28.2%)
Dover Corporation (24.6x, 16.8%)
Snap-on Incorporated (21.9x, 17.7%)
Illinois Tool Works Inc. (27.7x, 22.5%)
WABCO Holdings Inc. (26.1x, 14.3%)
Similar FCF Ret. to Alfa Laval Similar FCF Mult. to Alfa Laval
Economic Margin Asset Turn
ValuFocus | 38
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 14.9% 12.8% Last FY 16.4x 20.8x Est. Trend 6.0%
Normalised 14.8% 12.8% Normalised 18.2x 20.9x Last 10Y 1.5%
Mkt implied 8.9% Implied over CAP 5.0%
Free Cash Return FCF Multiple
Nothing out of the ordinary on the asset breakdown; we capitalise 20% of revenues expended for R&D to create a USD 88bn gross value. Note that if we capitalised, say, only15% of
revenues over just 8 years (perhaps with the argument that generics consume less capital), this would not materially change the rent or the FCF multiple. However, it would reduce the
replacement value by about USD 27bn, and the implicit fade would need to change to compensate. The current figure of 8,4% would come down to 6,9%, and the average implied return
would move up from 8,9% to 10,2%. These figures remain well within investable levels, in our view.
Three pharmaceutical stocks make it into our core franchise
list, and a few more in the contentious one. Price pressures are
a well-documented phenomenon, as is the shortening of asset
lives. Yet it remains that the stocks were expected to almost
disappear from the planet a few years ago, and half a decade
later, we find that 1- their ability to sustain and protect their
franchise is not that damaged, 2- they have adapted to the
new world (45% of Pfizer's revenues are in generic medecines
today) and 3- their valuation is still attractive, especially in the
context of expensive equity markets. Compare Johnson &
Johnson to Pfizer: it has a similar rent (13,6% vs 12,8%) but
trades on 5 points high multiple (26x vs 20,9x). Compare P&G
to Pfizer: 9,6% rent on 29,5x...
100 115
95 455
70 753
0
50 000
100 000
150 000
200 000
250 000
300 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0 7 371
88 323
31 4351 330 2 275 107 Net =100 115
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
4.6 yrs
11.3 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 130,8 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
6.0%16.4x14.9%
Market Cap. (USDm) = 195 566
Ent. Value (USDm) = 265 820Pharmaceuticals (Pharmaceuticals, Biotechnology and Life Sciences)
Pfizer Inc. @ 33 (USD) 12 June 2017
ValuFocus List: Core Franchise
ValuFocus | 39
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
30%
0x 1x 2x 3x
Invest. Cycles (11,3y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 14,8% │ Next 4Y: 14,9% (Implied)
14.8%
0%
10%
20%
30%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
The gross CF margin chart (first chart above) shows that, despite some volatility, nothing much has been altered in terms of margins. Our calculated normalised level of 46,3% looks very
accurate and in no need of change. So much for the oft-mentioned upheaval of the industry. Capital intensity (second chart above) is high and unchanged, too, which results, expectedly,
in a fairly constant operating rent. This makes the interpretation of the implicit future level (fourth chart above) fairly simple; investors in aggregate expect this state of affairs to carry on
for a few more years, before returns start their journey downwards to the cost of capital. This is not an unreasonable view, but it is a cautious view. This company has experienced a sea
change of its competitive landscape over the past decade, only to end up exactly where it started, in terms of margins, capital intensity and returns. We are all in favour of past
experience not being a guide etc..., but this resilience is poorly priced by the market, which is not expecting to see another such decade going forward. In the context of high uncertainty
on corporate profits, we would have expected proven resilience in a difficult environment to command a premium, not a discount.
0%
10%
20%
30%
40%
50%
60%
'07 '09 '11 '13 '15
Mrg% Norm
0%
10%
20%
30%
40%
50%
60%
70%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
8345
0
5 000
10 000
15 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 166 629
FADE RATE: 8.4%
IN % OF FADING FRANCHISE VALUE: 174.6%
Selected Alternative Investments Within Same SectorCompetitive Advantage
Mylan N.V. (19,5x, 14,3%)
Teva Pharmaceutical Indust (17,7x, 13,6%)
Astellas Pharma, Inc. (12,3x, 11,7%)
Valeant Pharmaceuticals In (18,3x, 16,1%)
Roche Holding AG (21,6x, 11,8%)
Hikma Pharmaceuticals PLC (19,3x, 13,8%)
Valeant Pharmaceuticals I (18,3x, 16,1%)
Novo Nordisk A/S (18,7x, 22%)
Mylan N.V. (19,5x, 14,3%)
Teva Pharmaceutical Indus (17,7x, 13,6%)
Similar FCF Ret. to Pfizer Inc.: Similar FCF Mult. to Pfizer Inc.:
Economic Margin Asset Turn
ValuFocus | 40
Growth in Capital Invested
Operating Net Operating Net Asset Growth
Last FY 8.6% 7.0% Last FY 14.5x 20.3x Est. Trend 6.0%
Normalised 9.4% 7.0% Normalised 15.3x 20.6x Last 10Y 6.3%
Mkt implied 6.3% Implied over CAP 5.0%
Free Cash Return FCF Multiple
The gross asset breakdown shows Intel as the behemoth that it is: almost USD 100bn of capital tied in tangible fixed assets. We estimate that Intel also uses slightly more than USD 70bn
of intangible capital. The company reports that 20% of revenues are ploughed into R&D each year, which need to be capitalised. The Three Sources of value chart suggests that perhaps
we should not include Intel in our Core list: it hardly has any franchise... But the reason is, partly, that we calculate a market-implied franchise, and Intel is at the cheap end of the current
market spectrum. With a fade rate more in line with Intel's status and market position (we suggest 6%), the Franchise Value would be worth twice as much.
The main reason not to buy Intel's shares is that cyclical
companies are preferably bought at the trough, and the last
trough was in 2009... Despite this unhelpful timing, investors
who can ride the cycle should be interested. We deal with
Intel's cyclicality by normalising its CF margin and therefore
cash return. Taking a simple average of peak (ca 15%) and
trough (ca 7%) operating cash return would suggest a
normalised level around 11%. We are using 9.4%, which yields
a normalised op.FCF multiple of 15.6x only, inexpensive in the
context of the current equity markets. In figures, this is
equilavent to about USD 11.3bn of op.FCF, in line with reported
numbers. The net FCF multiple, which we prefer, is 20.8x, again
at a noticeable discount to the (expensive?) market.
121 424
27 475
23 523
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
160 000
180 000
200 000INTRINSIC VALUEFUNDING SOURCE MARKET VALUE
= negativeThe Three Sources of Value (USDm)
0 4 652
70 282
98 432978 1 072
4 338 Net =121 424
0
20 000
40 000
60 000
80 000
100 000
120 000
140 000
160 000
180 000
200 000
3.9 yrs
9.1 yrsECO AGE:
ECO LIFE:
Asset breakdown (gross - USD 179.8 bn)
150% 50%
100%
rel. to last 10Yrel. to Sector median
rel. to Market median
150% 50%
100%
150% 50%
100%
rel. to Normalisedrel. to Sector median
rel. to Market median
6.0%14.5x8.6%
Market Cap. (USDm) = 168 158
Ent. Value (USDm) = 172 144Semiconductors and Semiconductor Equipment
Intel Corp. @ 36 (USD) 12 June 2017
ValuFocus List: Core Franchise
ValuFocus | 41
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This document is only permitted for individuals or firms who would fall
within the definition of a professional client as defined by the Financial Conduct Authority’s rules. This document does not provide personal recommendation based on your individual circumstances. By making this
information available to you, ValuAnalysis is not advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested. The views expressed in this
document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any of the information contained in this document. By viewing this document, you
confirm that you have read and accepted this disclaimer. SOURCES: Annual Reports, 10Ks, CIQ and ValuAnalysis proprietary adjustments.
Historical op. FCF Return...
0%
10%
20%
0x 1x 2x 3x 4x
Invest. Cycles (9.1y each)
Hist. Fut. Avg Fut.
... and Future Discounted Level
Op.FCF Return: Last 4Y: 9.4% │ Next 4Y: 6% (Implied)
9.4%
0%
10%
20%
'07 '09 '11 '13 '15 Norm.
Op.Rent Yld Net Rent Yld
The latter half (from 2011 onwards) of the first chart, above, is not Intel's real gross CF margin, but our estimate of its normalised, or mid-cycle, level: 48%. For comparisons, the
corresponding real margin is 51.2% as of last reported. Similarly, the operating FCF return (third chart above) is based on the same normalised margin from 2011 onwards, which means
that the return simply follows Intel's capital intensity. On this subject, we note that Intel is not managing to hold on to its historical turn of ca 55% (second chart above) and is now turning
over 47% of its net assets, which is a low number, showing the substantial capital intensity of the semiconductor sector. These adjustments notwithstanding, it is not too much of a
stretch to assume that 9.4% is representative of Intel's normalised operating FCF asset yield (remember that a simple arithmetic peak to trough average suggests 11%). In this case, the
implicit fade profile (fourth chart above) is undemanding, to say the least. The fade is a steep 10.5%, past the 10% "terminal decline" mark. In less technical terms, the average operating
cash return over this fade period is 6.3%. Furthermore, note that it is possible, within the constraints of the current valuation, to fit an immediate new trough (to 4.2%) one year out. We
have to conclude that the new cycle is already priced in. What we can't say is if bad momentum, when it comes, can crush this value.
0%
10%
20%
30%
40%
50%
60%
'07 '09 '11 '13 '15
Mrg% Norm
0%
10%
20%
30%
40%
50%
60%
70%
'07 '09 '11 '13 '15
Gross econ. CF per unit of Revenues Revenues per unit of Econ. Assets
Actual & Discounted
2599
0
2 000
4 000
6 000
8 000
10 000
'07 '09 '11 '13 '15 Norm.
EP (Op.) Discounted EP (Op.) @ 5%
Op. Economic Profits (USDm)
Fade Analysis
FRANCHISE VALUE WITH NO FADE: 82 583
FADE RATE: 10.5%
IN % OF FADING FRANCHISE VALUE: 300.6%
Selected Alternative Investments Within Same SectorCompetitive Advantage
NVIDIA Corporation (70.7x, 12.5%)
Marvell Technology Group L (60.7x, 3.7%)
Tokyo Electron Limited (48x, 9.8%)
Infineon Technologies AG (70.1x, 2.8%)
Microchip Technology Inc. (32.5x, 14%)
Analog Devices, Inc. (26.9x, 17%)
Xilinx Inc. (25.6x, 19.4%)
KLA-Tencor Corporation (21.9x, 18.2%)
Texas Instruments Inc. (23.5x, 22.8%)
Applied Materials, Inc. (27.2x, 14.2%)
Similar FCF Ret. to Intel Corp.: Similar FCF Mult. to Intel Corp.:
Economic Margin Asset Turn
ValuFocus | 42
This page is left intentionally blank
ValuFocus | 43
GLOSSARY
Competitive Advantage Period (CAP) The period during which a firm can generate a return (see Rent) above the cost of capital.
Economic Profits Cash profits or Free Cash Flow minus the notional cost of capital.
Excess Return The level of return above the cost of capital.
Fade The rate of normalisation of the competitive position of the firm, defined as its level of Rent and
growth rate. By construction, an excess return cannot be assumed to be perpetual, and the market
always assumes an eventual normalisation towards the cost of capital.
Franchise Value One of the three sources of value, defined as the net present value of a firm’s sustainable level of
Economic Profits over its Competitive Advantage Period.
Gross economic Capital (GeC) The sum of all operating capital used by the firm pre-depreciation, including all tangible assets,
capitalised intangible assets and operating leases, Other Long Term Assets (OLTA) and concession
assets.
Growth Value One of the three sources of value, defined as the residual of: Market Value minus Replacement
Value and Franchise Value.
Intrinsic Value The sustainable value of a firm, defined as Replacement Value plus Franchise Value.
Net economic Capital (NeC) The depreciated value of GeC, according to the principles of economic depreciation.
Net Free Cash Flow Gross cash flow minus all capital spending.
Operating Free Cash Flow Gross cash flow minus maintenance capital spending.
Rent or Rent Yield The ratio of FCF over Net economic Capital. We refer to it as “asset yield” or “cash return” as well.
Replacement Value One of the three sources of value, equal to Net economic Capital.
Residual Income Model A valuation framework defining the price of an asset as the net (depreciated) value of this
asset plus the net present value of its sustainable level of economic profits.
ValuFocus | 44
DISCLAIMER
This document is provided by ValuAnalysis Limited, which is authorised and regulated by the Financial Conduct Authority (firm reference number 710908). This
document is only permitted for individuals or firms who would fall within the definition of a professional client as defined by the Financial Conduct Authority’s rules.
This document does not provide personal recommendation based on your individual circumstances. By making this information available to you, ValuAnalysis is not
advising you or making any recommendation. Investments carry risk, including the risk that you will not recover the sum that you invested.
The views expressed in this document are as of the published date and based on information available at the time. ValuAnalysis does not assume any duty to update any
of the information contained in this document.
By viewing this document, you confirm that you have read and accepted this disclaimer.
CONFLICTS OF INTEREST
To mitigate the possibility of conflicts of interest, ValuAnalysis’ employees are subject to internal organisational and administrative arrangements in relation to the
management of inside information, handling of unpublished research material, gifts and hospitality, external business interests, remuneration and personal
transactions. These internal organisational and administrative arrangements have been designed in accordance with applicable legislation and relevant industry
standards. These internal organisational and administrative arrangements are considered appropriate and proportion in light of the nature, scale and complexity of
ValuAnalysis’ business.
As at the time of writing, ValuAnalysis does not perform services for any issuer mentioned in this report. Notwithstanding, ValuAnalysis may, to the extent permitted by
law, perform services for, solicit business from, or otherwise be interested in the investments, directly or indirectly, of any issuer mentioned in this report.
ValuAnalysis prohibits its analysts, professionals reporting to analysts and members of their households from making personal transactions in any issuer in the analyst's
area of coverage for a period of 10 days before and after the publication of research pertaining to the issuer. ValuAnalysis prohibits its analysts, persons reporting to
analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage.
ValuAnalysis has no agreements with issuers with respect to dissemination of recommendations. Analysts do not, nor will they, receive direct or indirect compensation in
exchange for expressing any of the views or the specific recommendation contained in this report. Analysts are paid in part based on the overall profitability of
ValuAnalysis.
ValuFocus | 45
In line with the European Union’s Market Abuse Regulation, ValuAnalysis provides quarterly statistics on the overall ratio of "Buy”, “Hold” and “Sell” in ValuAnalysis
recommendations in financial instruments and the proportion of issuers corresponding to each of those categories to which such person has supplied material services
of investment firms over the previous 12 months. These are as follows:
“Buy”, “Hold” and “Sell” recommendations Investment services provided to these issuers in
previous 12 months
Recommendation Number % of total Number % of total
Buy 40 100 0 0
Hold 0 0 0 0
Sell 1 0 0 0
The above table covers the period 1st September 2016 to 12th June 2017. This disclosure is reviewed and updated on a quarterly basis. Last updated 12th June 2017.
ValuFocus | 46
This page is left intentionally blank
ValuFocus | 47
This page is left intentionally blank
VALUFOCUS
For more information:
Pascal Costantini
Founding Partner
The Clubhouse, 8 St. James's Square
London SW1Y 4JU
(+44) 203 058 2931
Joakim Darras
Founding Partner
The Clubhouse, 8 St. James's Square
London SW1Y 4JU
(+44) 20 3058 2933
Janet Lear
Partner
The Clubhouse, 8 St. James's Square
London SW1Y 4JU
(+44) 203 058 2934
Diarmid Ogilvy
Founding Partner
The Clubhouse, 8 St. James's Square
London SW1Y 4JU
(+44) 203 058 2932
www.valuanalysis.com
Top Related