Small-Cap Investing Summit - Adrian Saville...•Facilitators, Enablers & Enhancers give examples of...

Small-Cap Investing Summit

Economic Opportunities & Investment Ideas in South Africa

@CannonAssets Adrian Saville Founder & Chief Investment Officer, Cannon Asset Managers

Our Business

Established 1994, owner-managed since inception

• alpha-generating, high conviction, value investment philosophy emphasizes quality

• 21 employees: 6 investment & 7 internal operations

• R3bn AUM

• Institutional clients incl. ABSA, Accenture, Clientele Life, Oppenheimer Memorial Trust,

Investment Solutions, Macsteel, Transnet Pension Fund, UPS & Verso

• Peregrine shareholding (2013) with group AUM R82bn

Cannon’s Investment Results

Cannon Asset Managers and McGregor BFA

1261%

806%

0

200

400

600

800

1000

1200

1400

2000 2002 2004 2006 2008 2010 2012

Cannon All Equities Market

Fundamental

Analysis

Quality &

Risk

Construction

Return

Expectations

Data Cleaning and

Analysis

Value measured by

our own PE, DY, P-

Book, P-Sales, CAPE

Fundamental

analysis (Graham

Net-Net, Sonkin ratio,

PEDY toolkit)

Backward and

forward looking

Forensic tool

(Benford)

Fundamental Score

Bankruptcy & Chuck

Years to buy back

Environmental,

Social & Governance

Qualitative risk

overlay

25 Management

events in 2013

Valuation (PE, P-

Book, PER)

Horizon (three years)

Fundamental

protection (quality,

cash power, balance

sheet)

Super-sector risk

rules

Alpha weights only

Maximum two entities

per sub-sector

Momentum (catalyst)

250

Sell

Discipline

Influences: Benjamin Graham, David Dreman, Anthony Bolton, Bob Haugen , James Montier & John Neff

Negation of VQR

Valuation triggers

Real-time decision

making

+ Good businesses

= Excellent prospects

25 – 35 Number of Stocks

Attractive Prices

A Fundamental, Repeatable Global Process

Top down not about forecasting – this is a fool’s errand

But economic architecture & industrial makeup key influences

• Survival

• Sustainability

• Quality & prospects

Overlooking this elevates the chance of “permanent destruction of capital”, the

single greatest investment risk

Unashamedly & Unequivocally In Search Of Intrinsic Value

From Left Behind

Adapted by Cannon Asset Managers (2012) from Angus Madisson (2008)

0

1000

2000

3000

4000

5000

6000

7000

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Pe

r ca

pita

in

co

me

($

pe

r p

ers

on

in

20

00

pri

ce

s)

Africa (sub-Saharan)

World

To Leading Edge

IMF data (2013); African Statistical Yearbook (2014)

• Consequence of advanced world structural decay

• Coupled with African structural reform

-4

-2

0

2

4

6

8

19

80

19

85

19

90

19

95

20

00

20

05

20

10

20

15

Real GDP Growth (%)

World

Advanced Economies

Sub-Saharan Africa

Commodity Prices &

New Demand

Debt Relief & Sustained

Debt Improvement

Economic Management

& Policy Platforms

Africa’s Demographic

Dividend

Rising Economic

Mobility

3.9

3.2

2.7

1.8

0.0

1.0

2.0

3.0

4.0

5.0

<30% 30%-60% 60%-90% >90%

% c

ha

ng

e G

DP

(a

nn

ua

l a

ve

rag

e)

Debt-to-GDP Ratio

Africa's Debt-to-GDP Ratio (%) from 1990 to 2010

1990 57.1

1995 66.7

2000 50.7

2005 30.4

2010 32.6

Five Forces

Saville and White (2013)

African Competitiveness Report (2011); World Competitiveness Report (2006-2013)

94.0

96.0

98.0

100.0

102.0

104.0

106.0

108.0

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12 2012/13

Sub-Saharan Africa Competitiveness Score (2006/07 = 100)

Insitutional Strength

Competitiveness Score

Five Forces Commodity Prices &

New Demand


Debt Improvement

Economic Management

& Policy Platforms


Dividend

Rising Economic

Mobility

Saville and White (2013); United Nations (2012)

0

200

400

600

800

1 000

1 200

19

50

19

60

19

70

19

80

19

90

20

00

20

10

20

20

20

30

20

40

Siz

e o

f w

ork

ing

po

pu

latio

n (

millio

n)

Africa

China

India

Europe

North America

• Population growth

• Labour force participation rate

• Productivity gains


New Demand


Debt Improvement

Economic Management

& Policy Platforms


Dividend

Rising Economic

Mobility

Saville and White (2013); McKinsey Global Institute (2010)

30%

40% 45%

73% 79% 82%

70%

60% 55%

27% 21% 18%

India Africa China Europe LatinAmerica

NorthAmerica

Urb

an

Po

pu

latio

n -

-- R

ura

l P

op

ula

tio

n


New Demand


Debt Improvement

Economic Management

& Policy Platforms


Dividend

Rising Economic

Mobility


New Demand


Debt Improvement

Economic Management

& Policy Platforms


Dividend

Rising Economic

Mobility

Herman Singh Future Advisory (2013); McKinsey & Co The Lions of Africa (2011); The Economist (March 2013)

“316mn new mobile phone subscribers signed up since 2000”

“112 day road trip Dakar to Cape Town only 9 had no

smartphone signal”

0

2 3

7

10

18

24 25

31

0

5

10

15

20

25

30

35

2004 2005 2006 2007 2008 2009 2010 2011 2012

Countries with 3G Services

The Impact On Economic Growth

IMF (2013); analysis by Cannon Asset Managers (2013)

50

100

150

200

250

300

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real GDP (2008 = 100)

China

India

Nigeria

United Kingdom

United States

IMF (2013); analysis by Cannon Asset Managers (2013); Capital Economics (2012)

Rebasing (2013)

• GDP +40%

• Deficit 2.5%

• Debt-GDP 15%

The Impact On Economic Growth

50

100

150

200

250

300

2000 2002 2004 2006 2008 2010 2012 2014 2016

Real GDP (2008 = 100)

China

India

Nigeria

United Kingdom

United States

Established evidence of structural shifts & drivers (economic, social and political)

Unique economic prospects, underpinned by wide margins and elevated ROEs

In this, an unequivocally important driver is rising connectedness in the form of enhancers

of TCIP:

• Trade flows

• Capital movements

• Information and knowledge streams

• movement of People

Translates into investments into Facilitators, Enablers & Enhancers of TCIP:

• Infrastructure (ELB)

• Skills (Adcorp)

• Trade (OneLogix) and trade finance (Sasfin)

Investment Implications

Great Investments Start With Value

• Economic growth does not dictate great investment results

• Great investments flow from paying a good price for a good business(value)

• Facilitators, Enablers & Enhancers give examples of great businesses at good prices

Ita Bel

Ger Fra

Spa Ire

3.9 4.1 Swi

Den Net 5.1 UK

Can NZ

US Swe

SAf Aus

0

2

4

6

8

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0

Real Economic Growth (%) and Real Equity Returns (%): 1900-2010

Dimson, Marsh and Staunton Triumph of the Optimists (2012)

Founded 1930 & listed 1951

Total solutions provider in materials handling & appropriate modular process plants

• innovation and in-house capability

• supply of equipment and technology with “world-class partners”

• Initially a net-net

• Market cap R1,450mn

• CA = R1,407mn and CL = R851mn with R470mn cash

• No long-term liabilities & equity built out of retained earnings (R572mn of R601mn)

Facilitators, Enablers & Enhancers: ELB Group

Cannon Asset Managers, ELB Annual Report (2013); ELB Interim Report (2013); Management meetings (2013)

• Price-earnings 11.4x and price-book 1.8x (2345cps)

• ROE 19.2% and Fundamental Score 5

• Inside ownership & management position

• Share buy backs (8.9mn of 33.0mn)

• Income before tax ROE target 30% (32%)

• Consistent cash conversion

• 30% revenue from SSA

• ARDBEL

Facilitators, Enablers & Enhancers: ELB Group

Cannon Asset Managers, ELB Annual Report (2013); ELB Interim Report (2013); Management meetings (2013)

Founded in 1975 as South Africa’s first recruitment advertising agency & today is the largest

workforce management group on the African continent

• recruitment, training, psychometric assessment, payroll management & BPO

• 3,000 permanent employees & 93,000 managed contractors

• blue collar, white collar & BPO, training and services

• Africa (Capital)

• India (34.6% Nihilint)

• Australia (Paxus & LSA)

Facilitators, Enablers & Enhancers: Adcorp’s Road To ROAM

Adcorp annual reports (2012; 2013); sharedata.co.za; www.adcorp.co.za


6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2010 2011 2012 2013

Asset Turnover (x)

Target (x)

4.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013

Return on Sales (%)

Target (%)

27.6

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

2010 2011 2012 2013

ROAM (ATO x RoS) (%)

Target (%)

RoS x ATO = ROAM

4.0 6.25 25.0

4.5 6.50 29.3

4.6 6.00 27.6



Evidence of sustainable advantage:

• WACC = (R586mn * 7.4%) + (R1,609mn * 10.4%) / (R2,195mn) = ~9.6%

• ROCE = 13.3%

• ROCE > WACC by 3.1% per annum since 2007


6.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2010 2011 2012 2013

Asset Turnover (x)

Target (x)

4.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013

Return on Sales (%)

Target (%)

27.6

20.0

22.0

24.0

26.0

28.0

30.0

32.0

34.0

2010 2011 2012 2013

ROAM (ATO x RoS) (%)

Target (%)


Valuation based on current fundamentals

• Earnings Multiple 13.5

• NAV Multiple 1.6

• Sales Multiple 0.4

523 592

716

957

1315

1483 1545

1638

1862

2065

158 195 237 224 196 272

196 196 209 237

0

500

1000

1500

2000

2500

3000

3500

4000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

NAV (cps)

HEPS (cps)

Average Current Price (cps)

Current Valuation (cps)



Valuation based on ROAM 25.0%

• Earnings Multiple 14.2

• NAV Multiple 2.2

• Sales Multiple 0.5

0

50

100

150

200

250

300

350

400

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

HEPS (Based on ROAM 25%) (cps)

HEPS (cps)

Fair value lifts from 3500cps to 4600cps


Facilitators, Enablers & Enhancers: OneLogix

• SADC logistics & specialised transportation

• Routes back to 1988 & listed 2000 (main board 2013)

• Botswana, DRC, Malawi, Mozambique, Namibia, South Africa, Zimbabwe & Zambia

• Revenue growth 29% p.a. over ten years with consistently strong cash flow

• Passenger car imports +8% in 2012 versus +2% for world

• Interim results operating profit +34% and core HEPS +35%

• PE 9.5x and DY 3.3% (since 2010)

Africa Economics Focus (February 2013) and Onelogix annual reports

0

20

40

60

80

100

120

140

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

R'm

n

Operating Income

CFO

Thank You

Small-Cap Investing Summit

Economic Opportunities & Investment Ideas in South Africa

@CannonAssets | [email protected] | cannonassets.co.za

Adrian Saville Founder & Chief Investment Officer, Cannon Asset Managers

This presentation has been approved by a member of Cannon Asset Managers (Pty) Ltd ("Cannon Asset Managers ") and should not be considered as an offer or solicitation of an offer to sell, buy or subscribe to any investment products, securities or any derivative instrument or any other rights pertaining thereto (“financial instruments"). This presentation is intended for use by professional and business investors only. This presentation may not be reproduced without the consent of Cannon Asset Managers.

The information and opinions expressed in this presentation have been compiled from sources believed to be reliable, but, neither Cannon Asset Managers, nor any of its directors, officers or employees accepts liability from any loss arising from the use hereof or makes any representations as to its accuracy and completeness. Any opinions, forecasts or estimates herein constitute a judgment as at the date of this presentation. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied is made regarding future performance. This information is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company and its subsidiaries. Cannon Asset Managers is not agreeing to nor is it required to update the opinions, forecasts or estimates contained herein.

The value of any securities or financial instruments mentioned in this presentation can fall as well as rise. Foreign currency denominated securities and financial instruments are subject to fluctuations in exchange rates that may have a positive or adverse effect on the value, price or income of such securities or financial instruments. Certain transactions, including those involving futures, options and other derivative instruments, can give rise to substantial risk and are not suitable for all investors. This presentation does not have regard to the specific instrument objectives, financial situation and the particular needs of any specific person who may receive this presentation. Investors should seek financial advice regarding the appropriateness of investing in any securities, financial instrument or investment strategies discussed in this presentation.

Cannon Asset Managers (or its directors, officers or employees) may, to the extent permitted by law, own or have a position in the securities or financial instruments (including derivative instruments or any other rights pertaining thereto) of any company or related company referred to herein, and may add to or dispose of any such position or may make a market or act as a principal in any transaction in such securities or financial instruments. Directors of Cannon Asset Managers may also be directors of any of the companies mentioned in this presentation. Cannon Asset Managers may from time to time provide or solicit investment banking, underwriting or other financial services to, for or from any company referred to herein. Cannon Asset Managers (or its directors, officers or employees) may, to the extent permitted by law, act upon or use the information or opinions presented herein, or research or analysis on which they are based prior to the material being published. Cannon Asset Managers may have issued other presentations that are inconsistent with, and reach different conclusions from, the information presented in this presentation. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them.

Cannon Asset Managers is an authorised financial services provider by the South African authority, the Financial Services Board under licence number FSP736. This

publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party, without

the prior written consent of Cannon Asset Managers. Cannon Asset Managers does not allow the redistribution of this presentation to non-professional investors and

cannot be held responsible in any way for third parties who effect such redistribution.

Cannon Asset Managers (Pty) Ltd Registration Number 2000/025176/07 is an authorised financial services provider under licence number FSP736. Cannon Asset

Managers (Pty) Ltd, PO Box 70997, Bryanston, 2021, South Africa, +27-11-463-3140.

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