UK Value Investor 2015 04 f2 · 2017. 5. 23. · FTSE 100 Valuation and Projection Page 2 Model...

IMPORTANT NOTICE: UK Value Investor provides information, not advice. It is for investors who want to make their owninvestment decisions and are capable of doing so without advice. If you think you need advice then you should seek aprofessional advisor. Please see the important notes on the back page for further information.

Contents

FTSE 100 Valuation and Projection Page 2

Model Portfolio Review Page 2

Selling: Balfour Beatty PLC (BBY) Page 14

FTSE All-Share Stock Screens Page 19

Metrics, Maximums & Minimums, Strategy Guide & Colour-Coding Key, Income Portfolio Performance Back pages

New highs and new lows

Another month, another new high for the FTSE 100. This time though it reached a new high above the

psychologically important 7,000 level (psychologically important for some anyway). I won’t say much more

than that as I wrote about the market’s current level versus its fundamentals last month. Although this tells

us nothing about where the UK market will go in the short to medium-term it was inevitable that this day

would arrive at some point. Personally I’m glad that it has finally broken through that barrier.

The new low I’m referring to is the first sale of a company from the model portfolio at a capital loss. While it

will never be enjoyable to lock in a loss on an investment it is important to know how to approach them:

1) Realise that the occasional loss is inevitable. Over a period of 10 years a portfolio like the model portfolio

is likely to invest in up to 80 to 100 different companies (30 in the first year and approximately six new ones

each year after that). There is no way on earth an investor is going to invest in 100 companies and not see a

single loss.

When a loss occurs I like to use my favourite analogy, which is property investing. If a company is sold at say

a 50% loss then that will equate to a portfolio loss of around 1.7% if the portfolio holds 30 companies. A 1.7%

loss is like having to spend £4,250 to repair the roof on a £250k buy to let property. It’s an annoyance, but

that sort of occasional expense is inevitable. However, the loss is less than half of a single year’s income and

would be barely noticeable over a 10 or 20 year period in which the property might easily see a £250k capital

gain. Making a small loss is only an issue if it occurs every year, so it’s important to try to avoid the same

problems in future, which is my next point.

2) Learn and implement the right lessons. The most important thing to do

after a company has been sold at a loss is to carry out an autopsy into the

root causes and whether they were visible beforehand.

If the problems were visible beforehand, put the necessary steps in place

to reduce the odds of investing in similar situations again. In Balfour

Beatty’s case many of the relevant lessons have already been learned and

have been integrated into the company analysis process in recent months.

John Kingham, 3rd April 2015

“There’s a fine line between having

done your homework and having

conviction in it and just being

stupidly stubborn. The best

investors figure out how to walk

that line, recognising their mistakes

and moving on when the situation

warrants. All of that is very hard - if

it were easy, everyone would be

good at it.” - Jon Jacobson in The

Art of Value Investing

April 2015

UK Value InvestorFor Defensive and Income-Focused Value Investors

During March the FTSE 100 stayed fairly close to the 7,000 level but by the end of the month had fallen back

to 6,892. That’s only just below where it started the month, at 6,950.

In terms of valuations the story hasn’t changed much, largely because neither the market nor its earnings and

dividends have changed much in the last couple of years. The FTSE 100 currently has a CAPE (Cyclically

Adjusted PE) ratio of 13.2, which is slightly below average for developed equity markets. However, anything

fairly close to mid-teen is a reasonably normal valuation, so despite the record high price levels we are along

way from anything that remotely resembles a boom.

On the other side of the Atlantic the S&P 500 has a CAPE ratio of almost 28, which is more or less where the

FTSE 100 was during the dot-com boom. While the US market has traded at higher valuation multiples, they

have only been higher during the run up to the 1929 crash (and subsequent Great Depression) and the

dot-com boom (and subsequent “lost decade” of returns for its investors).

One reason for the S&P’s high CAPE ratio is its very depressed earnings during the financial crisis of 2008/9.

However, I have edited Professor Shiller’s data (Robert Shiller, who developed the CAPE ratio) to effectively

erase the effects of the financial crisis, and still the S&P 500 has a CAPE ratio of almost 24. That would put the

US index almost into my “expensive” category, so without doubt the FTSE 100 is very likely the cheaper of the

two indices. On balance I think the FTSE 100 is likely to outperform the S&P 500 over the next decade.

FTSE 100 valuation and projection

Range of

CAPE values

Estimated probability ofseeing this valuation

2015 FTSE 100

(currently at 6,892)Description

2025 FTSE 100 (after 4%/yrearnings growth)

Above 32 5% Above 17,000 Extremely Expensive Above 25,200

28 - 32 (e.g. yr 2000) 5% 14,900 - 17,000 Very Expensive 22,000 - 25,200

24 - 28 10% 12,700 - 14,900 Expensive 18,900 - 22,000

20 - 24 10% 10,600 - 12,700 Slightly Expensive 15,700 - 18,900

14 - 20 25% 7,400 - 10,600 Normal 11,000 - 15,700

12 - 14 10% 6,400 - 7,400 Slightly Cheap 9,400 - 11,000

10 - 12 10% 5,300 - 6,400 Cheap 7,900 - 9,400

8 - 10 (e.g. yr 2009) 10% 4,200 - 5,300 Very Cheap 6,300 - 7,900

Below 8 5% Below 4,200 Extremely Cheap Below 6,300

Valuing the market: Stock market valuations change over time but they tend to stay within a range that is centred around their

intrinsic value. Investors can take advantage of this tendency as it implies that markets are more likely to go up when valuations

are far below intrinsic value and more likely to go down when far above.

500

1,000

2,000

4,000

8,000

16,000

32,000

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2012 2013

F

T

S

E

1

0

0

Year

FTSE 100 CAPE Valuation "Heap Map"

28 - 32 24 - 28 20 - 24 14 - 20 12 - 14 10 - 12 8 - 10 FTSE 100

Model portfolio review

Last month’s sell decision

On March 6th I added 1,600 ITE Group shares to the model portfolio at 185p per share, for a total

consideration of £2,979.82 after fees, which was about 3.8% of the portfolio’s total. I also added 13,500

shares to the income portfolio at the same price (the income portfolio review has now moved to the back

pages).

Performance review

This month I’ve added another goal for the model portfolio which is to produce annualised total returns of

more than 5% above inflation over any 5-year period. Whether or not that’s possible remains to be seen, but

I think an absolute return goal like that is a useful addition to just focusing on “beating the market”. As we’ve

seen over the last 15 years, it was possible for a portfolio to have zero capital gains and still beat the FTSE 100

during that period. So while I think “beating the market” is a good goal in bull markets, beating an absolute

rate of return in sideways or bear markets may be a more productive goal.

So far the model portfolio has only been running for four years, but in that time its annualised total return

has been 10.7% per year. Inflation has run at 1.9% a year so real returns have been 8.8%, well above my

target. The portfolio’s FTSE All-Share tracker benchmark has returned 8.6% a year for a real annual return of

6.7%.

Holdings review

As usual there was a lot of volatility at the individual company level. The biggest gainers were Hill & Smith (up

19%) and Standard Chartered (up 13%) while the biggest losers were N Brown (down 29%) and Serco (down

27%). It always amazes me that so much volatility at the company usually results in so little volatility at the

portfolio level (down just 2% during the month). However, beyond price fluctuations there was some

materially bad news from a couple of companies.

Serco dividend suspension and rights issue

Serco’s annual results have confirmed that it is unlikely to pay a dividend in 2015 at all. In addition a major

rights issue is currently underway. As usual I will be selling the nil paid rights rather than taking them up. It is

also extremely likely that I will be removing Serco from the portfolio in the next few months.

Balfour Beatty dividend suspension

Balfour Beatty’s new CEO has decided to suspend the dividend for two payments (the final payment of 2014

and the interim payment of 2015) in order to defend the balance sheet while the company works through its

turnaround program. Obviously this is not a good outcome. However, rather than covering the reasons why

this has happened here, I have detailed them in this month’s sell analysis which covers this month’s sale of

Balfour. Briefly, I think the company’s problems were caused by:

! A reliance on large, multi-year contracts which are won through a process of competitive tendering

! Too many large acquisitions which led to an overly complex organisation that was poorly integrated

! Too much debt for a cyclical company that relies on continually replacing large contracts

! Excessively large pension obligations

Reviewing your portfolio: In order to keep a portfolio on track it’s important to take time to review its performance against a

relevant benchmark. There may also have been events during the month where action is be required, such as new annual or interim

reports which need reviewing, or dealing with corporate actions such as mergers, acquisitions or rights issues.

Model portfolio performance

UK Revenue 45.5% International Revenue 54.5%

Note that the “average investor” and “bad investor” under-perform the market by 3% and 6% per year respectively due to

overtrading, buying high and selling low. These figures are based on research cited by Barclays and the book, Monkey with a Pin.

Cyclical Sectors 51.3% Defensive Sectors 48.7%

Performance Model Portfolio (A)FTSE All-Share Tracker

Trust (B)

Difference

(A) - (B)

Total return over 1 year 5.7% 6.4% -1.7%

Total return over 3 years 45.9% 37.2% 87.0%

Total return from inception (March 2011) 51.2% 40.2% 11.0%

Annualised return from inception 10.7% 8.6% 2.0%

Current cash value £75,612 £70,102 £5,510

Historic dividend yield 3.7% 3.9% -0.3%

3 year Beta (a measure of risk) 0.55 1 -0.45

Sharpe ratio (a measure of risk adjusted return) 1.05 1 0.05

This virtual portfolio represents the portfolio of a typical investor who is still in the capital accumulation phase. It started with

£50,000 in March 2011 and reinvests all dividends to generate additional growth.

£40,000

£45,000

£50,000

£55,000

£60,000

£65,000

£70,000

£75,000

£80,000

Model Portfolio Total Return FTSE All-Share Tracker Total Return

Average Investor (-3%/yr) Bad Investor (-6%/yr)

Size Allocation

Large Cap, 46%

Mid Cap, 41%

Small Cap, 13%

Industry Allocation

Industrials, 28%

Financials, 20%

Consumer Services,

17%

Consumer Goods, 12%

Utilities, 6%

Oil & Gas, 6%

Basic Materials, 5%

Health Care, 4%

Telecommunications,

3%

The portfolio should have at least 50% of its underlying revenues coming from international markets and at be least 50% invested

in defensive sector companies. If these limits are breached I will try to bring them back into line with the next buy or sell trade.

��

��

��

��

��

!��"#

$��%��

��

$��%��

&��'�(� ��)�� *+�,��

��

��

��

��

" -."/ 0��$��1��2 0�� ,3��"## �� 4"5.-# "6.77 8.6/ 9#.: "-.-/ :9/ 56/ #.# 76/ 7 4"9.:# #;

Latest annual results

2nd March - Amlin PLC (Purchase date: 8th February 2013)

“We’re a global specialty insurer and reinsurer with over a hundred years experience in the insurancemarkets. Our strong foundations and superior financial strength show that we are here for the long-term.” (www.amlin.com)

Net Asset Value pershare

Up 6.4%

10 Year avg earningsper share

Up 3%

Dividend per share

Up 3.8%

Debt Ratio

1.5 (defensive max 5)

Pension Ratio

2.6 (max 10)

Premium to SurplusRatio

1.5 (max 2)

Combined Ratio

89% (max 95%)

Does it still pass the buytests?

Yes

Quotes from the annual results

Amlin's result for 2014 was satisfactory. Profit was lower through a combination of reduced reserve releases afterhigh levels in 2013, and a fall in investment return reflecting weak economic growth in the world economy andlow interest rates.

Markets became more competitive during 2014. This was particularly true for reinsurance. The combination ofan influx of new capital from Insurance Linked Securities (ILS) markets and profitability of traditional participantsled to an inevitable drop in prices. However, the strength of the Amlin franchise allowed catastrophe business tobe held at stable levels reflecting the belief that rates remained adequate and non-catastrophe reinsurancebusiness grew.

The Reinsurance business benefited from limited major catastrophe losses, although the year was not benign,with activity characterised by a significant number of smaller international and US regional events. Marinecontinued to trade with good margins and the Lloyd's and European Property & Casualty operations deliveredprofitable growth. The only disappointment was the domestic UK Property & Casualty business which had acombined ratio of 105%, after winter flooding and other large risk losses.

The pace of change in traditional insurance markets, particularly London, combined with weaker pricing inmarket segments where surplus capacity is driving competition, present a more challenging trading environmentin 2015. The changes we made in 2014 have enhanced Amlin's ability to meet these challenges and to pursuethe opportunities for profitable growth that continue to present themselves. Amlin's financial strength, establishedfranchise and first rate underwriting and risk management capabilities place us in a strong position.

We remain committed to steadily growing our dividend over time and the Board has declared an increase for theyear of 3.8%. Our confidence in the business has also allowed us to declare a special dividend of £75 million or15.0 pence per share which will be paid on 28 May 2015. The Group's capital position remains strong.

0

50

100

150

200

250

300

350

400

0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012 2013 2014

P

e

n

c

e

p

e

r

s

h

a

r

e

P

e

n

c

e

p

e

r

s

h

a

r

e

Adj.Earnings (left axis) Dividends (left axis) Book Value (right axis)


3rd March - Tullett Prebon PLC (Purchase date: 5th September 2011)

“Tullett Prebon is one of the world’s largest interdealer brokers, and acts as an intermediary in theworld’s major wholesale over-the-counter and exchange traded financial and commodity markets,facilitating the trading activities of its clients” (www.tullettprebon.com)

Revenue

Down 12%

10 Year avg earnings per share

Up 3%

Dividend per share

Unchanged

Debt Ratio

2.4 (cyclical max 4)

Pension Ratio

1.9 (max 10)

Does it still pass the buy tests?

Yes


Market conditions remained challenging throughout 2014 as the overall level of activity in the financial marketsremained subdued, although there was some pick-up in activity in some products and markets in the second halfof the year. In the light of the continuation of difficult market conditions a number of actions were taken duringthe year to further reduce headcount and other fixed costs in order to maintain flexibility in costs and to align thecost base with the lower level of revenue. The benefit of this cost improvement programme, together with thecontinued benefit from cost management actions taken in previous years, is reflected in the maintenance of theunderlying operating margin at 14.3%. .

We have continued to focus on delivering innovative products and a first class broking service to our clients.Action has also been taken to develop and strengthen the broking business through hiring brokers and throughacquisitions, and to develop the group’s information sales and post-trade risk management services activities.

The Company completed the acquisition of PVM Oil Associates Limited and its subsidiaries (“PVM”), a leadingindependent broker of oil instruments. PVM is focused entirely on Energy products, and has a long history as aninternational crude oil and products broker covering OTC [Over The Counter] swaps, forwards and physicalcrude oil and refined products, and exchange traded instruments including WTI, Brent and Gasoil futures. PVM’scustomers are major oil companies, independent refiners and producers, government agencies, trading houses,banks, investment funds and corporations.

In early January 2015, the Company announced the expansion of its broking activities in North America throughthe acquisition of 40 brokers from Murphy & Durieu, a New York based inter-dealer broker. The 40 new brokershave expertise and access to deep liquidity pools in a wide range of fixed income products including corporatebonds, convertibles, municipal bonds and government securities, allowing the business to provide even strongerand better execution to clients in the US Fixed Income market.

It remains difficult, however, to predict accurately the level of activity in the markets we serve. The benefit of theactions we have taken through the cost improvement programme in 2014 will continue to flow through in 2015.

0

100

200

300

400

500

600

700

800

900

1,000

0

10

20

30

40

50

60

2006 2007 2008 2009 2010 2011 2012 2013 2014

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e

Adj.Earnings (left axis) Dividends (left axis) Revenue (right axis)


5th March - Standard Chartered PLC (Purchase date: 7th July 2014)

“We are a leading international banking group, with more than 86,000 employees and a 150-year historyin some of the world's most dynamic markets. We bank the people and companies driving investment,trade and the creation of wealth across Asia, Africa and the Middle East.” (www.sc.com)


2014 was a tough year, our performance was disappointing and we are acutely aware of the impact of this foryou, our shareholders. We faced a perfect storm: negative sentiment towards emerging markets, a sharp dropin commodity prices, persistent low interest rates and surplus liquidity, low volatility, and a welter of regulatorychallenges. As a result, we saw intense pressure on margins and volumes, a significant up-tick in impairmentand a sharp increase in regulatory related cost. Of course, it was not all about external factors. Some of thedecisions we took in the past look less good now than they did at the time, such as Korea which in 2014 madea loss before tax of $145 million. Not everything we did was as well executed as it should have been.

We have taken a range of actions in response to the way our world has changed. We have overhauled ourstrategy, making it sharper and more focused. We have reconfigured the organisation to align it better with ourstrategic priorities. We have attacked our cost base. We have redeployed capital. We have disposed of, or arein the process of disposing of, 15 underperforming and non-strategic businesses. We have de-risked portfoliosand segments, such as unsecured lending or correspondent banking, and we have stepped up the pace of ourprogramme to raise the bar on conduct. While some of these changes actually made our 2014 performanceworse, since we sacrificed income or increased investment, I am confident that the way we are reshaping theGroup will get us back to a trajectory of profitable, sustainable growth, delivering returns above our cost of capitaland driving the share price.

Our performance priorities are clear. First, we must dispel the concerns about capital, hence the clear target ofachieving a Common Equity Tier 1 (CET1) ratio of 11 to 12 per cent for 2015 and thereafter. Second, we mustimprove returns, hence we are setting a target return on equity of over 10 per cent in the medium term, so thatwe are delivering sustainably above our cost of capital. This will take a bit of time to achieve, not least becausethe actions we are taking to strengthen the CET1 ratio make this more difficult.

We are reshaping the Group to respond to the way our world has changed. We are reshaping the Group to getback to sustainable, profitable growth.

0

200

400

600

800

1,000

1,200

1,400

0

20

40

60

80

100

120

140

2006 2007 2008 2009 2010 2011 2012 2013 2014

P

e

n

c

e

p

e

r

s

h

a

r

e

P

e

n

c

e

p

e

r

s

h

a

r

e

Adj.Earnings (left axis) Dividends (left axis) Net asset value (right axis)

Net Asset Value per share

Up 2%

10 Year avg earnings per share

Up 2%

Dividend per share

Up 5% (unchanged in USD)

Common Equity Tier 1 Ratio

10.5% (min 10%)

Pension Ratio

0.7 (max 10)


Yes


5th March - Admiral Group PLC (Purchase date: 7th November 2013)

“The Company has grown to become one of the UK’s largest and most profitable car insuranceproviders, with over 11% market share. The Group also has operations in Spain, Italy, France and theUSA, and in total insures 3.7 million customers.” (www.admiralgroup.co.uk)

Net Asset Value pershare

Up 10%

10 Year avg earningsper share

Up 12%

Dividend per share

Down 1%

Debt Ratio

0 (defensive max 5)

Pension Ratio

0 (max 10)

Premium to SurplusRatio

1.0 (max 2)

Combined Ratio

88.7% (max 95%)

Does it still pass thebuy tests?

Yes


Admiral Group’s 2014 was the year of the Baked Alaska – hot and cold in a single bite. The cold? For the firsttime since we went public and the first time this century, Admiral Group did not post a record profit. We still madea lot of money and had an enviable, 52% return on equity, but, alas, the 2014 result is being dragged down bycyclicality and everything else, in sum, still required investment. The hot? Profits emerging from some of thosebusinesses outside the UK, including profit from ConTe, our Italian insurance business (in its 6th full year ofoperation) and record profits at Rastreator and LeLynx, our price comparison businesses in Spain and France,respectively.

The number one worry [for the CEO] is always number one on my worry list: irrational competitors. These arecompetitors who either don’t mind if they lose lots of money (perhaps it’s even in their plans) or fool themselvesin believing they won’t lose lots of money (but eventually they do) or don’t realise they are actually losing lots ofmoney (and, again, eventually they do). So they act irrationally and buy business and in the world of carinsurance irrational they may be, but they’re unlikely to pay the price for that irrationality for several years. Sothings can look jolly nice for them for quite a period of time (growth is good, right?). And the rest of the world isleft with a choice: be rational in response, which means you lose a lot of business, or join the ranks of theirrational and sacrifice profits.

That’s the position we found ourselves in, in the UK during 2014 as we tried to slalom our way through thepoorest part of the UK cycle. Our growth in vehicles insured, achieved in the first half of the year, was a modest4%. Our rates went up during the year across all customer segments. As our rates went up, our competitivenessdeclined. However, due to these rate increases, we feel we are in a better place starting 2015.

UK profits in the future are likely to be far more cyclically influenced than before and so for the next few yearsthe Group result is likely to follow this cyclical pattern. Longer term, in our view, there will be less UK cyclicalityin the result as our reliance on the UK car insurance portfolio reduces.

0

50

100

150

200

250

0

20

40

60

80

100

120

2006 2007 2008 2009 2010 2011 2012 2013 2014

P

e

n

c

e

p

e

r

s

h

a

r

e

P

e

n

c

e

p

e

r

s

h

a

r

e

Adj.Earnings (left axis) Dividends (left axis) Net Asset Value (right axis)


10th March - Hill & Smith Holdings PLC (Purchase date: 7th June 2013)

“An international group with leading positions in the design, manufacture and supply of infrastructureproducts and galvanizing services to global markets. […] facilities principally in the UK, France, USA,Thailand, Sweden, India and Australia.” (www.hsholdings.co.uk)

Revenue

Up 2%

10 Year average earnings

Up 10%

Dividend per share

Up 13%

Debt Ratio


Pension Ratio

2.9 (max 10)


Yes


2014 has been another good year for the Group resulting in record revenue generation and profitability.Following a good first half performance, trading conditions in many of our end markets continued to improvethroughout the second half which, together with the implementation of strategic initiatives to increase returns,have delivered strong year on year profit growth. Infrastructure Products performed ahead of our expectationswith both Roads and Utilities increasing year on year profitability. A strong performance from Galvanizing in theUSA and UK more than offset any weakness in France.

In December 2014, the Department for Transport published their long awaited Road Investment Strategy (‘RIS’).Recognising that the UK has suffered from insufficient and inconsistent investment, the transformationalinvestment plan sets out the short and longer term vision for the UK strategic road network. The RIS aims toprovide certainty of road investment funding over the period 2015/16 to 2020/21, improve connectivity andcondition of the existing network and, importantly, increase capacity, with projects that will deliver 1,300additional lane miles. The focus of the drive to add capacity will be additional ‘Smart’, or managed motorways,which is at the core of the Group’s product offering in the UK.

In France […] the marketplace remains very competitive due to over capacity and subdued demand. OurScandinavian business enjoyed another successful year despite adverse movements in exchange ratesimpacting local trading margins on products purchased from the UK. Sales of Zoneguard to local distributors inthe USA demonstrated increased levels of acceptance of our product in key states. Australia started to gainsome traction with a key customer and improved its profitability year on year. In India, the market remainsuncertain following national elections in the first half and performance was below the exceptional first full year ofoperation in 2013.

Overall, although some markets remain challenging, 2015 is again expected to be a year of good growth. Beyond2015, the prospects for our infrastructure and galvanizing businesses are encouraging and we are wellpositioned to continue to deliver sustainable growth and shareholder value.

0

50

100

150

200

250

300

350

400

450

500

0

5

10

15

20

25

30

35

40

45

50

2006 2007 2008 2009 2010 2011 2012 2013 2014

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e



12th March - Morrison (Wm) Supermarkets PLC (Purchase date: 7th May 2013)

“Yorkshire food retailer serving customers across the UK over more than 500 stores, 130 M locals andan online home delivery service. Our business is mainly food & grocery and we source & process mostof the fresh food that we sell though our own manufacturing facilities” (www.morrisons-corporate.com)

Revenue

Down 5%


Up 6%

Dividend per share

Up 5%

Debt Ratio

5.2 (defensive max 5)

Pension Ratio

6.4 (max 10)


No


Consumer confidence has started to recover in recent months. The reduction in oil and energy prices, togetherwith continued low interest rates and real wage increases, could sustain this recovery. However, real disposableincome has some way to go to reach pre-2008 levels, and customers tell us that they are unlikely to return to oldshopping habits in the near term. Shopping around for the best value and shopping more frequently are trendsthat look set to continue. Also, as we lowered prices during last year, deflation has become a feature of our LFL[like-for-like], which is another trend we expect to continue. Unsurprisingly, customers tell us that price remainsthe biggest driver of store choice. While our strategy is broadly correct […], we now believe it is right to increasethe pace of change, especially in our core supermarkets, to build trading momentum. This will be achieved viaa relentless focus on some of the key components of our value proposition.

Customers: All aspects of our strategy will start with the customer. We will work harder to restore the Morrisonsvalue offer and improve all the everyday details of the customer shopping trip. Price: Improving the Morrisonsvalue offer starts with lower prices. We are committed to consistently lowering prices and keeping them low.Promotions: As well as low, consistent and transparent pricing, we are focussing on fewer but more impactfulpromotions. This will help make our business simpler for customers, and cheaper for us to operate.Communication: During 2015/16, our communication to customers will prioritise our low prices, greatpromotions and fresh food strengths. Morrisons: Brand products Morrisons Brand is a big opportunity,especially where we can leverage our manufacturing capabilities.

The investment in our value proposition is being funded by a £1bn three-year self-help programme. This is anambitious plan, however many cost savings are initiatives that other retailers have benefitted from for some time,and will be accessed as we develop our IT infrastructure. We remain confident that, with these opportunitiesahead, we will deliver our £1bn plan.

The 2015/16 dividend will be not less than 5p per share. Beyond 2015/16, the dividend policy will be determinedand communicated as appropriate by the Board and new CEO. Morrisons is committed to generating strongoperational free cash flow. For the medium-term, the priority will be to further reduce the level of debt.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

0

5

10

15

20

25

30

2006 2007 2008 2009 2010 2011 2012 2013 2014

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e



12th March - Serco PLC (Purchase date: 7th May 2014)

“Our strategy is to be a superb provider of public services, by being the best managed business in oursector. We will be a focused B2G (Business to Government) business, specialising across five pillars:Justice & Immigration, Defence, Transport, Citizen Services and Healthcare.” (www.serco.com)

Revenue

Down 8%


Down 62%

Dividend per share

Down 71%

Debt Ratio

N/A (negative 5-year earnings)

Pension Ratio

N/A (negative 5-year earnings)


No


Serco experienced its first revenue decline in 25 years as a listed company, and profitability reducedsignificantly. The challenges have been numerous: we have had to increase costs to improve service deliveryon some already poorly-performing contracts; other contracts with higher-than-average margins saw reducedvolumes or were lost on re-bid; and we have won less new work. We have also had to take into account largeimpairments and onerous contract provisions established to cover future years of losses on certain contracts,and as a consequence the overall reported result for the year is a very large loss.

A strong balance sheet with a prudent level of financial gearing is an absolute necessity if we are to retaincustomers’ confidence and be able to execute a strategy that will allow Serco to deliver attractive levels of growthand returns in the future. To that end, we have launched today a fully underwritten equity rights issue to raiseapproximately £555m, the net proceeds of which will be used primarily to reduce the Group's indebtedness.

Over the last nine months we have, as promised, developed a new strategy, which is to focus on the public sectormarket and be a leading public service provider. Specifically, we intend to focus on five ‘pillars’, or marketsectors: Justice & Immigration, Defence, Transport, Citizen Services and Healthcare; and across fourgeographies: UK & Europe, North America, Middle East and Australia/New Zealand. We believe our chosenmarkets have compelling long-term structural growth drivers and that Serco can play a central role in helpinggovernments respond to the challenge of improving the quality and reducing the cost of public services, whilstearning for our shareholders sustainable and attractive risk-adjusted returns. We will get somewhat smaller andmore focused on businesses we are really good at, where we can deliver outstanding service and where ourskills, experience and international reach can differentiate us. While it will be a tough two or three years oftransition, this is necessary to become the successful, profitable and growing company that Serco rightly aspiresto be.

The Board is not recommending the payment of a final dividend for the 2014 financial year. The Board iscommitted to resuming dividend payments and a progressive dividend policy when it is prudent to do so. It is notanticipated that the Board will recommend any dividend in respect of the 2015 financial year.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0

5

10

15

20

25

30

35

40

2006 2007 2008 2009 2010 2011 2012 2013 2014

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e



25th March - Balfour Beatty PLC (Purchase date: 9th August 2011)

“For more than 100 years we have created and cared for the vital assets that enable societies andeconomies to grow: road and rail; airports, seaports, tunnels and bridges; health and educationfacilities; heat, light, power and water; places to live and places to work” (www.balfourbeatty.com)

Revenue

Up 2%


Down 12%

Dividend per share

Down 60%

Debt Ratio


Pension Ratio

23.2 (max 10)


No


Balfour Beatty’s underlying performance has been declining since 2010, with the sharpest and most noticeabledecline occurring over the last 12 months. This has been caused not only by the significant operational issuesimpacting Construction Services UK over the last two years, but also because the cost base of the Group is toohigh and there have been significant working capital outflows since 2009. This trajectory has made it imperativeto identify and address the key issues rapidly, in order to begin at once to restore the Group to strength.

Over the last few months, independent reviews have been underway on operations that account for 70% of theGroup by turnover and the remainder should be underway by the end of the summer. Already it is clear from theoutputs – as well as from wide-ranging discussions with senior operational leaders – that the root cause lies inthe Group’s rapid fourfold revenue expansion since 2000, largely by acquisitions which were insufficientlyintegrated. This resulted in an overly complex, devolved organisation with poor controls and weak disciplines incost control and project bidding. Following a major industry downturn, the UK construction business wasextensively restructured in successive waves and began to exhibit serious project issues which, together withother factors, resulted in substantial operating losses for the Group.

The Group retains many core strengths: a strong brand and reputation underpinned by market-leading andinnovative engineering capability, deep customer relationships […] and the commitment of a talented anddedicated workforce. The business model also balances Construction Services and Support Services with asuccessful Investments business which will continue to create significant value.

In mid-February 2015 the Group launched its “Build to Last” programme. This is designed to address the Group’sperformance as it affects all stakeholders […] by driving continuous measurable improvement. The initial phaseof Build to Last specifically aims within 24 months to improve operating cash flow by £200 million and achieve£100 million of overhead and procurement cost savings, against 2014 levels

The Board decided not to recommend a final dividend, to ensure balance sheet strength is maintained, butexpects to reinstate the dividend at an appropriate level, by March 2016

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013 2014

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e


“Our business finances, develops, manages and maintains essential assets, including buildings andinfrastructure by integrating local supply chains.” (www.balfourbeatty.com)

OverviewBalfour Beatty is involved in the full lifecycle of infrastructure assets such as roads, bridges and buildings,

from financing to design, construction and maintenance. It operates primarily in the UK and US and has been

in business for more than a century.

When I added Balfour to the model portfolio it was still performing well. However, it was facing some

headwinds in the UK and US infrastructure markets due to recession-like conditions and government

spending cuts in both economies. I thought the company stood a reasonable chance of getting through this

period without major problems, and for a couple of years that was true. Eventually though the company

became more risky and existing risks, which I hadn’t spotted, began to have a serious impact.

In the latest annual results announced this month the new CEO suspended the dividend for two payments,

although it could turn out to be longer. No rights issue has been announced yet but the company’s fortunes

have taken a serious turn for the worse, as has its ranking on the stock screen. Rather than wait for a potential

turnaround at some point in the future I have decided to sell Balfour now, extract any relevant lessons and

apply them to future investments.

Selling: Balfour Beatty PLC (BBY)

Maintaining your portfolio: As companies grow (or shrink) and as their share prices go up (or down) the features and relative

attractiveness of the investment change. If a company’s share price increases faster than its earnings or dividends, or if a company

falls into long-term decline, it may be time to sell and replace it with something that appears to offer better value for money.

Purchase price and date

254p on 09/08/11

Current price

240p on 01/04/15

Holding period

3 Year 8 months

Capital gain (net of fees)

-6.3%

Dividend income

18.6%

Annualised rate of return

3.5% per year

The impact of the financial crisis is clearly visible in the company’s post-2007 earnings. However, the general

upward trend was maintained with both revenues and dividends apparently unaffected by the recession.

So given that positive picture I added 950 shares to the model portfolio on August 9th 2011 at a price of 254p

per share. That came to £2,434 after stamp duty and fees, which was 5.1% of the portfolio (the portfolio was

worth just £47,280 at the time). 5.1% is a much bigger allocation than I would use today and that’s because

in 2011 I was targeting 20 holdings rather than 30. Eventually, in early 2012 if I recall correctly, I changed from

20 holdings to 30 to diversify the portfolio further in order to reduce risk.

Holding: A bumpy and ultimately disappointing three years

For the first year or so Balfour continued to perform well against a difficult economic environment. But by

the third quarter of 2012 things began to change. The company announced that profitability would be below

previous expectations and that its construction services unit would face a tough 2013. The shares dropped

by about 20%, although they soon recovered most of that.

2013 continued that less positive trend. In the 2012 annual results, published in March 2013, the CEO spoke

mostly of resilience in tough times and of growth when the recovery came, but revenues and profits declined.

The full-year dividend was still increased by 2% despite those declines. In April 2013 the company announced

that it was launching an immediate action plan in the face of increasing weakness in UK construction, and

further negative announcements were made during the rest of the year.

In 2014 things just got worse. The 2013 annual results were very bad, with underlying profits down by around

30%. This time it was a combination of poor results from both the professional services and construction

services businesses, with the key problem continuing to be the decline of the UK construction market. As is

often the case when companies run into significant problems, Balfour turned primarily to cost cutting,

disposal of underperforming and non-core businesses, and internal restructuring and refocusing in order to

turn the situation around.

Buying: An established business with a solid track record

In 2011 Balfour appeared to be having an impressive run of success. It had a Growth Rate over 10 years of

12.1% and had increased the dividend in every one of those years. It didn’t have a great deal of debt (just

£44m of operational borrowings, which gave it a Debt Ratio of 0.3) and it had about half of its business

operating on either side of the Atlantic, which seemed to give it some degree of protection from declines in

either the US or UK markets.

Here are Balfour Beatty’s financial results up to the 2010 annual report, which was the latest at the time:

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

5

10

15

20

25

30

35

40

45

2002 2003 2004 2005 2006 2007 2008 2009 2010

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e

Balfour Beatty Financial Results to 2010


In its 2014 Q1 statement the company announced the CEO’s departure and the possible sale of Parsons

Brinkerhoff (a professional services consultancy focused on infrastructure), which had only recently been

acquired in 2009 for £382m. Parsons was eventually sold in September 2014 for £812m and up to £200m of

that was earmarked for a shareholder return. At the half-year results the story was the same with the

dividend held fast and profits down by more than 50%. By this point the construction services business was

solidly loss-making, losing almost £70m at the operating level in the first 6 months of the year. In September

the dividend was put under “review” and the Chairman stated his intention to leave once a new CEO had

been found. All in all 2014 was a very bad year.

In 2015 the company found a new CEO (Leo Quinn, previously at QinetiQ) who immediately launched a new

transformation program with the goal of reducing costs by £100m and improving cash generation by £200m

over 2 years. At this point the dividend was suspended for two payments, with the expectation that it will be

reinstated in March 2016. Here are Balfour’s most recent results:

All in all then Balfour Beatty was not a great investment. I realise that some problems are inevitable and that

my investment strategy is primarily a value investment strategy, albeit a defensive value strategy. So buying

companies with minor problems is almost a prerequisite for buying them at attractive prices. But Balfour’s

problems are far more than minor. So my question is:

Was there anything that could have been done to avoid this situation, without being so cautious as to miss

out on other potentially attractive opportunities?

Learning the right lessons: Acquisitions, pensions and debts

Since 2011 I have introduced many improvements to the investment strategy with the goal of increasing

returns and reducing risk. This includes things like lowering the amount of debt that is acceptable, looking at

the size of a company’s defined benefit pension obligations, asking questions about how focused the

company is, how cyclical it is, whether it depends on large contracts, how much is spends on capex, how

much it has spent on acquisitions and what sort of competitive advantages it might have.

In relation to Balfour, several of these new checks would have made me more cautious about investing, but

one in particular would have ruled it out from the start.

Lesson 1. Be wary of companies that need to repeatedly replace large contracts

This was a lesson I learned recently after Serco ran into serious trouble; it is already part of the new company

analysis checklist. Companies that need to repeatedly replace large projects or contracts carry a lot of risk

from either not replacing the contract (which of course would reduce revenues and profits, sometimes

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

5

10

15

20

25

30

35

40

45

2006 2007 2008 2009 2010 2011 2012 2013 2014

£

M

i

l

l

i

o

n

s

P

e

n

c

e

p

e

r

s

h

a

r

e

Balfour Beatty Financial Results to 2014


dramatically) or bidding too low in order to win a new contract. If a contract is won at too low a price it can

lock the company into wafer thin profits or even losses over a multi-year period. This has definitely effected

Balfour’s UK construction services business. I’m not totally against investing in these sorts of companies but

they should have very low levels of debt; perhaps a Debt Ratio of just 3 rather than the standard 4 for cyclical

sector companies. While debt wasn’t initially a problem for Balfour, it did increase its operational borrowings

every year to a high in 2013 of more than £600m (a Debt Ratio of 3.7), which probably was too high.

Lesson 2. Be wary of companies that make lots of large acquisitions

This is another new check that was added to the company analysis checklist in January 2015 and it would have

provided another warning flag against Balfour. My rule of thumb is that if a company spends more on

acquisitions in a year than it made in post-tax profits, then that is a “large” acquisition expenditure. The more

large acquisitions there are, the more cautious you should be. In Balfour’s case it made large acquisitions in

the 2007, 2008 and 2009 financial years. In total it spent some £800m on acquisitions in those years while

only making adjusted post-tax profits of £430m. The problem with acquisitions is that they usually have to be

integrated, and the bigger they are the more disruptive they can be. The new CEO has highlighted these

acquisitions as a major cause of the company’s current problems. Although they wouldn’t necessarily have

ruled Balfour out as an investment, they would have made it more likely.

Lesson 3. Be wary of companies with large defined benefit pension obligations

Oddly enough this isn’t something that gets talked about much, but I think it has been instrumental in

exacerbating Balfour’s other problems. The rule which I brought in a couple of years ago was that a company

should have defined benefit pension obligations of no more than 10 times its Earnings Power (5-year average

earnings), i.e. a Pension Ratio of less than 10. I focus on the pension obligations rather than whether or not

the plan is in surplus or deficit because a surplus can quickly become a deficit, so a pension surplus is not a

guarantee of safety. Limiting the size of the overall obligations limits the maximum size of any deficit and any

associated deficit funding requirements.

In Balfours case it had pension obligations of £2,795m as at the 2010 annual results compared to 5-year

average earnings of £139m. That gave the company a Pension Ratio of 20 which is, quite frankly, massive.

How does this impact the company? It means the company is at risk of running a huge pension deficit which

the company will have a legal obligation to reduce, by any means necessary. In 2010 Balfour’s pension plans

had a deficit of £440m, more than three times its average earnings. That year it had to pay £81m into the

pension fund to close the gap, only slightly less than the £84 million paid out to shareholders as a dividend.

Over the last 10 years Balfour has paid more than £500m into the pension fund and yet it still runs a deficit

and the obligations just keep growing (they currently stand at £3,518m). With the dividend now suspended

and £85m of the £200m windfall from Parsons Brinkerhoff going into the pension fund, it seems to me that

Balfour is a company run primarily in the interests of its enormous pension scheme rather than its

shareholders. That is entirely as it should be given the company’s legal obligations to the fund’s beneficiaries,

but it does illustrate the reasons why I introduced the Pension Ratio in the first place.

Selling: Losses, suspended dividends and a potentially difficult turnaround ahead

The turnaround is expected to take at least a couple of years, although of course how well it goes and what

happens to the share price in that time is anybody’s guess. However, given the resilience of the share price

in the face of this bad news I will be taking this opportunity to offload Balfour and search instead for a less

risky and less financially obligated company. As usual I will sell the entire holding a few days after this issue

is published.

IMPORTANT NOTICE: This analysis is for information only. It is an example of how one investor applies a checklist approachto analysing a company and it should not be construed as investment advice and should not be relied upon in isolation beforeinvesting. You should always perform your own analysis and factual verification before making investment decisions. If youneed advice you should seek a financial advisor. See the important notes on the last page.

Holdings with a lower stock screen rank Reason for not selling

None There were no holdings with a lower stock screen rank than Balfour Beatty

Questions and Answers

Readers ask questions on a range of topics every month. Here are the most interesting and/or frequent:

Q: Why are some companies that I’m interested in missing from the stock screen?

A: Not every company listed on the London Stock Exchange makes it into the stock screen. It uses the

following filter before ranking the remaining stocks.

Only include stocks that:

! Are part of the FTSE All-Share index (i.e. not AIM and not FTSE Fledgling)

! Have a non-zero dividend in every one of the last 10 years (i.e. paid a dividend every year)

! Have a 10-year dividend cover of more than 1 (i.e. 10-year total profits more than total dividends)

! Are a “normal” trading business rather than an investment trust (either equity or real estate)

Defensive Sectors

! Aerospace & Defense

! Beverages

! Electricity

! Fixed Line Telecommunications

! Food & Drug Retailers

! Food Producers Gas

! Water & Multi-utilities

! General Retailers

! Health Care Equipment & Services

! Mobile Telecommunications

! Non-life Insurance

! Personal Goods

! Pharmaceuticals & Biotechnology

! Tobacco

Cyclical Sectors

! Automobiles & Parts

! Banks

! Chemicals

! Construction & Materials

! Electronic & Electrical Equipment

! Financial Services

! Forestry & Paper

! General Industrials

! Household Goods & Home Construction

! Industrial Engineering

! Industrial Metals & Mining

! Industrial Transportation

! Leisure Goods

! Life Insurance

! Media

! Mining

! Oil & Gas Producers

! Oil Equipment, Services & Distribution

! Real Estate Investment & Services

! Software & Computer Services

! Support Services

! Technology Hardware & Equipment

! Travel & Leisure

Defensive and Cyclical sectors

The model portfolio aims to be at least 50% invested in defensive FTSE Sectors as defined in the Capita

Dividend Monitor. The definitions are repeated here in case you want to follow a similar policy:

��

��

��

��

��

��

��

��

��

!"��#��

��

��

��$%�

��

� &��"'��(� &�) *+�� ,��%"�� -�./0� �1/2 3/14 5�/2 �0/04 254 .14 �/� -512

5 ��,��(�� *� *+��5.� #��6"�'��7��%�8��%��"�� -2/.0 �9/3 1/14 �1/� 55/54 :04 524 0/. -0�3

0 )�+��"'��(� )+# *+��5.� �"''��% -5/93 ��/5 1/�4 �./9 ��/54 234 �04 0/1 -99

1 ��"'�;��$%��(� �� *+��5.� *��% -9/�2 �9/3 1/�4 5./3 �:/24 234 534 �/� -�05

.

��

��

��

��

��

��

��

��

��

!"��#��

��

��

��$%�

��

:5 ��'��(� ��() *+��5.� �"''��% -:/�5 5./� 5/�4 1�/9 �./34 254 �14 �/� -52

:0 ��%��"'��(� �)�� *+�� "%��% -��/�: �0/2 0/34 �./0 ./.4 394 ��4 5/2 -010

:1 ��"'��(� >�� *+��5.� ��%��"��8�)��% -�./:: �:/5 1/.4 �./2 5/�4 304 �14 9/0 -11

��: (�$��8��"'��(� (�� *+�� (�,��%"�� -5/92 �./: 1/�4 50/1 ��/94 .:4 �34 �=> -:1:

��2 >�#)��"'��(� >�#) ��' *��(��+��"��% -�/2� �5/0 ./14 �./0 ./34 .14 �04 5/1 -0.

�5� ��"'��(� �� *+��5.� ��%7�?��8�)"��"��% -:/53 5�/1 0/94 51/3 9/04 ::4 14 5�/� -�1�

�5� ��"'��(� �� *+��5.� �"''��% -�/0: �/� 5/54 �1/� 1/24 9.4 :4 99/2 -��

�55 ��$��(� ��& ��' ��8��6"�'�� -9/.3 5�/9 5/�4 00/: �9/�4 :04 �54 �/9 -��

�50 ��$$%��(� �� *+��5.� *��8��"$��% -��/55 5�/9 5/54 52/� ./.4 :04 �:4 �/� -02

�51 ;� *+�� "��%�8�

��

��

��

��

��

��

��

��

��

!"��#��

��

��

��$%�

��

�30 &��(� &C/ *+�� (�,��%"�� -./1� ��/: 0/14 �5/. 3/14 134 24 �=> -�7�15

�31 ��%��(� ��C� *+��5.� *��% -./3� �3/� 0/14 �0/: �/:4 394 94 �0�/2 -0�9

�3. )��%��"%��%��(� )�# *+��5.� ��"%��$��$ -5/9: 5./. 5/24 0./1 �1/24 9.4 14 0/� -��0

�33 *+�� 37:2� �./3 0/.4 �1/1 �/24 .14 ��4

�39 ��* *+�� % -0/:� �5/9 5/34 �2/9 ./14 394 34 �/3 -.91

�2� (��"'��(� (C� ��' �"''��% -�/32 ��/2 5/94 2/� 3/54 394 .4 ./: -�2

�2� � ��' �"''��% -�/�3 �3/2 0/04 �./5 �/�4 304 04 �3/0 -5.

�2: ��,��+��(� �*�� *+��5.� ;�"%��%�8�;��%��"�� -�1/5. �3/5 0/94 55/9 1/�4 9�4 :4 0/1 -10

�22 ��%��(� �C� *+��5.� ��%��%��8��% -:/�5 �1/5 �/14 51/3 5/.4 9�4 �04 �/5 -1�

5�� "%��(� �� *+��5.� ��"��%�8� -.2�

5�� %��(� ��#� *+�� )�� -�1/.� 0�/� 0/.4 59/: 0/94 9�4 .4 1/2 -1.0

5�� )��"��8��'��;��%��(� )(� *+��5.� +��8�(��%"�� -./91 �3/2 5/14 �1/. 3/�4 .14 14 5/� -�35

5�5 �&

��

��

��

��

��

��

!��"��

��

!��"��

#$��%��

��

��

��&'�

��"��

�() *��+��!��$+��,� -%.� ��+ �� /� 01 2*0 20 3 **04 40 3 513 �13 0 /)

5� ��''��&��,� �� -6�� -��' /*04 �50� 1073 1202 �70 3 513 73 0 /2*�

� ��!��$+��,� �� -6�� 8��'$�� /�)01 �*07 40*3 2 07 �1013 723 )*3 0 /2*7

1) �&&��,� �!9 -6�� $++��' /�)02( �507 �053 2204 �(0(3 553 �43 202 /215

�2 ��-�'��:��,� ��-: -6��2) %��;$�+��&'��,� ?�: -6��2) -��' /10�� 70) 1023 250� 1013 413 �*3 0 /27

�1 ?��'��6��,� ?�6� -6�� 6�� /1*055 �(05 *023 2�0� 70(3 553 �(3 102 /1��,� ��> -6�� '��$��=��' /�(0) 2101 2053 �507 *0�3 )53 *3 704 /*(7

44 ��,� �� -6��2) ��' /2(017 2�05 20*3 110� �(053 513 �(3 �0* /�42

21 ��G��>��&'��,� �H�� -6��2) ��'��'��=��' /)70 ) (02 �0*3 240) )023 4(3 *3 *0 /(1

�)4 ��'��!��$+��,� ��! -6��2) -��$��' /*0*1 �)0( *053 �20 �0)3 )53 (3 *0( /**

�*� ��,� ��6� ��+ !��' / 04) 2 0* *0)3 404 �50�3 113 73 40 /14

�)( ��,� �� -6��2) �$++��' /* 021 220* �073 120� ��043 (73 53 50 /�1

2* ��,��$��,� �,�� -6��2) �$++��' /)0)) 504 (043 ��01 40 3 )53 173 20( /)*

221 ��$��'��,� ��> -6��2) ��$��'�=�?��& /� 0 ( *�0) �0)3 )701 2073 553 73 202 /�)

75 ��,� �C% ��+ -��$��' /2054 2*0* 10�3 2 05 ��0 3 4(3 ��3 �01 /12

)( ��&��,� �!� -6�� ?��&�' /�50)7 �)07 2053 2*0( (073 553 �*3 *01 /2

��

��

��

��

��

��

!��"��

��

!��"��

#$��%��

��

��

��&'�

��"��

�(1 �''��,� ��6 -6��2) �$++��' /707* 2(0) �053 *104 ��0*3 (73 ��3 40� /4*

�15 �$��'��$��'��,� �� -6��2) �� /��02 �70 20�3 240 )0)3 ()3 �(3 0( /4)

� -��,� -�� + ��$'��&��& /20 2 (0* )073 � 0� � 073 (73 53 *04 /*(

7� -��''��!��$+��,� -�� -6��2) ��8�"��=��+$��' /220 4 270( �0(3 140 �2013 513 �(3 0 /27

� 1 -�'��AH��'B�=��'��,� -�H -6��2) ��$'��6��'+�� /�10 7 �)0� �0(3 2(0( �10 3 � 3 53 20( /1

�44 -6�� 4�$'��!��'�=�>��'��$�� /�*02) �402 10(3 220( *0 3 (�3 53 10* /*1

2 !�$'��,� !�� -6��2) ��$��'�=�?��& /�1047 240( �013 170 � 0�3 723 )3 10) /2)

4� !��9��,� !�9 -6�� $��'�=�?��& /�)0*4 2�07 )023 �407 �043 (�3 �53 *04 /*< )�

�*4 !��!��$+�A6��B��,� !%! -6��2) 6��=�,��'$�� /2101 �40) 1043 �402 2013 )53 �23 )07 /))

25 !��"��,� !�:� ��+ ��$'��&��& /2�0)4 501 20 3 �(07 �1053 513 �53 07 /��

21� !��!��$+��,� !�� -6��2) -��$��' /1022 �(01 �0(3 2704 �013 413 43 *0) /)�

�* !��9�&��,� !�9 -6��2) 6��=�,��'$�� /5014 �10* 10*3 �)0( *023 (73 *3 �*0* /��)

�21 !��&&'��,� !�! -6��2) -��=��$&��' /� 022 2�0( 2023 270 )0)3 513 �53 0 /17

)5 >��8��'�!��$+��,� >-� -6��2) !��' /*04� �404 10�3 �*0* 10�3 (�3 �)3 �0) /(2

��) >��,� >,�� -6��2) ��=��;$�+�� /4077 2*0( �043 * 0 7073 � 3 �)3 �01 /52

�)7 >�'��,� >�� -6��2) �$++��' /�0)1 2*05 �0(3 2�02 1053 )53 223 �0) /(2

21* >��?��,� >,�, ��+ ��'��'��=��' /107* )0* �0(3 220 �0(3 )53 23 �(04 /2�

222 >��'��!��$+��,� >!! -6��2) -��' /205� ��(04 1023 1507 *0�3 4(3 � 3 202 /47

�)� >��$��'��,� >�9 -6�� $��'�=�?��& /2�01 2207 043 ))0) 2�0(3 553 73 10� /5)

(1 >��=��>��&'��,� >�,� ��+ ��$'��&��& /405) �)0) 2043 2 02 (0)3 553 � 3 10) /1

*4 >�'��,�� >�I -6��2) ��8��'$�� /50)� �201 2043 �401 70*3 ()3 �*3 �D9 /�4(

*) >��'��,� >�C -6��2) �$++��' /1051 2�04 10 3 2 05 5043 (73 �53 �07 /(�

�2* >�?��>��&'��,� >�?� -6�� ?��' /)0(* �205 )0*3 ��04 �0*3 4(3 73 �D� /7$��&��,� >6! -6��2) %��;$�+��$�'"��,� >�6 ��+ �� / 0*1 (0) 50�3 404 *013 )53 )3 201 /�(

77 ��,� �� -6��2) -��' /)02( �50 *023 �50) 4053 413 �23 105 /2 5

* �!�!��$+�>��&'��,� �!! -6��2) -��' /(0 7 �(04 *0 3 2)04 �5073 743 243 0 /�12

4 ��,� �� -6��2) ��$'��&��& /�20() �(05 2073 220* 40 3 513 �(3 �02 /2�

2) ��+��6��!��$+��,� ��6 -6�� 6�� /27041 40 *013 �401 �1053 ()3 � 3 )01 /��'�!��$+��,� �>! -6�� 6��=�,��'$�� /2401* 2705 �053 1202 40 3 (�3 �73 *05 /22(

() ��+��!��$+��,� �� -6��2) -��' /)0 1 �*0� *023 ��0* *0�3 (�3 �13 )04 /�17

7( ��'��,� ��C -6��2) �$++��' /)05 ��07 *0 3 �(0* *043 (73 53 10 /*

)1 ��!��$+��,� �6�9 -6�� $++��' /2*075 �707 20 3 2504 �4053 723 �*3 *02 /�(4

�4* ��'��,� ��C� -6��2) -��' /)04� �40 10*3 �105 053 4(3 (3 �1�07 /1�(

( �6��!��$+��,� �6� ��+ �� /�05 ��01 *0�3 �)0( 7013 513 273 �01 /12

11 H��,��6��+'��!��$+��,� H,6 -6��2) ��8��'$�� /� 0*( �(07 2053 2)01 � 0�3 553 �43 �D9 /��*

2( H��+��'�-�'��,� H�0 -6��2) !��' /*05 �402 �0*3 2207 �5023 723 2*3 04 /)*

�)* H��'��,� H��6 -6�� ' /11054 2 0( �053 1 0* � 0*3 (73 � 3 10) /2(*

��7 9�%��!��$+��,� 9�%� ��+ -��,��6��$��' / 07� �201 )0*3 �)01 )043 )*3 �13 20* /1)

�1* 9��!��$+��,� 9,� -6��2) ��'��$��=��' /70*5 �20� 20(3 �104 �043 ()3 73 )02 /14

��( 9��!��$+��,� 9�� -6��2) ��'��$��=��' /�)055 �502 *0)3 �)07 20 3 413 �*3 (01 /**

�57 9�&8�'��,� 9!- -6�� !��' /105� �20( 2043 �70( )0*3 4(3 43 04 /)(*

)) ,��'��,� ,�� -6��2) 6��=�,��'$�� /�0 * 50( 5043 *0* *073 ) 3 2�3 20 /2 7

�71 ,��,� ,�� -6��2) 6��&�>��"��=��;$�+�� /1014 �40) 10(3 2)02 0)3 (73 )3 40( /1*

�7 ,��!��$+��,� ,C� ��+ �$++��' /�047 ��07 20(3 70� 4023 4(3 )3 )05 /�7

��5 ,�&��=�!��!��$+��,� ,!�� -6�� ,�8��'$�� /20(7 �)05 *0 3 210* � 0(3 )53 �43 �D9 /5*5

�54 ,�"�=�?��,� ,:? ��+ ��'��$��=��' / 0)5 �10* *0(3 ��0( 013 )*3 *3 (0� /�4

�*1 ��!��$+��,� ��! -6��2) -��' /20 * �*01 10�3 � 01 �*0 3 ) 3 � 3 0) /�7(

�)5 ��&��'$��&�!��$+��,� �� + �$++��' / 0�4 2�04 )0�3 *0� 50*3 *23 43 *0 /�1

�1( ��'�=��+��!��$+��,� �9� -6�� !��' /)01) �(0( 1023 �)01 0*3 4(3 ��3 107 /)**

21) ��'��'��,� ��,> ��+ ��'��$��=��' /20(5 240 2023 2704 (0)3 *43 *3 *07 /��

�*5 ��'��F'��,� �� -6��2) 6��=�,��'$�� /�0)2 (0 *0*3 70( 0(3 4(3 13 �40� /5)

* ��'�!��$+��,� �� + �$++��' /*02* �(01 20*3 2�01 �2013 723 ��3 107 /2�

�(2 ��&&��,� �!!6 -6�� '+��=��8�'� /)0*7 220* 20)3 2*0� 7013 (�3 43 101 /2 5

�4) ��'��$'��'��,� ��% -6��2) ��$'��&��& /20(5 2)0) 2073 1)0* �*073 ()3 *3 10 /��1

24 ��E��'�AH��B��,� ��@� ��+ �$++��' /10() � 0� *013 501 *0(3 (�3 �13 *0� /1*

2 2 ��&��,� �� -6��2) �$++��' /)022 2(02 20�3 270) 043 4(3 2*3 0 /**

� ) ��-��$'��,� ��% -6��2) ��8�"��=��+$��' /��05� 2*0� �043 1701 21013 ()3 **3 20* /(1

2�� $��=��+��>��'��,� �,� -6��2) 6��=�,��'$�� /)0(* �407 20*3 �*0) 40 3 )*3 *3 20� /�42

1 ��6��!��$+��,� �6% -6��2) �$++��' /20(4 ��02 *0 3 �)0( ��023 743 �13 10* /((

1 ��&��'��,� �!�� -6��2) ��=��;$�+�� /10* �0) 1023 (0( ��013 (�3 73 *0� /4*

�1 ��&��,� �!�� + ��'��$��=��' /(054 2 0� 10*3 ��02 )0)3 *43 �*3 �0) /2*

�7 ��'��A:�B��$+��'��,� ��: -6�� -��=��$&��' /�071 �(0( (0�3 ��0 (0)3 513 (3 )02 /*5(

224 ��$��"��'��'��,� �6C: ��+ ��'��'��=��' /� 20) �*0 20 3 �70� 053 )53 (3 10( /2�

� ��!��,� �!0 -6�� !�'

��

��

��

��

��

��

!��"��

��

!��"��

#$��%��

��

��

��&'�

��"��

71 ��-��,� �-, -6��2) �$++��' /�05) �10 )043 �10� 2043 *23 �13 104 /)5

�14 ��-��,� �-! -6��2) -��' /24071 2�0 1043 1�0� � 0(3 ()3 73 704 /�))

��1 ��$��,� ��. -6�� ,�8��'$�� /�40(2 �507 2023 270* � 0(3 ()3 �53 �D9 /��$'��!��'�=�>��'��$�� /)50 2)02 20*3 270( ��0)3 553 2�3 �0) /��;$�+��=��' /��0** 2*02 �043 2704 � 0*3 513 �43 20( /* �

51 ��'�!��$+��,� �� -6�� !��$'��' /��0�5 �107 1043 �)01 )0)3 4(3 ��3 207 /1*1

� ( �+��'��,� �I� -6��2) ��=��;$�+�� /2�04 �50( 2023 240* ��0 3 (73 �13 �01 /�22

2 ) �+��>��,� �� + �$++��' / 0(� �1*0 073 ��0) 2*0 3 413 �3 (401 /�

(* �+��&��&��,� ��I -6��2) ��$'��&��& /1*0� 2)0* �073 1205 � 0 3 743 �(3 07 /74

21 ��,� �� -6�� /�*075 �)0) )053 �40) 50�3 513 � 3 )01 /�� + �$++��' /10*5 2201 �0*3 210 0)3 )53 2*3 �0* /�(

�(* ��&�>��,� �� -6��2) >��;$�+��=��' /2102) 1(01 �0 3 )(05 �*023 743 )3 401 /27

�(( 6��'$'��,� 6�� + �� /202* 1�0( 10)3 2�07 *0(3 )53 � 3 *04 /7

��4 6��=�,��,� 6�6� -6��2) -��$��' /)07( ��0 *043 �10� 10*3 413 � 3 102 /2*4

54 6��?��,� 6�� -6��2) ��'��!��' /2)0 2707 �043 )202 �10)3 723 213 �0( /22

�( 6��+�$'��,� 6�� -6��2) -��,��6��$��' /50( 2�07 *0 3 140* 2*0)3 723 143 *01 /21

�4 6�'��,� 6��% -6�� -��=��$&��' /20*2 504 40�3 507 (0 3 (73 73 *0) /2

Appendix 1: Metrics, maximums and minimumsFinancial metrics on the stock screen

Rank: The company’s rank on the screen, with 1 being the highest rank. The rank is calculated by sorting all of the

companies on the screen by each key factor (Growth, Quality, PE10, PD10, ROCE), creating a rank for each factor and

then adding those individual ranks together.

PE: The price to earnings ratio. This is included just for information and doesn’t form part of the ranking calculation.

Yield: The historic dividend yield. This is included for information only and doesn’t form part of the ranking

calculation. Instead, each company’s rank is based on PD10, the ratio between the current share price and the

average dividend paid over the past 10 years.

PE10: The ratio between the current share price and the company’s average adjusted earnings per share over the

past 10 years. This is used in the rank calculation. (MAXIMUM = 30)

Growth: The company’s Growth Rate. This is used in the rank calculation. It is the average growth of revenues,

earnings and dividends where growth in each is measured as the annualised growth of a 3-year rolling average over

the past 7 years. (MINIMUM = 2%)

Quality: The company’s Growth Quality. This is used in the rank calculation. It is the percentage of times that a profit

has been made, and that revenues, earnings and dividends have increased, measured over the past decade.

(MINIMUM 50%)

ROCE: The company’s median “net” Return on Capital Employed over the last decade. (MINIMUM 7%). Calculated as:

Adjusted profit after tax / (fixed assets + working capital), for non-financial companies

Adjusted profit after tax / shareholder’s equity, for financial companies (banks and insurance companies)

Debt: Debt Ratio – The ratio between a company’s total borrowings (total interest bearing debt) and its Current

Earnings Power (CEP). Provides a rough guide to a company’s ability to carry its debts in good times and bad. This is

“N/A” (not applicable) for banks (where I use a series of ratios defined by banking regulators: Common Equity Tier 1

Ratio for leverage and the Liquidity Coverage Ratio and Net Stable Funding Ratio for liquidity). For insurance

companies the Debt Ratio is “N/K” (not known) as I do not have data on borrowings for insurance companies.

(MAXIMUM = 4 for cyclical sector companies, 5 for defensive sector companies)

Earnings Power: Current Earnings Power (£m). Calculated as 5-year average adjusted profit after tax. Used in the

Debt Ratio and Pension Liability Ratio when reviewing companies for the model portfolio.

Financial metrics used to analyse companies but which are not on the stock screen

Pension Ratio: The ratio between the company’s defined benefit pension liabilities and its Current Earnings Power.

(MAXIMUM = 10)

FCF/Div: 10-yr total free cash flow to 10-year total dividend ratio. Preferred value is above 1, but this is not a hard

rule.

Capex/earnings: 10-yr total capital expenditure to 10-yr total adjusted earnings (post-tax profit) ratio. No hard rule

but below 0.5 is defined as LOW, 0.5 to 1 is MEDIUM, above 1 is HIGH.

Insurance company metrics

Premium to Surplus Ratio: A measure of how cautious an insurance company’s underwriting business is. Calculated

as the ratio between Net Written Premium and Tangible Net Asset Value. (MAXIMUM = 2)

Allocation to Equities: A measure of how cautious an insurance company’s investments are. Calculated as the

percentage of investment assets allocated to equities. (MAXIMUM = 10%)

Combined Ratio: Shows whether or not an insurance company is making a profit on its underwriting business.

Calculated as the sum of Loss Ratio and Expense Ratio. (MAXIMUM = 99%)

Bank metrics

Common Equity Tier 1 Ratio (CET1): A measure of bank leverage. Calculated as the percentage of “high quality”

capital relative to risk-adjusted assets. (MINIMUM 10%)

Liquidity Coverage Ratio (LCR): A measure of bank liquidity. Calculated as the ratio of “high quality” liquid assets

relative to expected net liquidity outflows (i.e. cash outflows) over a 30-day period. (MINIMUM = 100%)

Net Stable Funding Ratio (NSFR): A measure of bank funding stability. Calculated as the ratio between sources of

stable funding and items requiring stable funding. (MINIMUM = 100%)

Appendix 2: Strategy overview and stock screen colour-coding

Portfolio managementDeliberate diversification - To reduce the risks that come with each individual company it is generally considered a

good idea to hold a widely diversified portfolio. The model portfolio is diversified

UK Value Investor 2015 04 f2 · 2017. 5. 23. · FTSE 100 Valuation and Projection Page 2 Model...

Documents

Transcript of UK Value Investor 2015 04 f2 · 2017. 5. 23. · FTSE 100 Valuation and Projection Page 2 Model...