shaun van den berg head of client education at psg online fundamentals to value investing webinar...

Shaun van den BergShaun van den Berg

Head of Client Education at PSG OnlineHead of Client Education at PSG Online

Fundamentals to Value Investing WebinarFundamentals to Value Investing Webinar

Wednesday, 20 February 2013Wednesday, 20 February 2013

• Macro Fundamentals

• Financial Ratios

• Value Investing

• “The Investor” newsletter

• Summary

• Conclusion

Agenda Agenda

Presenter: Shaun van den Berg

Macro Fundamentals (Economic Analysis)Macro Fundamentals (Economic Analysis)


• GDP (Above 4% or below?)• Inflation (Relative to Reserve Bank Target?)• Interest Rates (Going up or down?)• Foreign Interest Rates (Going up or down?)• Exchange Rate (Weakening or strengthening?)

General Economic InfluencesGeneral Economic Influences


Gross Domestic Product (GDP)Gross Domestic Product (GDP)

Average 4%Average 4%

ExpansionExpansion

ContractionContraction 2010: 3.1%

2011: 3.5%

2012 Q2: 3.4%

2012 Q3: 1.2%

GDP Data Source: www.statssa.gov.za

2012 Q1: 2.7%

Fiscal PoliciesFiscal Policies

Tax CutsTax Cuts AdditionalAdditional Taxes Taxes

Discourage Discourage SpendingSpending

Encourage Encourage SpendingSpending


Government spendingGovernment spending

Increases Increases or decreasesor decreases

in government spending in government spending

Influences Influences the business the business environmentenvironment

Government spending Government spending has a strong has a strong

“Multiplier Effect”“Multiplier Effect”

Companies that Companies that rely on rely on

government government spendingspending

Defence, Defence, Social grants, Social grants, Education or Education or InfrastructureInfrastructure

Influence the Influence the General EconomyGeneral Economy

BudgetBudget

PrioritiesPriorities

1166

55

4433

22

Multiplier EffectMultiplier Effect

Road Road BuildingBuilding

Earthmoving Earthmoving EquipmentEquipment

SuppliersSuppliersConstructionConstruction

WorkersWorkers

ConcreteConcreteMaterialsMaterials

ConsumerConsumerGoodsGoods

EqstraEqstra

BarworldBarworld

BellBell

WearneWearne

PPCPPC

M&R M&R HoldingsHoldings

WBHOWBHO

AvengAveng

AfrimatAfrimat

RetailersRetailers

Monetary PolicyMonetary Policy

Restrictive Restrictive Monetary PolicyMonetary Policy

Reduces expansion ofReduces expansion ofBusinessesBusinesses

More expensive More expensive to finance home loansto finance home loans

Increases Increases borrowing costsborrowing costs

Reduces Growth RateReduces Growth Rate of Money Supply of Money Supply

Reduces supply of fundsReduces supply of fundsfor working capitalfor working capital

Reduces demand Reduces demand for Durable goodsfor Durable goods

Affects all segments Affects all segments of economy & of economy &

Relationship withRelationship withother economiesother economies

11

44

33

22

88

77

66

55


InflationInflation

• Government, industry & consumer over spending.

• Printing too much money to finance luxuries.

• By-product of too low interest rates promoting too much growth too quickly.


Headline CPI annual inflation rate in January 2013 was 5.4%. This rate was 0.3% than the 5.7% in December 2012. On average, prices increased by 0.3% between December 2012 & January 2013.

Inflation (Continued)Inflation (Continued)

Inflation causes Inflation causes differences between real differences between real & nominal interest rates & nominal interest rates

Inhibits growth & Inhibits growth & innovationinnovation

Influence the trade Influence the trade balance & exchange ratebalance & exchange rate

Beyond domestic Beyond domestic economy - differential economy - differential

inflation & interest ratesinflation & interest rates

Changes in spending & Changes in spending & savings behaviour savings behaviour

Unexpected changes in Unexpected changes in Inflation – difficult to planInflation – difficult to plan

11

55

44

33

22

66


Interest rates riseInterest rates rise

Negative for profitsNegative for profits

Money is diverted to interest-Money is diverted to interest-bearing securitiesbearing securities

Market anticipates this & Market anticipates this & peaks before interest ratespeaks before interest rates

Lower share prices &Lower share prices &lower company valuationslower company valuations

Consumers spend lessConsumers spend less- Lower profits- Lower profits

Demand for Demand for moneymoney

increasesincreases

Interest Rate CyclesInterest Rate Cycles

11

77

66

55

44

33

22


Repo RateRepo Rate

5.0%5.0%

- 7.0%- 7.0%

R157 Bond R157 Bond

Bullish

Bearish

U.S. T-Bond 30U.S. T-Bond 30

Bearish

Bullish

Competitive?

ZAR vs USD & EURZAR vs USD & EUR

Competitive?

Resistance

Resistance

Support

SupportWeaker

Weaker

USD vs EUR vs GBP/ JPY vs USDUSD vs EUR vs GBP/ JPY vs USD

Weaker

Stronger

Weaker

• GDP

• Inflation

• Interest Rates

• Foreign Interest Rates

• Exchange Rates

Quick SummaryQuick Summary


Financial RatiosFinancial Ratios


• Turnover Growth• Operating Profit Growth• Operating Margin• Interest Cover• Earnings before Tax

(EBIT) Growth• Effective Tax Rate• Profit Attributable to

Ordinary Shareholders Growth

• Dividend Cover• Retention Rate• Earnings per Share

(EPS) Growth

Ratio AnalysisRatio Analysis

• Headline EPS Growth• Net Asset Value (NAV)

growth• Return on Equity (ROE)• Return on Tangible

Assets• Return on Capital (ROC)• Debt/ Equity (Gearing)• Share Price (Cents per

share)• Price/ Earnings (P/E)• Dividend Yield (DY)• Price/ Net Asset Value

(P/NAV)• Cash Flow / EPS


Fundamental Analysis ChecklistFundamental Analysis Checklist

UndervaluedUndervalued

Risk Risk ManagementManagement

ProfitableProfitable

P/E < 16P/E < 16PEG < 75%PEG < 75%

PRICE/NAV < 2PRICE/NAV < 2

ROE % ROE % > 15%> 15%

Interest CoverInterest Cover> 3 times> 3 times

EarningsEarningsNumber of shares in IssueNumber of shares in Issue

ProfitProfit Profit = Earnings

Dividends

Retained EarningsRetained Earnings

= Earnings Per Share (E.P.S.)= Earnings Per Share (E.P.S.)

E.PS. = E.PS. = R66 000 000R66 000 000 825 000 000 825 000 000E.P.S. = 8cE.P.S. = 8c

Investor or Earnings RatiosInvestor or Earnings Ratios

Earnings Per Share (E.P.S.)Earnings Per Share (E.P.S.) x 100% x 100%Current Share PriceCurrent Share Price


= Earnings Yield (%) (E.Y.)= Earnings Yield (%) (E.Y.)

E.Y. =E.Y. = 8 cents per share 8 cents per share x 100% x 100%100 cents per share100 cents per share

E.Y. = 8%E.Y. = 8%

Dividends Per Share (D.P.S.) Dividends Per Share (D.P.S.) x 100%x 100%Current Share PriceCurrent Share Price = Dividend Yield (%) (D.Y)= Dividend Yield (%) (D.Y)

D.Y. = D.Y. = 3 cents per share 3 cents per share x 100%x 100% 100 cents per share 100 cents per share

D.Y. = 3%D.Y. = 3%

You want a high earnings yield You want a high earnings yield

You want a high dividend yield You want a high dividend yield


Current Share PriceCurrent Share Price Earnings Per Share (E.P.S.) Earnings Per Share (E.P.S.)

= Price / Earnings Ratio (P/E)= Price / Earnings Ratio (P/E)

P/E = P/E = 100 cents per share100 cents per share 8 cents per share 8 cents per share

P/E = 12.5 timesP/E = 12.5 times You want a low P/E multipleYou want a low P/E multiple


Valuation: Valuation: PEG RatioPEG Ratio


• PEG = P/E Ratio / Forecast average growth over next 5 years

• Select companies with not only low P/E ratios as such, but those companies with P/E ratios low relatively to their EPS growth

• Trying to target the better companies trading on low P/E’s

• Earnings growth rate must be higher than the P/E ratio at time of investing

PEG ValuationPEG Valuation


Although both shares are trading at a P/E of 15 our forecast Although both shares are trading at a P/E of 15 our forecast growth rate is 30% for stock 1 versus 10% for stock 2. growth rate is 30% for stock 1 versus 10% for stock 2.

PEG ValuationPEG Valuation

Name Share Price EPS Growth P/E PEGStock 1 100c 30% 15 50%Stock 2 200c 10% 15 150%

Average 20% 15 75%

This means Stock 1 trades at a PEG of 50% (15/30),which is This means Stock 1 trades at a PEG of 50% (15/30),which is considered very cheap; Stock 2 at 150% (15/10) is expensiveconsidered very cheap; Stock 2 at 150% (15/10) is expensive..

On average the sector is on a PEG of 75% (15/20), and,On average the sector is on a PEG of 75% (15/20), and, therefore, indicating value. therefore, indicating value.

Valuation: Valuation: Net Asset Value (NAV)Net Asset Value (NAV)


• Net Asset Value (NAV) is the Ordinary Shareholders' Funds divided by total number of shares issued.

• In theory if the company sells all of its assets at recorded prices & pays off all debt, the net amount will then be available for distribution to shareholders.

• Share prices should rarely trade below this value. .

Valuation: Net Asset Value (NAV)Valuation: Net Asset Value (NAV)

NAV = NAV = Ordinary Shareholder’s FundsOrdinary Shareholder’s Funds Total number of shares issued Total number of shares issued NAV = RNAV = R276 000 000276 000 000 850 000 000 850 000 000 = 32.4 cps = 32.4 cps


• Price/Net Asset Value (P/NAV) together with return on equity (ROE) is one of the most powerful valuation tools, but is seldom used correctly.

• The calculation is simply the current share price divided by the NAV.

Price / Price / Net Asset Value (P/NAV)Net Asset Value (P/NAV)

P/NAV = P/NAV = Current share priceCurrent share price Net Asset Value (NAV) Net Asset Value (NAV) P/NAV = NAV = 100 cps100 cps 32.4 cps 32.4 cps P/NAV = 3.1 times P/NAV = 3.1 times


Profitability Ratios (ROE)Profitability Ratios (ROE)

ROE = ROE = Profits attributable to ordinary shareholdersProfits attributable to ordinary shareholders Ordinary shareholder’s funds Ordinary shareholder’s funds

ROE = ROE = R66 000 000 x 100%R66 000 000 x 100% 276 000 000 276 000 000

ROE = 23.91%ROE = 23.91%

ROE = ROE = Headline EPSHeadline EPS Opening Net Asset Value (NAV) Opening Net Asset Value (NAV)

ROE = ROE = 7.4 cents x 100%7.4 cents x 100% 28.8 cents 28.8 cents

ROE = 25.69%ROE = 25.69%

Debt / Equity RatiosDebt / Equity Ratios

Debt / Equity = Debt / Equity = (LT + ST interest bearing debt) - (Cash + Bank) (LT + ST interest bearing debt) - (Cash + Bank) Total Shareholder’s funds Total Shareholder’s funds

Debt / Equity = Debt / Equity = (R115 000 000 + R43 000 000) - R14 000 000(R115 000 000 + R43 000 000) - R14 000 000 R288 000 000 R288 000 000

Debt / Equity = Debt / Equity = R158 000 000 - R14 000 000R158 000 000 - R14 000 000 R288 000 000 R288 000 000

Debt / Equity = Debt / Equity = R144 000 000R144 000 000 R288 000 000 R288 000 000

Debt / Equity = 50Debt / Equity = 50

Interest CoverInterest Cover

Interest Cover = Interest Cover = Earnings before interest & tax (EBIT)Earnings before interest & tax (EBIT) Net interest paid Net interest paid

= = R115 000 000R115 000 000 R20 000 000 R20 000 000

= 5.75 times= 5.75 times

• One of the most important ratios to consider financial riskOne of the most important ratios to consider financial risk

• A three times cover means sufficient profits to pay the current interest A three times cover means sufficient profits to pay the current interest charge three times - manageable charge three times - manageable

• This is normally the minimum cover required - below this level, we This is normally the minimum cover required - below this level, we would rarely contemplate an investment!would rarely contemplate an investment!

Strategy: Value InvestingStrategy: Value Investing

• Regarded as the “father” of Value investing.• Warren Buffett’s mentor. • From 1936 – 1956, remarkable record as a share picker• Over 20-years, mutual fund had a compound average return of at least 14.7%,

compared to 12% for the overall market– $10 000 invested would have earned roughly $60 000 more than the

average.• He looked for shares trading below their calculated value

– Instead of buying NAV (Assets – Liabilities)– Net current asset value (NCAV) approach– Wanted to know what the company would be worth if liquidated – Only include current assets (cash, stock & debtors), ignore long term

assets, such as buildings & subtract long & short term liabilities – Find companies trading at two-thirds or less of their NCAV

• (P/NCAV < 0.40)• Ben Graham insisted on a heavy discount • Need Margin of Safety … “a price so low that you can make money even if

some part of your analysis turns out to be wrong” – A true value investor would buy companies that the rest of the market

think are lousy.

Successful Investor: Successful Investor: Benjamin GrahamBenjamin Graham


Successful Investor: Warren BuffetSuccessful Investor: Warren Buffet

“Price is what you pay, value is what you get”

Warren Buffet

• If you had invested $10 000 at inception into Berkshire Hathaway in 1965 … your nest egg would be worth more than $50-million.

• Warren Buffet is a patient & cautious investor. • He ignored the tech-bubble entirely & still does not hold a

single technology or internet stock. • He likes shares he can “see” & “understand”• “It is much easier to predict the relative strength that Coke

will have in the soft drink world than Microsoft will in the software world”

• Buffet likes to know the companies intimately.• Holds onto them for the long term, or as long as they pass his

growth tests without becoming over-priced. • Advice: The key to success is to think of yourself

as part-owner of the business.

Successful Investor: Warren BuffetSuccessful Investor: Warren Buffet


• Strategy of selecting shares trading for less than their intrinsic values.

• Seek shares of companies that they believe the market has undervalued.

• The market overreacts to good & bad news, resulting in share price movements that do not correspond with the company's long-term fundamentals.

• The result is an opportunity for value investors to profit by buying when the price is deflated.

• Typically, value investors select shares with lower-than-average price-to-NAV or price-to-earnings (PE) ratios and/or high dividend yields.

Value InvestingValue Investing


• The big problem for value investing is estimating intrinsic value.– There is no "correct" intrinsic value. – Two investors can be given the exact same information & place

a different value on a company. – For this reason, another central concept to value investing is

that of "margin of safety". – This just means that you buy at a big enough discount to allow

some room for error in your estimation of value.

• The very definition of value investing is subjective. – Some value investors only look at present assets/earnings &

do not place any value on future growth. – Other value investors base strategies completely around the

estimation of future growth & cash flows.

• Despite the different methodologies, it all comes back to trying to buy something for less than it is worth.

Problems: Value InvestingProblems: Value Investing

• Compared to charting, value investors have tons of financial documents to read.

• It is very labour intensive. • The value investor is often subject to

management buy outs or "going private" phenomenon.

• You have to wait for market forces to realise that the company is undervalued to move it up.

• You need loads of patience.

Problems: Value Investing Problems: Value Investing

Please refer to Tutorial #6: Developing an Investment StrategyPlease refer to Tutorial #6: Developing an Investment Strategy for more informationfor more information

• Wide Moat– An understandable & competitive business

model (Barriers to entry)

• Strong Management– Excellent management team

• Margin of Safety– Favourable long-term fundamentals.

Investment Principles (3M’s)Investment Principles (3M’s)

PSG Asset Management’s Investment Philosophy: Consistent, Conservative & Contrarian

Company AnalysisCompany Analysis


Research: Company AnalysisResearch: Company Analysis

Company AnalysisCompany Analysis




Manageable Manageable FinancialFinancial

RiskRisk

ProfitableProfitable

Value Filter on PSG OnlineValue Filter on PSG Online


Research Tools: Value FilterResearch Tools: Value Filter

Select Select FiltersFilters

Select Select SectorSector

Research Tools: Value SearchResearch Tools: Value Search

Select Select DefaultDefault

Select Select SearchSearch

Watch ListsWatch Lists

““Rank” Watch List as InvestorRank” Watch List as Investor

• Use the Research Tools– Value Filter (Sectors/ Comparison)– Value Search (Opportunities)– Company Analysis (Be informed) – Watch Lists (Potential Winners)

• “It is far better to buy a fine company at a fair price, than a fair company at a fine price.” – Warren Buffet

Summary & Conclusion: Investing Summary & Conclusion: Investing


Fundamentals & Long-term Share picksFundamentals & Long-term Share picks

The Investor The Investor


The InvestorThe Investor

Bi-monthly newsletter One Share Spot

Long-term equity investor

Positives & Negatives

Technical ViewRecommendation

Equity Account

3-year view

Sasol (SOL)Sasol (SOL)

Bowcalf (BCF)Bowcalf (BCF)

Sunint (SUI)Sunint (SUI)

Hudaco (HDC)Hudaco (HDC)

• Sasol (SOL)• Bowcalf (BCF)• Sunint (SUI)• Hudaco (HDC)

The Investor - Share PicksThe Investor - Share Picks

Email [email protected] to be added to The Investor mailing list

OpenOpen

DateDate StockStock EntryEntry 19.2.201319.2.2013 P&L %P&L %

20121206 SOL 35500 39676 10.53%

20130117 BCF 760 780 2.56%

20130130 SUI 9870 9695 -1.81%

20130214 HDC 9700 9800 1.02%

• Big Picture – Economy (GDP growth) – Inflation & Interest Rates

• Company Analysis:– Turnover Growth > 10%– HEPS Growth > 10%– Valuation:

• Price/NAV < 2 • PEG > 35 < 75 (Undervalued)

– Profitable: ROE > 15%– Manageable Financial Risk:

• Interest Cover > 3 times– Cash Flow: Cash /HEPS > 0.75

• Online Tutorials

Summary: WebinarSummary: Webinar


• Links to PowerPoint presentation will be sent.• Next Webinars:

– Short-term trading … what makes the market tick• Lunch (13h00–14h00): Wednesday, 13 March 2013

– Advanced Technical Analysis (Candlesticks)• Lunch (13h00–14h00): Wednesday, 20 March 2013

• Next Traders Forum– PTA: Tuesday, 26 February 2013 (18h00 – 20h00) – JHB: Tuesday, 12 March 2013 (18h00 – 20h00) – DBN: Wednesday, 17 April 2013 (18h00 – 20h00)

• Good Luck • Happy Trading!

Conclusion: WebinarConclusion: Webinar


Contact us

Travis Robson

[email protected]

(011) 996 5204

Shaun van den Berg

[email protected]

(011) 996 5254


shaun van den berg head of client education at psg online fundamentals to value investing webinar...

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