Ian Lance

Ian Lance

Portfolio manager

What’s the catalyst?

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Over the last few months, we have tried to convince investors that fears about the economic consequences of lockdown have produced some incredible bargains in the stock market.

At some stage during the conversation, however, there will be an awkward pause followed by “Well that’s all very well but what’s the catalyst?” This is, of course, an impossible question to answer since if people knew what the catalyst was, it would probably already be priced in. In fact, when looking at the big regime changes in investment history, very few had identifiable catalysts even in hindsight.

The catalyst question is also usually focussed on macroeconomic events, for example, I am now repeatedly told that “value can’t perform unless interest rates go up”. This does, however, make the assumption that there can be a number of companies in the market trading at a fraction of their true worth and that no one will step in to take advantage of this. This doesn’t strike me as a particularly plausible assumption and even less so in light of some recent events in which long term buyers have stepped in to buy assets at significant discounts;

  • Pearson – the Swedish activist investors Cevian Capital have taken a 5.4% stake in the company and are looking to take a seat on the board and work with management to unlock the value in the business. The share rose by 15% on the day of this announcement.
  • Royal Mail – Czech billionaire Daniel Kretinsky recently raised his stake in Royal Mail to above £100m. The owner of Sparta Prague football club, who made his fortune in energy, now owns more than 6%of the postal service. Kretinsky’s shareholding – via the Vesa Equity Investment vehicle he owns with his business partner Patrik Tkac – is worth £106m. 
  • BT – the Saudi Arabian Public Investment Fund is believed to be building a stake in BT and have apparently been discussing the part financing of the roll out of high-speed broadband across the UK. This highlights the fact that sovereign wealth funds frequently have a time frame more suited to businesses such as BT which are involved in long-term investment programmes.

Elsewhere, some companies have started to take actions to realise value themselves;

  • Capita – The company has embarked on a disposal programme that could culminate in c. 70% of profits (c. £70m EBITA) within its software division being sold. The first sale has been achieved (Eclipse – est. 12x EV/EBITA exit multiple) with the disposal process for SIMS, its most valuable asset, underway. Further processes could follow in due course. Total software asset disposal proceeds could exceed £0.9b, sufficient to erase Capita’s balance sheet net debt and we believe would leave the rump business valued at 0.3x EV/Sales. If the rump business was able to produce margins of c. 9% and these profits were valued at 10x EV/EBITA, based on our calculations the implied value of the business would be c. 130p per share from today’s 40p.

During the 1980s, there were a number of corporate raiders who were willing to step in and take advantage of disconnects between the price of a business and its long-term value. Among the most notable corporate raiders of the 1980s in the US were Carl Icahn, Victor Posner, Nelson Peltz, T. Boone Pickens, Kirk Kerkorian, Sir James Goldsmith, Saul Steinberg and Asher Edelman. In the UK, companies would fall prey to Lords Hanson and White at Hanson, Hanson protégé Greg Hutchings at Tomkins, Nigel Rudd and Brian McGowan at Williams, Sir Owen Greens at BTR.

Many of the businesses discussed above are trading at less than half what we believe they are worth, and whilst most institutional fund managers are too worried about short-term earnings momentum and quarterly performance to take advantage of this, it does appear that there are still some long-term investors who will act. These days companies such as Elliott Capital, Cevian and Valueact might have a slightly less swashbuckling image than Lord Hanson but they still know a bargain when they see it. The crucial point is, however, that if there are opportunities to purchase assets for significantly less than they are worth, eventually they will draw in long-term buyers (as an aside, where have all the private equity buyers gone?). Value may be realised one business at the time and maybe that is ‘the catalyst’.

The statements and opinions expressed in this article are those of the author as of the date of publication, and do not necessarily represent the view of RWC Partners Limited. This article does not constitute investment advice and the names shown above is for illustrative purposes only and should not be construed as a recommendation or advice to buy or sell any security. Past performance is not a guide to the future. The price of investments and the income from them may fall as well as rise and investors may not get back the full amount invested. Forecasts and estimates are for illustrative purposes only. The forecasts and estimates are based upon subjective assumptions about circumstances and events that may not yet have taken place and may never do so. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment

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