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Quest™ : UK themes update – operation style twist18th April 2012
Nigel Sedgley+44 (0)20 7523 [email protected]
Quest™ helpline+44 (0)20 7523 [email protected]
2
Quest™ framework and tools
M&A
LBO valuation
LBO Superscreen
Quest™ market-to-book (replacement cost of assets)
Deal Watch and analysis
Stocks & Products
Companies in the News
triAngle Escalator
Newsletter
Performance
Style matrix
Quest™ themes
Screening
Screen for stocks
triAngle
Wealth creation
Cash flow returns
Capital deployment
Growth
Value tools
Quest™ valuation
Quest™ market-to-book
LBO FCF yield
triAngle Value (Quest™ + conventional)
Risk management tools
Quest™ Risk Rater
Aggressive/Defensive Indicator
Quest™ triAngle
Momentum
3
2008-2009 all over again?
Operation style twist
The run to safe stocks in H2 2011 was more extreme than in 07/08
Value saw its longest stretch of UK weakness – 9 negative quarters
By late 2011 quite a lot of bad news was priced in?
Value approach in Nov 08 Quest Newsletter delivered strong performance
Value started working before the trough in 08/09
Which Value tools to use? (Stable measures)
Stock screens to find value opportunities and overextended (expensive) situations
Are we in for a repeat of 2011 where the New Year Value rally gave way to weakness? *New *
Volatility means there will be opportunities. Assessing the risk/reward trade off *New *
4
90
100
110
120
130
140
150
160
170
Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
60
70
80
90
100
110
Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12
Q-files performance highlight the exponential shift to quality
High Q-score companies outperforming
Volatile companies underperforming
Quest™ Risk Rater
Aggressive defensive indicator
UK large caps (to 6th April)
Aggressive Defensive indicator
■ Identifies the most/ least cyclical and volatile companies
■ Based on three measures: EBITDA stabilityCFROA stabilityShare price volatility
■ Measured over 12 years (including forecasts)
■ High deciles (10) indicate defensive, more stable stock
Pause, or back to
defensives?
5
100
1000
10000
Au
g-9
8F
eb
-99
Au
g-9
9F
eb
-00
Au
g-0
0F
eb
-01
Au
g-0
1F
eb
-02
Au
g-0
2F
eb
-03
Au
g-0
3F
eb
-04
Au
g-0
4F
eb
-05
Au
g-0
5F
eb
-06
Au
g-0
6F
eb
-07
Au
g-0
7F
eb
-08
Au
g-0
8F
eb
-09
Au
g-0
9F
eb
-10
Au
g-1
0F
eb
-11
Au
g-1
1F
eb
-12
triAngle™
Value
Quality
Momentum
Factors and triAngle composition
Quest™ valuation
Quest™ market-to-book
EV/sales rel. LRA
Dividend yield rel. LRA
P/E rel. LRA
CFROC spread
Capital growth
Equilibrium growth
Fixed charge cover
CFROC change
9m-relative trend
100/200-day switch
12m-relative range
30/90 day switch
Earnings momentum
triAngleValue Quality
Momentum
33% 33%
33%
Quest triAngle
Excellent 12- year track record
3-pronged approach improves consistency
UK Large – 42/53 +ve quarters, +4.0% average
Pan-Euro – 36/48 +ve quarters, +3.0% average
UK Small – 34/41 +ve quarters, +6.4% average
■ Value, Quality and Momentum ‘ baskets’ are dynamic – driven by current rankings
UK large caps
6
2008 all over again? ■ 12 years of live triAngle history
■ Value works in short sharp burst – normally when valuation dispersion is high.
■ During the credit crunch, and in H2 2011, Quality and Momentum were the main drivers
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
7
-15% -10% -5% 0% 5% 10% 15%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
-15% -10% -5% 0% 5% 10% 15%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
9 negative Q in a row2nd best in a decade
3rd best in a decade
2nd best in a decade
Yield holding up
UK Large
Factor by factor in H2 2011 – Quality and Momentum strong
May-Aug 2011 Aug-Nov 2011
best for over 3 years
More mixed
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
8
-20% -15% -10% -5% 0% 5% 10%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
Factor by factor in Q1 2012 – Mini dash for trash
UK Large
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
Nov 2011-Feb 2012
worst since May 09
Worst since May 09
Value rally
2nd worst in a decade
3rd worst in last decade
1st positive in 10 quarters
Best since May 09
3rd worst ever
worst since May 09
9
CFROC Spread
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
Feb 12
0
500
1000
1500
2000
2500
3000
3500
4000
CFROC Spread* FTSE350
Three months ending at date show n*Pre Feb 04 Avg over 5 historic yrs. Post Feb 04 Avg over 4 Historic, 1 Forecast yr.
Value
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
Feb 12
0
500
1000
1500
2000
2500
3000
3500
4000
Value FTSE350
Three months ending at date show n
Earnings Momentum
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
Feb 12
0
500
1000
1500
2000
2500
3000
3500
4000
EPS momentum 3m FTSE350
Three months ending at date show n
Quality
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
Feb 12
0
500
1000
1500
2000
2500
3000
3500
4000
Quality FTSE350
Three months ending at date show n
Fixed Charge Cover
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
Feb 12
0
500
1000
1500
2000
2500
3000
3500
4000
Fixed charge Cover* FTSE350
Three months ending at date show n*Live triAngle factor since Feb 04. Previously Ex post backtest. 3m to Feb 04 N/A.
triAngle
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
Feb 12
0
500
1000
1500
2000
2500
3000
3500
4000
triAngle FTSE350
Three months ending at date show n
triAngle H2 2011 in historic context: Highlights
Best for 3 yrs
3rd Best in a decade
9 neg quarters in a row
2nd best in a decade
3rd Worstever
Worst for 3 yrs
Equal weightings dangerous at turning points
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
10
Style matrix – markets back into risk-off mode in the last month
Data to 13th April 2012Source: Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
11
-40% -30% -20% -10% 0% 10% 20% 30%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
UK end Nov 08-end Feb 09: Value rallied before the market
More stable value measures leading the way
Fixed charge cover: Feb-May 2009 -13%, May-Aug 2009 -7%
A sign of rotation
Quality held up
12
The troughV,Q neutral,Mmtm -ve
Crisis developingValue –ve, Qual +ve,
Mmtm +ve
History rhymes – where are we now?UK Large
Now(2010-2012)
to 13 April 2012
Then(2007-2009)
Market rallyingValue +ve, Qual neutral,
Mmtm -ve
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
60
70
80
90
100
110
120
130
140
150
160
170
180
J an-07
Mar-07
May-07
J ul-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
J un-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
J un-09
Aug-09
Oct-09
Value
Quality
Momentum
Value made an absolute low in Nov 2008
60
70
80
90
100
110
120
130
140
Jan-10
Mar-10
May-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Value
Quality
Momentum
Current pattern looks like Sept 08 and Feb 09
13
Earnings yield rel. to trailing 10 yr avg
0.0
1.0
2.0
3.0
4.0
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Nov
-11
Upper qtlMedian
Lower qtl
Equities Cheap
Equities Expensive
Quest default valuation
-75%
-50%
-25%
0%
25%
50%
75%
Mar-
09
May-
09
Jul-09
Sep-0
9
Nov-
09
Jan-1
0
Mar-
10
May-
10
Jul-10
Sep-1
0
Nov-
10
Jan-1
1
Mar-
11
May-
11
Jul-11
Sep-1
1
Nov-
11
Jan-1
2
Mar-
12
Upper qtl
Median
Lower qtl
Equities Expensive
Equities Cheap
EV/Sales rel. to trailing 10yr avg
0.00
0.50
1.00
1.50
2.00
May-
01
Nov-
01
May-
02
Nov-
02
May-
03
Nov-
03
May-
04
Nov-
04
May-
05
Nov-
05
May-
06
Nov-
06
May-
07
Nov-
07
May-
08
Nov-
08
May-
09
Nov-
09
May-
10
Nov-
10
May-
11
Nov-
11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
Quest Mkt-to-book (ex goodwill)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Nov
-11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
But how much is now priced in?….. market valuation charts ■ In late 2011, markets were as cheap as Oct 2008 & April 2009. But the ‘new normal’ is quite close.
■ Corporate action, policy response less likely to be as helpful this time, but less solvency risk.
Prices as at 12th April
New normal?
New normal?
14
Quest market to book (yr avg)
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
+12
m
Current 0.71LRA 0.80
Quest market to book (yr avg)
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
+12
Current 0.86LRA 0.90
Quest™ market-to-book: What is the opportunity? Level + dispersion
“Time to rejoin the Q”
“Who is still left in the Q?”
Market level
Dispersion
Europe ex UK smallUses avg mkt cap for yrUK Large cap
“Slowly moving up the Q”
As at April 18
CITN/ Newsletter articles“Time to get into the Q”
“Jostling about in the Q”
Still 10% below LRAClose to LRAFeb = 0.88
As at Apr 18
15
80
100
120
140
160
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10F
eb 1
0M
ar 1
0A
pr 1
0M
ay 1
0Ju
n 10
Jul 1
0A
ug 1
0S
ep 1
0O
ct 1
0N
ov 1
0D
ec 1
0Ja
n 11
Feb
11
Mar
11
Apr
11
May
11
Jun
11Ju
l 11
Aug
11
Sep
11
Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio
UK Value
60
80
100
120
140
160
180
200
Jan 9
0
Apr
90
Jul 9
0
Oct 90
Jan 9
1
Apr
91
Jul 9
1
Oct 91
Jan 9
2
Apr
92
Jul 92
Oc
t 92
Jan 9
3
Apr
93
Jul 9
3
Oct 93
Jan 9
4
Apr
94
Jul 9
4
Oc
t 9
4 60
70
80
90
100
110
120
130
140
150
160Value (Composite)
P/E
Price/Book
DY
DJSTOXX (RH)
Kept outperforming after the other value measures waned.M&A, just –in-time capexsupport a sustained rally
Quest™ market-to-book: the market recovery and beyond
2003-6
1992-4Price to book worked well (Pan Euro)
2009-11Market to book headed the Value charge
and sustained performance
Mkt troughMarch ‘09
Mkt peakFeb ‘11
80
100
120
140
160
180
Mar
03
Apr
03
May
03
Jun
03Ju
l 03
Aug
03
Sep
03
Oct
03
Nov
03
Dec
03
Jan
04F
eb 0
4M
ar 0
4A
pr 0
4M
ay 0
4Ju
n 04
Jul 0
4A
ug 0
4S
ep 0
4O
ct 0
4N
ov 0
4D
ec 0
4Ja
n 05
Feb
05
Mar
05
Apr
05
May
05
Jun
05Ju
l 05
Aug
05
Sep
05
Oct
05
Nov
05
Dec
05
Jan
06F
eb 0
6M
ar 0
6
Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio
UK Value
16
Finding Value II: Time to rejoin the Q
Quest™ market-to-book
A variation on Tobin’s Q which compares market value of a company to the replacement cost of assets
Profits, sales, cash flows and dividends are all unpredictable at present.
Valuation relative to the asset base is more stable.
Excellent track record at market turning points.(Time to get into the Q note – November 2008)
Total market capitalisation (equity + debt + quasi debt)
Quest™ mkt-to-book = --------------------------------------------------------------------------------
Estimated replacement cost of assets
17
Quest™ market-to-book strategies
■ Cheapest companies on market to book
■ Current pricing relative to a long-term view of asset’s productive capacity over their lifetime (Nov 08 note)
Quest™ mkt-to-book
Q-discount (10yr) = ------------------------------------------------------
Cyclical average CFROC / WACC
■ Avoid value traps: Solvency, historic average may overestimate future potential, asset write downs/ badwill
■ What if no mean reversion? – need to consider valuation relative to the ‘new normal’
Quest™ mkt-to-book
Q-discount (+12m) = ------------------------------------------------------ +12m CFROC / WACC
18
Pan-Euro market to book performance
Quality filters don’t help when the market takes
off
To 16 Apr 2012
Trough?
But, will there be a ‘dash for trash’ this time?
Q discount has lagged
behind
Or did we see it in January?
19
Finding Value II: UK Quest market-to-book: Time to rejoin the Q?
Updated weekly on Q-Files
20
Value Superscreen: Using Quest™ screening – Criteria
Mkt to book below LRA
Quality filters (optional)
triAngle Value score
Upside on Quest and cheaper than usual
15% more upside than 10y average
21
Value Superscreen: Using Quest™ screening – Stocks 16 April
2012
Criteria >0>15
AA-B B
>5 <0.8
Ranked by mkt cap
Quality filters.1) Lots of
debt/quasi debt .2) Negative EPS
momentum. Signal of risk of a profit warning?
Companies which meet the ‘quality
filters’
?
Plus…Chemring, N Brown, Supergroup,
Interserve
22
Over-extended valuations: The other side of the Value trade
Outperformed
Mkt to book above LRA
Mkt to book/returns analysis
Lacks value support
Other value metrics
Other risks
23
Over-extended valuations: The other side of the Value trade<5>15 >1
16 April 2012
Ranked by mkt cap
24
Consumer goods – Expensive or defensive? (Pan-Euro)
1012141618202224
Apr
07
Oct
07
Apr
08
Oct
08
Apr
09
Oct
09
Apr
10
Oct
10
Apr
11
Oct
11 10
12
14161820
2224
Apr
07
Oct
07
Apr
08
Oct
08
Apr
09
Oct
09
Apr
10
Oct
10
Apr
11
Oct
11
0
160
320
480
640
800
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Curre
nt
€bn
0
160
320
480
640
800
QUEST value Market cap
0
5
10
15
20
25
1997
1999
2001
2003
2005
2007
2009
2011
%
CFROC Forecast CFROC
CFROA Cost of capital
A-B Inbev, AB Foods, Beiersdorf, BAT, Carlsberg, Christian Hansen, CSM, Diageo, Danone, Givaudan, Heineken, Henkel, Imperial Tobacco, Kerry, Nestle, L’Oreal, Pernod, PZ Cussons, Reckitt Benckiser, SAB, Tate, Unilever
Quest valuation Cash Flow Returns
triAngle Value score (/33) triAngle Quality score (/33)
Equally weighted
Equally weighted
25 January
25
-6 -4 -2 0 2 4
Christian Hansen
Tate & Lyle
Kerry Grp
Unilever NV
Nestle
Henkel
Diageo
Heineken
Pernod Ricard
Givaudan
SABMiller
BAT
Beiersdorf
AB Foods
L'Oreal
PZ Cussons
Danone
Imperial Tobacco
A-B InBev
Carlsberg
CSM
Reckitt Benckiser
Consumer universe average
0 5 10 15 20 25
Christian Hansen
Tate & Lyle
Kerry Grp
Unilever NV
Nestle
Henkel
Diageo
Heineken
Pernod Ricard
Givaudan
SABMiller
BAT
Beiersdorf
AB Foods
L'Oreal
PZ Cussons
Danone
Imperial Tobacco
A-B InBev
Carlsberg
CSM
Reckitt Benckiser
Consumer universe average
Current
Average
Consumer goods Value scores rel 5y average
Current minus 5 year average
Downgrades by consumer
team Jan 2012
25 January
Downgraded by consumer
team Feb 2012
26
Consumer goods CFROC deciles rel 5y average
-3 -2 -1 0 1 2
Imperial Tobacco
Givaudan
Danone
Pernod Ricard
CSM
Nestle
Reckitt Benckiser
Heineken
Beiersdorf
Carlsberg
Christian Hansen
A-B InBev
Diageo
Kerry Grp
L'Oreal
PZ Cussons
BAT
SABMiller
AB Foods
Henkel
Unilever NV
Tate & Lyle
Consumer universe average
0 2 4 6 8 10 12
Imperial Tobacco
Givaudan
Danone
Pernod Ricard
CSM
Nestle
Reckitt Benckiser
Heineken
Beiersdorf
Carlsberg
Christian Hansen
A-B InBev
Diageo
Kerry Grp
L'Oreal
PZ Cussons
BAT
SABMiller
AB Foods
Henkel
Unilever NV
Tate & Lyle
Consumer universe average
Current
Average
Current minus 5 year average
Top 3 buys by consumer
team Jan 2012
25 January
27
Consumer goods Quality scores rel 5y average
-8 -6 -4 -2 0 2 4 6
Givaudan
Imperial Tobacco
SABMiller
Nestle
Danone
PZ Cussons
CSM
Unilever NV
Kerry Grp
Pernod Ricard
L'Oreal
Beiersdorf
AB Foods
A-B InBev
Heineken
Reckitt Benckiser
Tate & Lyle
Diageo
Carlsberg
Christian Hansen
BAT
Henkel
Consumer universe average
0 5 10 15 20 25 30 35
Givaudan
Imperial Tobacco
SABMiller
Nestle
Danone
PZ Cussons
CSM
Unilever NV
Kerry Grp
Pernod Ricard
L'Oreal
Beiersdorf
AB Foods
A-B InBev
Heineken
Reckitt Benckiser
Tate & Lyle
Diageo
Carlsberg
Christian Hansen
BAT
Henkel
Consumer universe averageCurrent
Average
Current minus 5 year average
25 January
28
Margins bite, leverage hurts – Reporting season poses risks■ Designed to explore the risks associated with over-optimism in analysts forecasts
■ March/June 2011 articles: GDP slowing, commodity prices rising. Peak margins screen combined full valuation.
■ Forecasts and valuations have fallen but consensus forecasts show forecasts remain high.
■ Output: Q-File. Excel spreadsheet (searchable + Filters) + CITN articles
23 June 2011 CITN
■ Original articles March/June: 79 names. CITN article highlighted Siemens , Volvo, Aker, Daimler, WH Smith, Philips, PPR, Fiat, Ferrovial, Clariant, Cookson, Lanxess, Sandvik, Pernod Ricard, ABB.
■ Margin stability definition: average historical EBITDA margin (10 years) divided by standard deviation of EBITDA margin over the same period (minimum 5 years required for calculation).
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Margins plus other risk factors
UK Screen as at 12th April
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Performance of the Q-discount screen from Nov 08-
Pan-euro
Source:Datastream
Rel to WIEROP$
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Appendices
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What is Cash Flow Return On Capital?
■ Cash Flow Return On Capital (CFROC)
■ Real
■ Post-tax
■ Return On Gross Invested Capital
■ Shifts from accrual accounting towards cash
■ Better insight into corporate performance and valuation(takes into account all the capital used, asset life, asset mix)
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CFROC: Step 1 – Accounting to cash
EBIT + Investment & non-operating income + Interest income – Current tax ≈ NOPAT + Dep’n & Amort’n + Rental expense – Tax shield on interest & rent + Monetary working capital adjustment
Non-depreciating assets Land & investment property Fixed asset investments Stock Monetary working capital
+ Depreciating assets Fixed assets at gross cost Fixed assets current cost (adjusted) Capitalised operating leases Intangible assets Cumulative goodwill w/off
€ Gross cash flow
€ Gross investment
Cash in
Cash out
=€ Operating income
€ Operating assets
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Quest™ valuation
Cash Flow Return On Capital in a DCF model
■ Use Consensus forecasts — 2-years forward
■ Forecast Cash Flow Return On Capital — existing assets
■ Forecast growth rate — reversion to mean
■ Forecast Cash Flow Return On Assets — future investment returns (reversion to mean)
■ Forecast net cash flows — implicit
■ Discount back using WACC for Enterprise Value
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UK companies within 10% of 5-year trough Quest™ market-to-book – by size
Rank by market
cap
Updated regularly
on Q-Files
<10%
13 April
Data from the Quest triAngle
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Q-files
*New*
*New*
