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Henkel: Underappreciated Consumer Goods and Adhesives Leader

October 3, 2019 in Audio, Consumer Staples, Equities, Europe, European Investing Summit, European Investing Summit 2019, European Investing Summit 2019 Featured, Ideas, Large Cap, Transcripts

Christopher Rossbach of J. Stern & Co. presented his in-depth investment thesis on Henkel (Germany: HEN3) at European Investing Summit 2019.

Thesis summary:

Henkel is a leading consumer goods and adhesives company. It is the largest supplier of adhesives with ~14% global share,. It has a solid franchise in Home and Personal Care, operating primarily in the laundry, hair care, and bath and shower categories with a consolidated #1 and #2 position in Western and Eastern Europe and a significant presence in select overseas markets. Henkel is an underappreciated asset with a leadership position in its targeted markets. The company was historically a collection of under-managed assets but following a change of management in 2008, it embarked on a multi-year transformational program, turning into a stable, high-value business. Increased competitive pressures and operational mishaps in the consumer business have been a headwind, but the management team is taking the right steps to address these through €300 million in incremental investments and a strategic review of the Beauty portfolio. The slowdown in the auto and electronics end markets has also created headwinds for the Adhesives business. The unlevered balance sheet provides strategic optionality.

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About the instructor:

Chris Rossbach is Managing Partner of the London-based private investment firm, J. Stern & Co. Established to provide investments for the Stern family, it is devoted to long-term investments for families, charities, institutions and other long-term investors with a multi-generational approach. J. Stern & Co. builds on the Stern family’s 200 year old banking tradition with a conservative approach and institutional-level analysis and resources. It manages bespoke concentrated global equities portfolios and funds following a strict fundamental investment approach, looking for quality and value, based on its own proprietary analysis, with a long-term investment horizon. Prior to co-founding J. Stern & Co., Chris had senior investment roles at Merian Capital, Magnetar Capital, Lansdowne Partners and Perry Capital. Chris holds a BA from Yale University and a MBA from Harvard Business School.

XLMedia: Search Engine Optimization (SEO) Leader

October 3, 2019 in Audio, Equities, Europe, European Investing Summit, European Investing Summit 2019, Ideas, Micro Cap

Value investor Paolo Cipriani presented his in-depth investment thesis on XLMedia plc (UK: XLM) at European Investing Summit 2019.

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About the instructor:

Paolo Cipriani is an investor with six years of investment experience. He holds a master’s degree in accounting from Florence University. He runs a concentrated long-only portfolio with a focus on small- and mid-caps around Europe. His investment strategy is based on a selection of high-quality businesses with an identifiable structural competitive advantage. He invests in public companies led by entrepreneurial business leaders who leverage the competitive advantage of their business by allocating capital only to the highest-return opportunities.

Inconsistency in BMW’s Financial Indicators

October 1, 2019 in Deep Value, Equities, Equities, Europe, European Investing Summit, Ideas, Large Cap, Transportation

This article is authored by MOI Global instructor Daniel Gladiš, chief executive officer of Vltava Fund, based in the Czech Republic.

Daniel presented an investment thesis on BMW at European Investing Summit 2017.

BMW is a very well-managed company, maybe the best-run of all automotive companies. This can accordingly be seen in its financial results for the past 15 years. Nevertheless, a certain inconsistency can be detected in the financial statements concerning the financial objectives BMW’s management sets out and how it assesses their fulfillment.

BMW consists of two businesses. The first one is, of course, the automotive division, which develops, manufactures and sells cars and motorcycles. The second, often overlooked, is BMW Bank. The latter finances approximately one-half of BMW sales through leasing and consumer loans, and it also provides financing to dealers. The two businesses complement one another nicely, but they are so different that they are reported separately in the financial statements. Each is evaluated by management on the basis of a different financial indicator.

For the bank, the basic indicator is return on equity (ROE). Over the past 5 years, this averaged 18.7%. That is a very high number for a bank today, and a level unachievable for most large European and American banks. The high ROE stands out especially when we realise the low risk associated with BMW Bank’s assets. Their average maturity is around 2 years, and the average proportion of bad debt over the past 5 years was 0.36%.

On the other hand, return on capital employed (ROCE) is the key indicator used by management in the automotive division. Its average value over the past 5 years was 67%. This is again a very high number, and it best shows that BMW has a long-term competitive advantage. Such high returns on capital would not be possible without such an advantage. (ROCE for the motorcycle division over the past 5 years was 30%. This is also a very high number. BMW’s motorcycle business, however, is much smaller than its automobile business, and we can omit it in further consideration.)

When we compare BMW Bank’s ROE and the automotive division’s ROCE with the same indicators for comparable companies, BMW turns out to be doing very well in these relative terms. The absolute values of these indicators in comparison to costs of capital are very high, as well, and both indicators also substantially surpass management’s targets. The objective of BMW’s management is to reach at least 12% ROE in the bank and 26% ROCE in the automotive division. These objectives have been greatly exceeded in each of the past 5 years. So far, so good, it seems.

But let us take our appraisal a bit further. The ROE of the company BMW as a whole was 15.7% on average over the past 5 years. This number includes both the bank and the automotive division. You may think – how can BMW’s overall ROE be 15.7% when one part (the bank) has ROE of 18.7% and the other part (the automotive division) has ROCE of 67%? The explanation is simple. The formula for calculating ROCE excludes net cash from capital. And cash is high for the automotive division. On a 5-year average, its cash amounted to EUR 18 billion even as debt stood at zero. The cash consists in savings collected over years of the company’s operations and which gradually are increasing due to the automotive division’s positive free cash flow. This is, therefore, capital that is not “employed” in manufacturing and therefore is also excluded from the calculation of ROCE. Because it is part of BMW’s equity, though, it is included in the calculation of ROE.

BMW is therefore in a situation of having very high ROCE but only slightly above-average ROE, as it is burdened by a large sum of unused cash. Could this cash be used more effectively and partially paid out to shareholders? A number of investors have posed this question, and one also asked it to the management in a conference call held on the occasion of announcing the company’s results for 2018. The management’s response was that it is not considering to pay out this excess cash because it will be needed to maintain the high investment rating and, in particular, to support BMW Bank. In other words, the cash is not excessive.

If that is the case, then it should be included either in the calculation of BMW Bank’s ROE or in that of the automotive division’s ROCE, or partially in both. These indicators would then be much lower. If all this cash were included in calculating the bank’s ROE, it would drop to approximately one-half its current level. The management’s inconsistency in thinking about BMW’s financial indicators is thus fully revealed here. It is not possible to exclude cash from the calculation of financial indicators while at the same time claiming that this money is necessary for doing business going forward.

The same inconsistency appears in the declared targets concerning ROCE and margins in the automotive division. For this year, BMW’s management expects to substantially exceed its objective of 26% ROCE. At the same time, it anticipates that the EBIT margin of the automotive division will be substantially under the long-term target of 8–10%. This does not make much sense. Either the ROCE target set is too leniently, or long-term EBIT margins are unrealistic, or the entirety of the capital employed is not properly taken into consideration in calculating ROCE.

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Disclaimer: This document expresses the opinion of the author as at the time it was written and is intended exclusively for promotional purposes. The investor should base his or her investment decision on consideration of comprehensive information about the Fund. Our projections and estimates are based on a thorough analysis. Yet they may be and sometimes will be wrong. Do not rely on them and take your own views into consideration when making your investment choices. Estimating the intrinsic value of the share necessarily contains elements of subjectivity and may prove to be too optimistic or too pessimistic. Long-term convergence of the stock price and its intrinsic value is likely, but not guaranteed. Only a qualified investor pursuant to § 272 of Act No. 240/2013 Coll. may become a shareholder of the Fund. Persons who are not qualified investors pursuant to the aforementioned provision of the Act shall not be allowed to invest. The value of an investment may increase and decrease. Neither return of the amount originally invested nor increase in the value of such investment is guaranteed. The Fund’s past performance is not a reliable indicator of future investment returns. The information contained in this letter to shareholders may include statements that, to the extent they are not recitations of historical fact, constitute forward-looking statements within the meaning of applicable securities legislation. Forward-looking statements may include financial and other projections, as well as statements regarding our future plans, objectives or financial performance, or the estimates underlying any of the foregoing. Any such forward-looking statements are based on assumptions and analyses made by the Fund based upon its experience and perception of historical trends, current conditions and expected future developments, as well as other factors we believe are appropriate in the given circumstances. However, whether actual results and developments will conform to our expectations and predictions is subject to a number of risks, assumptions and uncertainties. In evaluating forward-looking statements, readers should specifically consider the various factors which could cause actual events or results to differ materially from those contained in such statements. Unless otherwise required by applicable securities laws, we do not intend, nor do we undertake any obligation, to update or revise any forward-looking statements to reflect subsequent information, events, results or circumstances or otherwise. Before subscribing, prospective investors are urged to seek independent professional advice as regards both Maltese and any foreign legislation applicable to the acquisition, holding and repurchase of shares in the Fund as well as payments to the shareholders. The shares of the Fund have not been and will not be registered under the United States Securities Act of 1933, as amended (the “1933 Act”) or under any state securities law. The Fund is not a registered investment company under the United States Investment Company Act of 1940 (the “1940 Act”). The Fund is registered with the Czech National Bank as a foreign alternative investment fund for offer only to qualified investors (not including European social entrepreneurship funds and European venture capital funds) and managed by an alternative investment fund manager. Investment returns for the individual investments are not audited, are stated in approximate amounts, and may include dividends and options.

European Investing Summit 2019 — Agenda

October 1, 2019 in Diary, European Investing Summit

European Investing Summit 2019 consists of six live sessions and more than twenty sessions that have been recorded in recent days. The live sessions take place on Thursday, October 3 and Friday, October 4. The recorded sessions will be released on October 3-5 based on the agenda below.

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(The times shown are based on Eastern Standard Time — New York.)

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Register for LIVE Sessions at European Investing Summit 2019

October 1, 2019 in Diary, European Investing Summit

European Investing Summit 2019 consists of six live sessions and more than twenty sessions recorded in recent days. The live sessions take place on Thursday, October 3 and Friday, October 4.

Live sessions are typically available for replay within 24 hours. All session recordings and materials remain accessible to members for an unlimited time.

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Don’t You Believe Them

October 1, 2019 in Equities, Europe, European Investing Summit, Letters

This article is authored by MOI Global instructor Massimo Fuggetta, managing partner at Bayes Investments, based in London.

By the time I started writing my D.Phil. thesis, I had pretty much come to the conclusion that academic life was not for me. So I decided to try and see what it was like to work in the City, and got a summer job at James Capel. Subsequently bought by HSBC, James Capel was then a prominent UK stockbroker and one for the few to pioneer into European equity research. So it was that, overnight, I became their ‘Italian Equity Strategist’.

I wanted to dip a toe in the water – I got a breath-taking full-body plunge into the wide ocean. In no time I was talking to all sorts of ‘clients’ about all things Italy – a true life shaping experience. I still remember – or was it a nightmare? – being in front of a big shot from the ‘Danish Pension Fund’, trying to answer as best as I could his full cartridge of very detailed questions.

It didn’t last long. First, being at work at 7am was definitely not my thing. Besides that, I soon realised I wanted to be on the other side – the buy side, not the sell side. A fund manager, not a stockbroker. So when my friend Bruno got me an interview at JP Morgan Investment Management, where he was working as a company analyst – ‘I’m there at 9am and I can manage my time quite flexibly, as long as I get the job done’ – I was all for it.

But before leaving James Capel I wrote my final piece for their European Equity Strategy publication. It resurfaced recently in a house move. Reading it again after such a long time (yes, the London phone code was 01) made me laugh out loud:

The Italian stock market has gone up 9% by the end of July since the beginning of 1988. This relatively poor performance can essentially be ascribed to fundamental market uncertainty on the critical issues of political stability and fiscal policy, which constitute both the primary target and the key test for the new coalition government headed by the Christian Democratic leader Mr de Mita.

A global reform of the institutional and administrative apparatus of the Italian state is another major concern of the de Mita government. The aim is to make legislation a less lengthy and cumbersome process and to increase the efficiency of the Public Administration.

Political uncertainty – which has kept foreign investors out of Italy for two years – is certainly among the key factors which explain the poor relative growth of the Italian market and the low level of current valuations relative to the performance and prospects of the Italian quoted companies.

As Bruce Hornsby had been singing a couple of years earlier, ‘That’s just the way it is – Some things will never change’.

Since the launch of the Made in Italy Fund, now more than three years ago, I have been banging on this point. Viewed from a top-down, macro perspective, Italy has always looked like an unattractive place to invest. Unstable governments, inefficient public services, bulky debt, higher bond yields and, before the euro, a chronically weak currency. Add for a good measure a few evergreens, such as corruption, the South backwardness and organised crime. And, from a stock market point of view, a limited number of quoted companies – currently about 350, against more than 800 each in France and Germany – mainly concentrated in banking and finance, utilities, oils and a few consumers. The whole lot worth about 600 billion euro – less than Apple. Who would want to invest there?

So common is this ‘country’ way of thinking that it takes some unlearning to realise how fundamentally wrong it is.

Investors do not buy countries. They buy companies – companies that happen to be based in a certain country and are therefore, in most cases, quoted on that country’s Stock Exchange.

But what does that mean? Is Microsoft a US company? Is Nestlé a Swiss company? Yes, that’s where they are headquartered and quoted. But no, not in the sense that their performance is related in any meaningful way to the performance and vicissitudes of their country of origin. What is the relationship between LVMH and the growth of the French economy? Or Ferrari and the stability of the Italian government?

The national dimension of equity investing is largely a remnant of a long-gone past, when most businesses were predominantly domestic. This is clearly not the case today, and not only for the big global corporations, but also, and increasingly so, for smaller firms selling their products and services around the world. To think that there is any direct link between these companies and the economic conditions of their country of origin is lazy at best.

There are still of course many companies whose business is mainly domestic. For these, the linkage to the state of the national economy may be stronger – but it is far from being linear, stable or reliable. Indeed, for some companies a weak economy may create opportunities to gain market share from competitors or to introduce new products and services.

So it is never as simple as economy=stock market. This is so in general, but it’s especially true for Italy, where the sector composition of the market bears no resemblance to the country’s economic reality.

Then what’s the point of the Made in Italy Fund? Isn’t its very name meant to evoke the same national dimension that I am saying makes no sense?

No. The Fund does not invest in Italy as a country. It invests in Italian companies with a market capitalisation of less than one billion euro, quoted on the Milan Stock Exchange.

Why only those and why only there? Two reasons:

1. It is a good place for finding pearls – companies with high growth prospects, strong and sustainable profitability and attractive valuations. Many of them are smaller companies, leaders in specific market niches, where good management and Italian flair allow them to build and maintain a solid competitive advantage in Italy and abroad. Of course, there are many good companies elsewhere. Buy in Italy they tend to be cheaper. Why? Precisely because investors snub Italy as a country! This is clearly true for many foreign investors, indolently clinging to their ‘country’ way of thinking. But in the last few decades it has been increasingly true also for domestic investors, who in a post-euro, pan-European world have been shedding a sane home-country bias in favour of a snobbish xenophilia.

2. Soon after I joined JPMIM after James Capel, I started managing the Italian slice of their international equity and balanced portfolios. This was – hard to believe – thirty years ago. Since then I have done many other things, but my involvement with the Italian stock market has hardly ever stopped. I am – I fear to say – a veteran. As such, I like to believe that my experience, together with my ‘Italianness’ – in language, culture and mores – make me especially suited to spotting Italian pearls and, as importantly, avoiding Italian pebbles and duds.

Italy is my country. Like most Italians, I have a complex love-hate relationship with it. Di Maio or de Mita, its politics has always been messy, its public finances rickety, its international credibility regularly in the balance. In my thirty years as an Italian fund manager, I have never been able to build a credible top-down investment case for Italy as a country (incidentally, can one do so for France or Germany or any other developed nation?). But when I flip it around and look bottom-up at Italian companies, especially the smaller ones that form the backbone of the Italian economy, I have no hesitation. In a universe of around 280 companies with less than one billion market cap – now steadily increasing through a sustained flow of new IPOs – I have no trouble selecting thirty or so to include in the Made in Italy Fund. If anything, the problem is to keep track of all the opportunities.

So my attitude to chronic Italian bears is, with Bruce Hornsby: ‘Ah, but don’t you believe them’. Country allocation should not be about countries. It should be about finding pots of value around the globe, and focused managers able to extract them.

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European Banking — A Quiz of Sorts

September 30, 2019 in Equities, Europe, European Investing Summit, Financials, Letters

This article is authored by MOI Global instructor Stuart Mitchell, investment manager at S. W. Mitchell Capital, based in London.

Let us start with a short quiz, a Challenge, if you will. I am going to list the financial characteristics of five banks – for the moment I will call them BlueBank, GreenBank, YellowBank, RedBank and GreyBank. I will then ask you to match them with their market valuation metrics.

So, here we go.

Financial characteristics

Valuation metrics

Source: Exane, company annual reports.

You may well have guessed that GreenBank goes with A: GreenBank generates a paltry 1.6% on equity and trades at just 0.2x book. It also has a very high 93.1% cost income ratio. Not too difficult.

Now it gets a bit trickier. GreyBank looks like it could go with valuation D. The highest RoE (16.4%) is, as you might expect, rewarded by the highest price to book value (1.1x). But then again, maybe this valuation is YellowBank’s. YellowBank dominates its local market, derives almost half of all revenues from fee income, is well-capitalised, has the second highest RoE and the second lowest CIR.

Wrong. YellowBank in fact carries valuation E; those top-notch characteristics trade on a measly 0.6x book value, and YellowBank throws off a dividend yield of no less than 9.5%. But enough suspense. Time to drop the colour-coding and reveal all: YellowBank is Intesa Sanpaolo.[1]

Intesa Sanpaolo is by far the largest bank in Italy with an 18% market share in loans and deposits (as shown in the table above). Just as importantly – perhaps more so – the bank has over 20% market shares in the lucrative asset management, pension funds and factoring markets.

The business is highly diverse, with 48% of revenues coming from wealth management and insurance.

And since 2013-14, when net income was under peak pressure, the recovery has been strong, and it has been consistent:

With financial and commercial characteristics of the business as impressive as this, how can it be that the market accords Intesa such a lowly valuation?

There are three main reasons in our view.

1/ Cost cutting under-appreciated.

That the Italian backdrop is subdued is no secret. But this is causing the market to fail to appreciate the opportunity for the bank to increase returns significantly by cutting costs. The bank has put in place a highly ambitious cost-cutting programme which includes branch closures, redundancies, Information Communication Technology integration, the centralisation of procurement and – above all – digitalisation. Assuming no more than a modest 2.8% per annum net interest income growth and 5.5% annual growth in net fee income, the bank should be able to generate the following returns before 2022:

2/ Non-performing loan risk exaggerated.

The market has also in our view exaggerated the risks associated with non-performing loans (NPLs) in the balance sheet. Whilst the net NPL ratio as a proportion of the existing loan book is still optically higher than it would ideally be (4.2% of assets), the exposure has fallen steadily over a good number of years, and new NPL creation is now running at the lowest level ever.

Investors, furthermore, have in our view not understood the complexities of the Italian legal system where it can take anything up to ten years for a bank to take control of collateral in the event of a defaulting loan. This makes for a startling contrast with, say, with the UK, where a bank can normally seize a defaulter’s assets within months. The collateral is there. It just takes a long time for it to arrive. In the meantime the accounts can look (unrealistically) poor.

3/ Italian sovereign risk too high.

Lastly, we believe that the market has exaggerated the risks that the bank suffers for being Italian. Directly the bank owns €30bn of Italian government bonds, equivalent to 27% of tier 1 equity. Even a 20% default in Italian bonds would wipe out a manageable 14% of tier 1 equity. Run the numbers backwards, and you will find that the current share price implies an 11-12% plus cost of equity, a figure which is wholly fanciful. Or, as we see it, wrong.

You might be surprised to see that Italy has a similar country risk premium to Hungary, Morocco, South Africa and Russia. India is, indeed, viewed as being lower risk than Italy.

Source: Country default spreads and risk premiums, January 2019, NYU Stern School of Business.

What could justify such levels? Perhaps only fear of Italy crashing out of the European Union. We think this unlikely as long as support for such a break is at modest levels:

Source: Kantar, in-out Europe poll, April 2019.

And finally, we think that investors underappreciate the wealth of the private sphere: Italians are seen as being in distress. Not so. According to Allianz, where mighty Germany has just over €52,000 of net financial assets per capita, and the Celtic Tiger Ireland €47,000, Italy notches up assets per capita of nearly €59,000. The distress is perhaps not acute….

But what about valuation?

Our calculation produces some startling results, depending on which of a range of more or less probable scenarios.

1. If we assume that the restructuring programme fails (we don’t of course assume this, by the way), that the RoE stays at 9.6% and that profits grow at 4.5% per annum, we come out with a share price of €2.60, or 37% higher than where the stock trades today.

2. If we then assume that the restructuring programme is successful, and that the group generates a somewhat higher sustainable RoE of 12%, then the share price should be €3.95, more than double where the shares trade today.

3. And finally if we were to reduce the Italian country risk and the cost of equity by 2%to 11% we get a share price target of €4.97, 2.6 times higher than today.

So you may well not have got your starter for ten. But markets are not like quiz games.

It isn’t Jeremy Paxman who holds the answers (or Bamber Gascoigne, if you can remember that far back). Future reality is rarely accurately reflected in current share prices. And it won’t be revealed before the jaunty closing theme music strikes up. It may take time and patience as well as insight.

That is the opportunity for stock pickers like us. The Challenge, so to speak…

________________
[1] Blue: BNP on valuation C / Green: Deutsche Bank (A) / Red: RBS (B) / Grey: Swedbank (D).

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Disclaimer: This thought piece is a confidential communication issued by S. W. Mitchell Capital LLP and is for information only. It was prepared by S. W. Mitchell Capital LLP only for, and is directed only at persons that qualify as Professional Clients or Eligible Counterparties under the FCA rules, including appropriate institutional investors and intermediaries. It is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. No person receiving a copy of this newsletter may copy it for transmission to another person. This document has been prepared from sources which are believed to be accurate, however in producing it S. W. Mitchell Capital LLP may have relied on information obtained from third parties and accepts no liability for the accuracy or completeness of such information. It is the responsibility of every person reading this document to satisfy himself as to the full observance of the laws of any relevant country, including obtaining any government or other consent which may be required or observing any other formality which needs to be observed in that country. Past performance should not be seen as an indication of future performance and will not necessarily be repeated. The value of investments and the income from them may fall as well as rise and is not guaranteed. The investor may not get back the original amount invested. Changes in rates or exchange may cause the value of investments to fluctuate. S. W. Mitchell Capital LLP is a Limited Liability Partnership registered in England No. OC312953. Registered address 38 Jermyn Street, London SW1Y 6DN. Regulated and authorised in the UK by the Financial Conduct Authority. The material provided herein has been provided by S. W. Mitchell Capital LLP and is for informational purposes only. S.W. Mitchell Capital LLP serves as investment sub-adviser to one or more mutual funds distributed through Northern Lights Distributors, LLC member FINRA/SIPC. Northern Lights Distributors, LLC and S.W. Mitchell Capital LLP are not affiliated entities.

European Investing Summit 2019 Preview: Sberbank

September 30, 2019 in Equities, Europe, European Investing Summit, Financials, Ideas, Large Cap

This article is authored by MOI Global instructor Guillermo Nieto, partner and portfolio manager at Salmon Mundi Capital, based in Madrid.

Salmon Mundi Capital is a Spanish sicav listed on the MAB (Spanish Alternative Stock Exchange). We invest all over the world in different asset classes, both long and short. Our investment philosophy is based on value investing and the Austrian school of economics. We are value investors because we prefer to buy cheap assets with a high margin of safety. We usually find attractive investment opportunities in assets, sectors, commodities or countries out of favour due to temporary problems. We find the Austrian school of economics useful to us as a framework for our investments. We take into account distortions caused by credit cycles and their impact on asset valuations, this is why we try to avoid investing in countries which have had a large and rapid credit growth during many years. This analysis has led us to avoid several countries that are in fashion, and to look at others beyond the investors radar, such as Russia.

Since the sanctions were imposed on Russia in 2015, investors have been afraid to invest in the country. However, we believe Russia despite its negative aspects, that are widely known, has positive fundamentals, and the authorities have managed the economy in a very orthodox manner in recent years, in contrast to the rest of the world’s major countries. Currently they have only 15% of public debt to GDP, a level that is much lower than the one of the heavily indebted Western countries. Russia is the fourth country with more reserves worldwide, and its reserves fully cover all its foreign debt. In 2018 they had a 7% current account surplus. Russia is one of the major countries with a lower level of debt (79% both public and private debt). In addition, we see potential because Russian assets are very cheap. Russian equities are trading at only 7x CAPE.

Among the Russian shares that we have in our portfolio, we have the largest exposure in Sberbank. Sberbank was founded in 1841 and it is the largest Russian bank. It has 93 million active retail clients in the country. The bank is the leader in Russia in both retail deposits and loans to companies (45% and 31% respectively) and it grants 54% of all the mortgages in the country. Sberbank has undergone unprecedented changes with the appointment of its new CEO in 2007. The bank has focused more on clients and on technological improvements, achieving a very strong cost-effective culture. Sberbank is an international reference in digitization and one of the strongest banking brands around the world.

Its credit quality is good, just 4% of NPLs, which is significantly lower than the Russian banking system. Its current dividend yield is 6.8% but if they finally successfully fulfill its strategic plan for 2020 it could reach 10% next year. In spite of being one of the most profitable banks (ROE of 24%) and one of the most cost-efficiency banks (33%), it is trading at just 5.8x earnings and 1.3x book value. Compared to other emerging countries’ banks, it trades with a 50% discount.

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Diagram of Ensemble’s Investment Philosophy

September 29, 2019 in Equities, Letters

This article is authored by MOI Global instructor Todd Wenning, a senior investment analyst at Ensemble Capital Management, based in Burlingame, California. Visit Ensemble’s Intrinsic Investing website for additional insights.

“I do believe in simplicity. It is astonishing as well as sad, how many trivial affairs even the wisest thinks he must attend to in a day… So simplify the problem of life, distinguish the necessary and the real. Probe the earth to see where your main roots run.” –Henry David Thoreau

According to a quick Bloomberg screen, there are about 2,000 companies in our investible universe. At any given time, we’ll own between 15 and 30 of them.

To narrow down the list of potential portfolio holdings, we employ a framework borne out of both our personal and team experiences.

Over the past four years, we’ve written dozens of blog posts that have elaborated on this framework. We wanted to boil all of that down into a one-page diagram that shows, as Thoreau put it above, where our “main roots run.”

Before we invest in any company, we must believe that three key factors – management, moat, and forecastability (which informs our valuation) – are present. These factors are of equal importance.

Indeed, if even one of the factors is missing, we consider the idea a trap. We haven’t written specifically about traps yet, so here’s a summary.

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Jeff Gramm on His Book, Dear Chairman

September 29, 2019 in Audio, Explore Great Books Podcast, Interviews, Meet-the-Author Forum, Meet-the-Author Forum 2019, Meet-the-Author Forum 2019 Featured, Member Podcasts, Transcripts

Jeff Gramm discussed his book, Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, at MOI Global’s Meet-the-Author Summer Forum 2019. Jeff is a portfolio manager at Bandera Partners.

The full session is available exclusively to members of MOI Global.

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About the book:

A sharp and illuminating history of one of capitalism’s longest running tensions—the conflicts of interest among public company directors, managers, and shareholders—told through entertaining case studies and original letters from some of our most legendary and controversial investors and activists.

Recent disputes between shareholders and major corporations, including Apple and DuPont, have made headlines. But the struggle between management and those who own stock has been going on for nearly a century. Mixing never-before-published and rare, original letters from Wall Street icons—including Benjamin Graham, Warren Buffett, Ross Perot, Carl Icahn, and Daniel Loeb—with masterful scholarship and professional insight, Dear Chairman traces the rise in shareholder activism from the 1920s to today, and provides an invaluable and unprecedented perspective on what it means to be a public company, including how they work and who is really in control.

Jeff Gramm analyzes different eras and pivotal boardroom battles from the last century to understand the factors that have caused shareholders and management to collide. Throughout, he uses the letters to show how investors interact with directors and managers, how they think about their target companies, and how they plan to profit. Each is a fascinating example of capitalism at work told through the voices of its most colorful, influential participants.

A hedge fund manager and an adjunct professor at Columbia Business School, Gramm has spent as much time evaluating CEOs and directors as he has trying to understand and value businesses. He has seen public companies that are poorly run, and some that willfully disenfranchise their shareholders. While he pays tribute to the ingenuity of public company investors, Gramm also exposes examples of shareholder activism at its very worst, when hedge funds engineer stealthy land-grabs at the expense of a company’s long term prospects. Ultimately, he provides a thorough, much-needed understanding of the public company/shareholder relationship for investors, managers, and everyone concerned with the future of capitalism.

About the author:

Jeff Gramm is co-founder and portfolio manager at the hedge fund Bandera Partners. Gramm, who co-founded the hedge fund with Greg Bylinsky in 2006, also serves as a director on the boards of two companies that Bandera took a large stake: Tandy Leather and Rubicon Technology. He also served on the boards of Peerless, Morgan’s Foods, and the now defunct Ambassadors Group.

He teaches applied value investing at Columbia Business School. Prior to starting Bandera, Gramm was a junior partner at a start-up investment advisor Arklow Capital. He is the author of the 2016 corporate governance book Dear Chairman: Boardroom Battles and the Rise of Shareholder Activism, a book about shareholder activism.

MOI Global