JSE Investor Forum · JSE Investor Forum Shaun van den Berg Head of Client Education ... ‐Warren Buffett. Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial

Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial Services Provider, FSP No. 42996

JSE Investor ForumShaun van den BergHead of Client Education Tuesday, 10th June 2014


Agenda

• Introduction to Value Investing– Criticism of Value Investing– Introduction to Value‐based Research

• Astral Foods Ltd (ARL)• Master Drilling Group Ltd (MDI)• Comp‐Clearing Outsourcing Ltd (CCL)• PSG Group (PSG)

• Summary • Conclusion


Introduction to Value Investing



• Investment ideas of two professors at Columbia Business School in 1928• Ben Graham & David Dodd.• Legendary author & money manager• Father of value investing• Most famous student: Warren Buffett, chairman of Berkshire Hathaway

• Essence of value investing: “To buy stocks at less than their intrinsic value” • Graham called this the "margin of safety"

• Buy shares that appear under priced or cheap based on fundamentals• High dividend yields (DY) • Low price‐to‐earning (P/E) multiples• Low price‐to‐book (P/NAV) ratios

Source: http://www.investopedia.com/university/value‐investing/


• Actively seek shares the market has undervalued• Find shares the market has not priced correctly

• Share is worth more than is reflected in the current price • Market overreacts to good & bad news• Share price movements do not correspond with long‐term fundamentals• Opportunity to profit by buying when the price is deflated

• More concerned with the business & its fundamentals ‐ Other influences on price

• Be patient for the rest of the market to recognize & correct pricing issue • Value investors are buy & hold investors ‐With a company for the long term • Focus on "finding an outstanding company at a sensible price" rather than generic

companies at a bargain price (Bargain hunting)• Buffett credited Charlie Munger with encouraging him to focus on “long‐term

sustainable growth” rather than on simply the valuation of current cash flows or assets




"Value investing is just standard economics. Think logically about what you are doing. Think about it without emotion.

And think about what makes sense."

‐ Andrew Weiss


• Potential to mislead small value investors• Low priced share or a share that has seen a sharp drop in its price • Could be due to a fundamental change in the company's financial health

• Method of calculating the "intrinsic value" • Two investors can analyse same information & reach different conclusions • No systematic or standard way to value a share

• No ambiguity in the calculated value in value investing • Share selection procedures are very specific ‐ Intended to avoid subjectivity• Focus on documented & objective past numbers

• Subjective & predicted future ones

Criticism of Value Investing



“It’s far better to buy a wonderful company at a fair price than a fair company at a

wonderful price.”‐Warren Buffett


Introduction to Value‐based Research


PE ratio = 18.13

EY% = 5.51%

DY% = 2.69%

Top 40 Index – Large Caps Chart as at Friday, 6th June 2014


Mid Cap Index

PE ratio = 18.29

EY% = 5.47%

DY% = 3.00%

Chart as at Friday, 6th June 2014


Small Cap Index

PE ratio = 13.43

EY% = 7.44%

DY% = 3.62%

Chart as at Friday, 6th June 2014


“The stock market transfers money from the active to the patient.”

‐Warren Buffett


• Do not pay more that 60% to 70% of share’s intrinsic value

• Low normalised PE ratio relative to sustainable growth rate• Not low PE but low PE relative to growth

• Unsuitable for companies with volatile EPS trends

• Profitability • EPS growth• ROE

Value‐based Research: Selection Criteria


“The vital thing in connection with a security is earning power. Two properties with the same reproduction value, book value or outstanding capital may differ widely in

earning power.”

– Phil L Carret


Both shares are trading at a P/E of 15 Forecast growth rate is 30% for stock 1 versus 10% for stock 2.

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

Average 20% 15 75%

Stock 1 trades at a PEG of 50% (15/30) = Considered very cheapStock 2 at 150% (15/10) is expensive.

On average the sector is on a PEG of 75% (15/20) = Value


Watchlist – Value View


“Intrinsic value is a number that is impossible to pinpoint, but essential to

estimate.”

‐Warren Buffett


Watchlist – Quality View


Quality‐based research criteria

• Consistent above average ROE or RONTAV• High operating margin potential • Low financial risk

• Interest cover• Good historic cash conversion

• Quality of earnings• Pays a dividend• Long track record / Economic cycles


Quality‐based research criteria

• Quantitative tools not to be used in isolation • Tool to enhance investment process• Investigate sustainability of values/ ratings

• Not guaranteed to result in outperformance• Below average risk • Fundamentally undervalued• Potential for positive investment returns


Company Selection


Astral Foods Ltd (ARL)


Astral Foods Ltd (ARL)Chart as at Friday, 6th June 2014


Master Drilling Group Ltd (MDI)


Master Drilling Group Ltd (MDI)Chart as at Friday, 6th June 2014


Comp‐Clearing Outsourcing Ltd (CCL)


Comp‐Clearing Outsourcing Ltd (CCL)Chart as at Friday, 6th June 2014


PSG Group (PSG)


PSG Group (PSG)Chart as at Friday, 6th June 2014


Summary & Conclusion• Many people have made fortunes using a value‐based approach to investing. • Value‐based approach suggests a philosophy that works over time

• If you buy carefully • Hold for the long term

• Register for 30‐day FREE trial• Research Platform

• Value & Quality Filter / Company Analysis / Watch Lists• Trading Platform ‐ One Login/ One Platform

• Equities/ ETF/ Unit Trusts / CFD/ SSF/ Currency Futures & Offshore

Good Luck & Happy Trading!


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Disclaimer

This publication has been issued by PSG Online. It is confidential and issued for the information ofclients only. It shall not be reproduced in whole or in part without our permission. The informationcontained herein has been obtained from sources which and persons whom we believe to be reliablebut is not guaranteed for accuracy, completeness or otherwise. Opinions and estimates constituteour judgement as of the date of this material and are subject to change without notice. Pastperformance is not indicative of future results. This report is provided for informational purposesonly. No information contained herein, no opinion expressed and no recommendation madeconstitutes a representation by us or a solicitation for the purchase of any of the securitiesmentioned herein and we have no responsibility whatsoever arising here from or in consequencehereof. Securities, financial instruments or strategies mention herein may not be suitable for allinvestors and investors must make their own investment decisions using their own independentadvisors as they believe necessary and based upon their specific financial situations and investmentobjectives. The employees of PSG Online may from time to time own securities mentioned herein.Analyst Certification The research analyst who prepared this report certifies that the view expressedherein accurately reflect the research analyst’s personal views about the subject security and issuerand that no part of his compensation was, is or will be directly or indirectly related to specificrecommendations or views contained in this report.

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JSE Investor Forum · JSE Investor Forum Shaun van den Berg Head of Client Education ... ‐Warren Buffett. Online Securities Ltd. Is a member of the JSE Ltd. and an authorised Financial