market folly

Continuing our notes from the London Value Investor Conference 2013, the next speaker is Simon Denison-Smith of Metropolis Value Fund.  He talked about his investment strategy and presented the long ideas of Cisco Systems (CSCO) and J. Smart.


Metropolis' Strategy

Denison-Smith’s investment strategy draws extensively on his experience of building and running  businesses. He has extensive experience of private company buyouts. Since inception in 2008  Metropolis Valuefund has returned 12% per annum.

He likes to buy unloved companies but he noted it was difficult to execute the strategy consistently  for a number of reasons. You need to be able hold your conviction when the market is selling off  hard. You need to be able to treat volatility as risk. It helps to think of investments as a fractional  stakes in a business. Avoid anchoring to an investment thesis as the facts change. Avoid over-  diversifying, 10-20 stocks are enough. You have to be able to cope with periods of inactivity.

Metropolis apply an entrepreneurial and private equity approach to long only investing. They screen  for cheap businesses and rule out most candidates using criteria such as sector, pension liability,  clarity of business and unfavourable ownership structure. They spend most of their time assessing  the quality of businesses carrying out analysis of multiple years of accounts, broker reports, web  based research, modelling cashflow and identifying risks. The favour the sum of discounted future  cashflows as a measure of value.

Denison-smith said that trying to fully understanding the bear case is an important part of their  process. As Chalie Munger says, always invert.


Idea: Long Cisco (CSCO)  

Since 1999 EPS has grown 13% pa. PE has fallen from a peak of 300x to 11-12x. EBITA margins  have remained within the range of 26-34%. It consistently generates positive operating cashflow  after interest and tax. Cashflow is consistently higher than reported profits. Today Cisco’s post tax  cashflow is only costs 7x. Free cashflow yield is 14%. Cisco has a moat in terms of scale, brands  and high switching costs. Denison-Smith noted that Cisco’s reputation for producing routers and  switches that are the safe and reliable option was particularly important. The most significant  threat to Cisco is that disruptive technology (SDN) and increased competition, particularly from  Huawei, will impact their high gross margins.


Idea: Long J. Smart (SMJ: LON)  

Denison-Smith billed J. Smart as an idea for personal accounts. J. Smart develop residential and  commercial property in Edinburgh. They also provide a range of construction services for external  and internal use. It is a family management team with 50% ownership and it is not covered by any  analysts. They are buying back shares and there is a dividend of 4%. The shares are illiquid. It’s  cheap in balance sheet and cashflow terms. The discount of enterprise value to net tangible book  value less cash is 65-70%. EV: post tax FCF of 7-8x. FCF yield of 12-14%.


Be sure to check out other investor presentations: notes from the 2013 London Value Investor Conference.