Be ready for $4, page-10

"@madamswer, as someone whose careful and measured postings I respect, it's interesting to see you state quite such forceful confidence in the prospects of FID. Would you care to elaborate on why you feel it's a good investment at present?"

@pseudonym1,

A particular investing saying goes,

"Quality is what you buy, but Value is what you get".


And in terms of Quality, FID has that aplenty:

It's financial pedigree speaks for itself:

For starters, the balance sheet is in impeccable condition, being totally unencumbered by borrowings, modest lease commitments (Total lease liabilities are equivalent to less than half the level of Profit Before Tax), and Current Assets are almost twice the level of Current Liabilities.

It is a >30% ROE business, which has grown its earnings at an average rate in excess of 20%pa over the past decade or so, through a combination of both organic growth [*] and pretty astute acquisitions, which have resulted in the Cost-to-Income for the business falling from 79% in 2012, to 56% today.

And that growth has been achieved without any recourse whatsoever to shareholders for capital... in fact, since 2004 (which is as far back as I have assessed the company), ~$10m worth of shares has been bought back, with Shares on Issue today being 8% lower than it was in 2004.

[*] Although, it is noted that a non-immaterial element of that organic growth has been due to a secular rising in equity markets which has help drive up FUM levels.


Also, FID's financial accounts are clean and presented in conservative manner, with little sign of accounting alchemy or other obfuscation of undesirable financial elements.

And the company's managers have been great stewards of shareholder capital: as I said, the impressive growth in the business has been funded at the same time as the Issued Share Capital has been reduced.

Over the period that I've reviewed the company, almost two-thirds of Operating Cash Flow has been returned to shareholders (~55% in the way of dividends, and 11% via share buybacks), although that buyback component has been heavily weighted to the earlier years.
(No shares have been bought back since 2015. Over the past 5 years capital returns, all by way of dividends, represented 55% of Operating Cash Flows, with the balance being deployed towards acquisitions. (The company consumes almost no capital for the purchase of Property, Plant & Equipment.))


So, plenty of Quality, what about Value?

Given the nature of the business, the company's earnings are - to a large extent - subject to the vagaries of what equity markets are doing at any given point in time.

Inevitably, FID's earnings contracted in 2009 (the GFC) and in 2012 (the Greek debt crisis), shown by the red columns in the chart below, along with an indicative forecast [*]
for FY2020 result (given current market ructions):



[*] I say, "indicative forecast", but it is likely to be less of a reduction than my projection, given the first-half result was 13% higher than 1H2019, although DH2020 is likely to be lower than DH2019, unless markets stage a spectacular recovery from here (which I doubt).

But even if we use that "indicative" figure which looks somewhat conservative and corresponds to NPAT of $11m (EPS of 35cps), the resulting P/E multiple is around 13x.

For a ~35% ROE company with an operating track record going back nearly two decades, which is managed and operated by people that have significant shareholdings in that company, and who have a demonstrated track record of creating wealth for the owners of the company, I am more than happy to pay a price that is 13.5x earnings.

Especially if that company will be able, going forward, to compound the growth in its earnings as it has done in the past (and there is nothing that I can identify that suggests to me that this will not be the case).


Of course, I might tomorrow, or next week or next month, be offered those earnings at an even more attractive multiple, but I have no ability to know whether or not that will be the case, so I rely only on my assessment of fundamental value to know when to buy.

I tend to just buy when I see value being on offer.

I've not followed FID for long; just the past two or three years, during which time I thought the shares were generally fairly- to fully-valued, bar the brief period in late 2018 when the share price fell to around $4.00 along with the rest of the market during the bond market jitters at the time.

By my reckoning, the stock is currently at similar valuation levels to late 2018 (yes, the share price is ~15% higher, but so are the company's earnings).


To your question of:

"I'd quite possibly get back into FID, but I'm not in the game of selling at $6 to get back in at $5. Hence my interest in your view on the long term prospects of the company..."

As you might be able to tell, I think the long-term prospects of the company are most sound, no different to what they were a month ago (actually, in a way the current fall in asset prices is exactly what shareholders in a company like FID, which is essentially an industry aggregator, should want because it means that the expectations of the vendors, of the sorts of businesses that FID seeks to acquire, become moderated).

I fully expect the company will, over the next 5 years, grow its earnings and dividends at an average rate of between 12%pa to 15%pa (which is conservative, I feel, as it would be a sharp slowing compared to the company's long-term compound average growth rate of around 20%pa and the past seven years' compound average growth rate of 25%pa) which means a near-doubling in earnings over that investment time horizon.

One thing is for certain: if that (quite likely) eventuality transpires, the stock price will be a lot higher than its current level.


"Might I also ask what other stocks you have in your sights in the present panicked environment?"

Great question: one thing I've learnt, having been brutalised and scarred by a number of these bouts of market hysteria, is that none of them is the same as any other; they all start differently, they respond differently and they end differently.

It is impossible to time then, either at their starting points or at the point in time when they bottom.

So what I do is I employ a crude rule of thumb that goes as follows:

"For every 4% or 5% that the market falls, allocate ~2% of surplus cash to shares."

Even though it probably isn't, it somehow "feels" scientific, and it eliminates the need to guess when to start buying. (Of course, it assumes that one has surplus cash on hand to begin with and, also, if market corrections are truly large - like the GFC (i.e., ~50%) - unless one starts out with more than 20% cash holding, one will run out of "bullets" before the bottom is reached. So it is not a fool proof methodology, but it has the desired effect of "averaging in" without risking going too early.)

In terms of what I've been buying, 6 months ago I was struggling to see any value in the area in which I most like to invest, namely small- to mind-cap stocks (i.e., $100m to $1.5bn Market Caps).

But this current market rout has thrown a number of high-quality businesses back into attractively-valued territory, after having been expensive for a considerable period of time.

For what it's worth, I have been adding to my holdings in the following:

Large Caps:
AIX
AMC
LNK
RHC

Small Caps:
KME
KOV
SDF
SDI
SXE


And the following are companies which I own and which I now think are undervalued, but which I have not yet got round to buying more of, but which I expect I will do in coming days/weeks:

PENDING (Established Companies):

BRG (*)
DTL
IFL
IRI
JYC (*)
PTM
SMP (*)
VUK

(*) Denotes potential Coronavirus supply chain issues.

PENDING (Emerging Companies):
M7T
PKS
SKF


In times like these, its hard to know what will happen next, but my experience has been that it doesn't pay to try to be too cute, or to attempt to finesse things.

Instead, the best thing to do is to anchor ones views in cold, hard valuation metrics because that way, even if one gets the timing wrong, the capital loss is not permanent.

But trying to buy stocks at exactly their lows is a bit of a fool's errand because its impossible to do and no one rings a bell to tell one when that point is reached.

Even worse, the time for buying stocks that can't be valued might have been an OK thing to do over the past few months/years, but now is no time for that, because the chances of permanent capital loss in those sorts of cases have just gone up dramatically.

.