Statement of Principles

Our aim

• To inform investors’ decision making process as fully as possible but not to make decisions for them.
• To understand the companies we cover and the markets in which they trade.

 

We come from a stockbroking research background and as brokers fully recognise the inherent conflicts in facing two sets of users. In managing these natural conflicts we put at the forefront the belief that research has no value to companies if it has no value to investors.

 

Our approach

All our initiations will fully describe the company’s markets and business environment. We will address positives and negatives and prepare valuations based on likely scenarios.

 

Companies get a chance to correct for any factual inaccuracies but do not get to comment on valuation or opinion.

 

We see timely comment as important. We will from time to time be brought inside ahead of announcements and we have procedures to keep us compliant with Market Abuse regulation.

 

Our research targets all professional investors. Regulations prevent us, however, from providing investment opinion and advice to the general public and some global jurisdictions.

 

We do not publish explicit investment recommendations but often these will be implied by valuation ranges.

 

 

Valuation methodology

We do not make specific recommendations on securities in the companies we cover. However we do show valuations for these securities under a number of scenarios.

 

Equity markets tend to value securities according to the expected cash return that the securities can generate for investors relative to the investment made. If we could perfectly forecast future cashflows, a DCF model would be entirely appropriate. Of course we cannot do this but the model remains helpful especially when forecasts are variable as in the case of companies where cashflow is changing as a result of new developments or recovery. We see the DCF model as the prime valuation tool for most of the companies we cover.

 

Our cashflow forecasts are based on assessments of the markets in which our companies operate and we will take into account many factors including overall market size, competition, committed orders and order pipelines and market diffusion rates. Pricing and production costs will impact margins and a full assessment of capital requirements including working capital will be made.

 

We tend to explicitly forecast over a number of years as appropriate to the company and then adopt a terminal value which either assumes a perpetuity valuation using Gordon’s growth model or an annuity valuation where earnings are based on limited life projects. Our terminal growth assumptions are based on a lifecycle view and as such are usually negative in real terms. We further check terminal valuations on a multiple basis to identify any cases where these appear unusual.

 

We use a weighted average cost of capital based on market data. Our cost of equity is closely informed by decisions made by bodies such as the UK Regulators’ Network and the Competition and Markets Authority. Cost of debt is based on actual borrowing costs where available. For early stage technology companies we will also examine additional non-systematic risk adjustments similar to those used in biotech or oil and gas valuations.

 

In addition to DCF valuations we will also make use of single period models including EV/EBTIDA, PE and Yield. We see these are particularly helpful where earnings and cashflow predictability is challenging. Where earnings are foreseeable and also relatively stable we will also look at single period valuations based on the annuity formula although we will also back these up with a DCF valuation.

 

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