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The Violent Capitalist graduated with a BS in Finance and International Business and a minor in Politics from New York University in 2004. He is also a CFA Charterholder (2009) who has held many roles throughout the industry. He has been a credit research analyst at an independent credit... More
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  • F&C Asset Management Attracts Activist Investor 2 comments
    Aug 17, 2010 12:21 PM | about stocks: NLS
    Sherborne Investors, currently in the controlling position of Nautilus here in the USA, has decided to also take aim at F&C Asset Management based in the UK. Nautilus has not really played out will for the firm, but here's why I think their focus on F&C should prove extremely worthy of their resources.

    F&C Asset management is really a niche investment management company and is geographically diversified. They have about 100billion pounds under management and have offices in pretty much every major money center in the world.

    At 63 pence, the market cap of the company stands at about 320mil pounds. 150mil in cash and 280mil in debt gives an enterprise value of about 420mil pounds.

    The basic rule of thumb for investment management co's is using 2% of AUM (I have my own reservations about this valuation method in that they are firms that deserve premiums to this and discounts to it depending on their main order of business). 2% of 100bil = 500mil. If their EV should = 500mil, that means they should trade closer to 80 pence or about 25% higher.

    They also have a book value of about 590mil, subtract out management contracts which are being amortized out and their book value is 390mil. If you think that market cap should trade close to book value, F&C should be worth about 78 pence, or about 24% higher.

    My traditional valuation method is to take a multiple of EV against its free cash flows. Cash flows currently are about 5mil from income + amorization of contracts = 55mil and about 1.5mil being spent on capex. FCF is about 53 million. Taking a 10 multiple of this # and that gives an expected EV of 530mil, a target price of 85 pence or 35% higher.

    Basically I don't think that its a coincidence that 3 different valuation methods are giving the such similar valuations! To throw an extra kicker in the mix, you also get dividends of 6 pence per year. The 30mil dividend payments is easily managed with 50mil+ FCF (please remember my FCF definition is different from the textbook version). The dividend yield is about 10%, so you can theoretically have total returns of at least 75% here in 5 years!

    Current Price: 63 pence
    Conservative Target Value: 80 pence
    Expected Total Returns in 5 years: 75%+
    Time Period: Approximately 4-5 years or sooner
    Strategy: By shares close to 63 pence or lower - purchase 50% of a total allotment and be prepared to double down in the 50's.





    Disclosure: I am long F&C Asset Management
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  • PCF
    , contributor
    Comment (1) | Send Message
     
    Not clear why you think free cash flow is £53m. Consolidated statement of cash flows shows net cash inflow from operating activities at 8.3 and from investing activities 6.6, which combined are 28% of your figure.
    18 Oct 2010, 05:35 AM Reply Like
  • Violent Capitalist
    , contributor
    Comments (100) | Send Message
     
    Author’s reply » NI + D&A = OCF

     

    i dont look at the traditional OCF figure because it can be very volatile in the short run.
    18 Oct 2010, 08:41 AM Reply Like
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