1. Group Structure
The following companies are subsidiaries of Execution Holdings Limited (“Execution Holdings Group”) and are authorised and regulated by the Financial Services Authority:
• Execution Noble Limited
• Execution Noble & Company Limited
• Execution Noble Research Limited
• Noble Fund Advisers Limited
Please note there are other entities which form part of the Execution Holdings Group, while have no regulated activities in the UK.
2. Background to Disclosure Requirements
The disclosures set out below are in accordance with the requirements of the UK's Financial Services Authority (the "FSA") set out in COBS 12.4 together with the FSA's associated guidance relating to research disclosures in connection with research recommendations.
3. Basis of Valuation
Banks
Our fair values are based on a straight line price to book model. The aim is to have consistent valuation inputs across the sector - so all our numbers are adjusted in the same way to achieve underlying returns. This valuation methodology compares the share price with real returns. The ROE which a company generates is compared to the cost of capital and this generates the price to book at which the stock should trade. For example a bank with a cost of capital of 10% that generates a 20% ROE should trade at a multiple of twice book. This methodology is conservative as it implies that the ROE reverts back to the cost of equity in the following year so it gives no credit to companies with superior returns over time or high growth. As a result in a few cases - namely the Asian banks we base our fair values on a price to book model that factors in ROE’s above the cost of equity for three years - known as value curve. When deciding if a stock is good value or not we also take into account other variables such as PE, pre-provision multiples and dividend yield but use the price to book model to set fair value.
Insurance
Our fair values are also based on a straight line price to tangible book model. The adjustments made to stated shareholders equity to attain the tangible book are to exclude goodwill, add back off balance sheet unrealized gains, equalization reserves and any incremental present value of future profits on life business (PVFP). We then compare this price to book with the operating returns which the company earns on this tangible book to its cost of capital. Operating returns take stated net profit and exclude any one-off items, restructuring costs and realized gains on the investment portfolio. As a cross check we also follow the P/E (operating earnings as defined above) of the stocks too.
Telecommunication
The valuation methodology we use for valuing companies is to apply a Discounted Cash Flow to rolling ten year cash flow forecasts. The component parts of each business are valued in this way and then added together to derive an overall valuation. The resultant Fair Value is a twelve month forward valuation i.e. what we believe the company would be worth in twelve months, and is usually the same as our Price Target for the stock. From time to time we may also issue a clearly labelled near term Price Target that differs from our underlying Fair Value. This is to take account of catalysts that may cause the stock price to under/over-shoot our Fair Value on a short term basis.
Consumer
We calculate fair value for consumer staples stocks using a methodology known as adjusted present value (APV). This requires us to discount a business' operating cash flows using its cost equity to arrive at a net present value. In addition we discount the value of the business' tax shield using the cost of debt and a target debt level. We add this to the estimated equity value already calculated, and after deducting debt and the value of minorities derive a theoretical fair value. This is theoretically the same as a conventional discounted cash flow calculation using a weighted average cost of capital, but allows us specifically to take account of fluctuating levels of debt.
Retail
Our fair values are based on an average of three 15 year valuation models - a DCF model, an EVA model (that values the spread of ROIC over WACC) and a Residual Income model (that values the spread of ROE over cost of equity). We use common assumptions across all retailers, so we use a 15 year government bond yield and a 4.5% equity risk premium to obtain our cost of equity and WACC for each company. We also assume 2% cashflow growth into perpetuity for all retailers and we add back goodwill written off to our Invested Capital. Our 12 month price targets are usually the same as our average fair value but may make reference to relative PER’s, sales and profit multiples, mid term earnings growth, dividend yields, freehold asset valuations, LBO valuations and/or specific catalysts or issues likely to affect the stock within the next 12 months.
Media
Our fair values are based on a combination of three valuation metrics, a DCF model, a number of market multiples (EV/sales, EV/EBITA, P/E, FCF yield, Div yield) and SOTP valuation. We use common assumptions across all media companies for WACC and long term growth. Our 12 month price targets are based on these metrics and are adjusted to account for relevant factors such as potential take-over, earnings momentum, financial gearing, capital allocation risk, etc.
Travel & Leisure
Fair values are based on a weighted average of a DCF calculation along with PE, EV/EBITDA multiples and a REP ratio (ratio of economic profit defined as (EV/IC)/(ROCE/WACC)). We use common assumptions across all Pub Companies for our DCF of a standard 5.5% risk premium and a 4.1% cost of debt. We make adjustments to our debt/equity ratios to reflect what we believe will be the long term capital structure of the individual company and assume a long term growth rate of 0% into perpetuity.
Capital Goods
Our fair value estimates are based on target EV/EBITA multiples primarily, although in cases were appropriate we also reference DCF valuations, free cash flow yields and sum-of-parts valuations. Our target EV/EBITA multiples are established using a 15 year trading history of the company and making relevant adjustments were there has been, or is likely to be, a material change to group structure, long term growth, competition in end markets or future margin improvement. We use adjusted EBITA estimates, stripping out non-cash, non-recurring items and normalising capitalisation and depreciation of assets that would otherwise obscure the valuation. We use enterprise values that include forecast net debt, the market value of minorities, off-balance sheet assets and pension underfunding.
Aerospace and Defence
Our fair values are based on an analysis of relative historic valuation multiples, specifically the P/E and EV/Sales ratios. We make a 10-year valuation history for each stock in our aerospace and defence coverage universe. Then to value an individual stock we calculate the share price at which it would be trading in line with its 10-year average premium or discount relative to the sector peer group, on P/E and on EV/Sales. In cases where a company has undergone structural change in the last 10 years, we apply target multiples which take account of the structural changes as well as the historic relative multiples.
4. Further Disclosures
All prices provided within research reports are taken from the close of business on the day prior to the issue date unless explicitly otherwise stated.
The Execution Holdings Group does not produce maintenance research and as a result there is no planned frequency of reports for companies under coverage.
Research reports are produced on an ad hoc basis.
Equity Research Analysts and members of their immediate families are absolutely prohibited from purchasing or receiving securities prior to an IPO for subject companies and other companies in the industry or industries assigned.
The Execution Holdings Group does not have any major shareholdings in any issuer or any other significant financial interests in any issuer unless specifically disclosed in the research report.
Execution Holdings Limited is registered in England and Wales no. 04916295
Execution Holdings Limited and subsidiaries Group Pillar 3 Disclosures