Valuation

The Manager believes that buying stocks trading at an attractive valuation offers a margin of safety in case the business’ fundamentals unexpectedly deteriorate. Determining the intrinsic value of a business is an essential part of the Manager’s investment approach. The Manager estimates the intrinsic value by looking at the forecasted EBITDA, a transaction based multiple applied to the EBITDA estimate and the net debt or cash level of the company. Expectations for EBITDA are based upon earnings growth trends over the last couple of years, the outlook for the industry and the company itself. Multiples are preferably derived from market transactions from either industrial or financial buyers in the same industry or sector. If these are not available or transactions are too far in the past, multiples can be derived from looking at historic multiples of the same company or current multiples of peers. In order to judge the predictability of the valuation we look at the variability of the forecasted EBITDA, the variability of the multiple applied to the EBITDA estimate and the net debt or cash level of the company. If the range of EBITDA predictions for a company is large or the recent transaction multiples for companies in the sector differ a lot, the conviction level for valuation tends to be lower than for companies with better predictable numbers. If the net debt level of the company is high, the conviction level for valuation tends to be lower than for companies with lower net debt levels.

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