Philosophy

Our Kennox Value philosophy drives everything we do – from the structure of our business, through our processes to the highly differentiated portfolio we produce – and has remained unchanged over the 10 years since portfolio inception.

We buy only the highest quality companies and only when they are available on excellent valuations. We achieve this by thinking only in the long term.

Time   Our independent structure gives us the freedom to take a long-term view in a market dominated by short-termism. We look to take advantage of opportunities generated by market over-reaction to a company’s uncertain, often unattractive, shorter-term prospects. We buy exceptional companies when they are unloved and have the patience to hold for the longer term, allowing short-term headwinds to turn to tailwinds.

Quality   Our focus is always on the underlying health of a company, rather than its short-term growth prospects. All our stocks have the hallmarks of quality which minimise the risks inherent in equity investing:

  • Sector Leaders: a strong franchise with a competitive advantage
  • Low levels of debt (or even net cash): ability to endure difficult conditions
  • Conservative management: prioritise long-term performance over short-term growth
  • Long-term track records: proven capacity to survive in various market conditions and cycles

Valuations   We believe valuations are a primary driver of any investment decision, not just a secondary factor. We insist on getting our companies at excellent prices. For us, this means looking through a company’s shorter-term performance and prospects and instead assessing its Sustainable Earnings – the earnings that we believe a company can conservatively sustain over a 5-10 year period.

We will pay a price that reflects a conservative multiple of these earnings: up to 12x Sustainable Earnings. On this multiple, we can achieve excellent long-term returns without the need to make significant growth assumptions. This low multiple also provides the opportunity for exciting upside on possible re-rating.

Our focus on valuations continues throughout the period we hold each stock. Conscious that risks increase as the share price rises, we look to trim a holding as it goes through 15x Sustainable Earnings and will be exiting the position when the share price reaches our risk threshold of 20x Sustainable Earnings.

 

Case Study

Semperit (SEM:AV)

Semperit is listed on the Austrian stock exchange with a market cap of €529m. Kennox bought Semperit in April 2009 at €17.36 and sold out of the position in November 2010 at €33.12. During our holding period, the investment returned over 100% for the Fund.

Quality   Semperit is a world leading rubber company with over 180 years of experience in the industry.  It generates a third of its revenue supplying surgical and examination gloves globally to the medical, chemical and food industries. The remaining revenue is from sales of other rubber products (eg. conveyor belts; ski and snowboard foils etc.).

It is amongst the market leaders in all fields in which it operates (with 30% of the global handrail sales, a leading position in conveyor belts and 20% of European medical glove sales). All of Semperit’s divisions have strong margins with management focused on costs despite significant growth (an unusual combination in our experience).

Valuations   We first encountered Semperit in early 2009, when it appeared on several of our screens: the price had fallen to a 5-year low and it screened well across multiple valuation metrics (it traded at under 10x non-peak earnings and it paid a greater than 5% covered dividend). In addition, it had a rock-solid balance sheet with no debt.

We conservatively assessed its sustainable earnings at €40m – below peaks of €45m in 2007, and around the average profits made over the previous 5 years (we discounted some of the recent growth, factored in higher raw material costs and assumed no revenue growth).  With a market cap of €350m (€65m of which was held in cash), this constituted an enterprise value to sustainable earnings multiple of just 7x.

The highest quality company was being offered at exceptional valuations. The question was, of course, why?

Time   The market had reacted negatively to a profit dip in 2008, the result of increasing raw material costs (latex and synthetic rubber). As a result, the share price was heavily impacted, down 60%. We set out to determine whether this was a short-term issue or a more long-term, structural problem.

Our research suggested that the impact of the increased costs of raw materials was in fact short-term. We concluded that it was a burden that would be felt equally across global suppliers, and over a longer time horizon would be shared by customers. We were confident that the majority of our concerns should only impact performance in the near term, and did not undermine our longer-term assessment of the company’s quality and its ability to generate sustainable earnings.

Having confirmed that Semperit’s underlying profit drivers were differentiated from the companies in the portfolio, we were able to gain full conviction. We initiated a buy in April 2009 and Semperit quickly became a 4% position.

Our holding period was 18 months (significantly shorter than our average), during which time the share price more than doubled. This came as the result of a modest 10% earnings increase, showing how depressed market sentiment had been. Having bought on 7x Sustainable Earnings, valuations went through 16x in just over a year at which point we reduced our position by 25%. We sold out of our position when sustainable earnings reached our risk threshold of 20x in November 2010.

 

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