Lindsell Train IT 80% Premium to NAV

stphnstevey

Just started looking at LT, so apologies if I am missing something and all the LT lovers out there

But at first look I am struggling to see why this is at 80% premium to NAV and the share price up 100% in a year

The share price vs NAV disparity seems to have been happening since 2015 and the gap ever increasing

The underlying assets do seem to be performing, but not exceptionally, certainly not doubled their share price in a year

The largest value and biggest share holding is Lindsell Train Ltd (about 45% of assets). Where can you find what that is invested in?

From Managers Report:
It was the rise in the Directors’ valuation of the Company’s holding of LTL of 26% (36% including the dividend) that contributed most to returns. This performance and the perceived undervaluation of the holding in the minds of some investors contributed to the 45.7% rise in the Company’s share price and the expansion of the share price premium to the NAV to 64.6% As regular
readers of my Chairman’s statements will know, any share price premium to the NAV comes with a health warning to new investors. This is because Company shares bought at a high premium can quickly lose substantial value if world stock markets fall and/or the business performance of Lindsell Train Limited deteriorates. I realise that these warnings have proved to be too cautious
in the past. Benign markets and good performance at LTL have driven the value of the Company ever upwards; but history tells us that after ten years of more or less unbroken gains in world markets the risks of a shake-out, for reasons we cannot necessarily predict today, must be rising.
The sharp 11% fall in markets in the last quarter of 2018 was a warning to investors of how quickly prices can decline in a short space of time.

The management charge and performance charges are high compared to a specialist market tracker or FTSE tracker, but relative to an IT

75% UK based, with a imminent Brexit

Could another Woodford happen?

AnotherJoe

If I held it now I'd be selling but then again I made that decision a couple of years ago when considering whether to buy and that turned out to be wrong

ruperts

Fashion investing/performance chasing?

jaybeetoo

https://www.moneyobserver.com/news/lindsell-train-investment-trust-85-premium-why-are-investors-buying

bowlhead99

stphnstevey wrote: »

The share price vs NAV disparity seems to have been happening since 2015 and the gap ever increasing

The most valuable investment the trust holds is a share in the LT management business.

That's a private business and not listed on any stock exchange. It will be valued periodically (not daily) using the usual methods for valuing private businesses, which will generally include some assessment of valuations of other comparable and profitable businesses that are listed, as well as what is known about valuations ascribed to other comparable non listed businesses.

Investors in LT's trust -especially in recent boom years since LT started to build its track record of being very successful at managing funds and investment trusts - have increasingly felt that the true underlying value of this privately owned LT management company (which isn't listed on any stock exchange because of it being a private business) is greater than the 'fair value' that the trust's accountants will put on it within the accounts of the trust that owns a stake in it.

The investors will hold that view partly because they think that LT would not be so aggressive as to put a really high value on their own private management company even if they LT genuinely think it's worth a lot of money. Because LT would be nervous about appearing biased and their auditors and other commentators would be sceptical about it. So they'll have an easier time of it if they give it a cautious valuation in the accounts. Which means the investors will think this particular asset - which makes up the biggest component of total assets - is really worth more than it says on the tin, due to the valuation being perhaps a bit underplayed. So, investors will pay more than it says on the tin, because they guess (rightly or wrongly) that it's been valued with conservative assumptions.

And some of the investors think to themselves that even if *was* valued at a real 'fair value', they personally really like the LT management company and are so super confident that they're willing to pay more to get exposure to that company than what the average fair value assessment would be.

Even if the trust didn't own a bit of the management company, the rest of the assets in the trust might command a premium to their individual NAVs because you are not just buying the assets, you're buying a whole package of assets and an assets selection strategy provided by a competent manager with a good track record, so a premium might be expected like other successful trusts can have, driven by supply and demand, where the sum is considered greater than its parts. But with this trust the premium is mostly coming from the big unlisted holding, which the market thinks is misvalued within the NAV, compared to what they're willing to pay to get access to it.

The largest value and biggest share holding is Lindsell Train Ltd (about 45% of assets). Where can you find what that is invested in?

It's not an investment holding company. It's a fund manager. If it has £16bn of assets under management and charges half a percent as management fee, plus some performance fees, it would make revenues of over £80 million, and after paying £30 million of operating costs (mostly salaries) that's still £50m, before tax.

So it's not 'invested in' investments, but its fortunes are clearly tied to the recurring investment management mandates it has, and the money it can earn from them will depend on includes and outflows to its open ended vehicles as well as investment performance growing or shrinking the AUM of all its mandates (including the trust).

You could get its accounts from Companies House online if you were interested but you won't have enough info to judge its valuation.

The management charge and performance charges are high compared to a specialist market tracker or FTSE tracker, but relative to an IT

I think you stopped your sentence without finishing it.

Yes charges of an actively managed investment trust are higher than a simple market tracker.

Yes people are happy to give away some of their profits above some performance threshold, and with a high watermark, as a performance fee, because they hope that they will get better net performance by motivating the management in that way. Clearly people are ok with the concept otherwise they wouldn't be willing to pay so much more than NAV for a chance to participate in the investment scheme.

However, 'the madness of the crowds' has been in common parlance since Mackay's book of the same name 180 years ago, in which he covered among other things the South Sea Company bubble of 300 years ago and Dutch tulip mania the century before that. So, the crowds aren't always right.

75% UK based, with a imminent Brexit

Setting aside the stake in the management company which is about 45%, that means only 30% is UK listed and 25% not UK listed. The non UK listed companies like PayPal and Nintendo and Mondelez might not worry massively about Brexit as they make more money outside the UK than inside it. And likewise, UK listed companies in the portfolio like Unilever and Diageo make more money outside the UK than inside it.

Then for the management company, much of the money it manages is invested in overseas companies. For example half its assets under management are in the £8bn global equities fund, whose portfolio companies make most of their money outside the UK. If Brexit is bad and the pound crashes, the value of those dollars and yen etc increase in sterling terms and the management company makes more profits from its percentage-based fees, although if course some UK investors may cash in their chips because of uncertainty or other commitments in their own lives.

If Brexit goes really well, and sterling rebounds to be worth more dollars and euros and yen per pound, the foreign-currency denominated assets and incomes of the trust's portfolio companies (including the management company's non-sterling derived fee income which drives its profits and valuation) will fall in pounds.

Could another Woodford happen?

You would need to define what you mean by a Woodford happening and consider why and how it happened.

tin586

Even after numerous warnings from Train, the premium has been pushed to completely irrational levels. Like a bubble waiting to burst.

An interesting parallel is Law Debenture Corporation, which has a fiduciary services business alongside its investment trust. The business is accounted for at market value and LWDB trades at a discount (although there are also other factors at play to explain the discount).

I’m buying (more of) LWDB and steering clear of LTI.

Prism

Also, most people would buy the fund not the trust if they don't like the premium

bostonerimus

80% premium is silly, as is investing in unlisted stuff as Woodford owners have found. I have a fundamental issue with buying anything at a premium because it is popular so those type of closed end funds are off the table for me.

talexuser

Buying at this sort of premium is as risky as having effectively one share worth 45% of the portfolio. I do worry about people buying this stuff based on performance graphs and star manager articles because their savings accounts have historically poor rates and the fallout from the next dip creating snowball panic selling.

stphnstevey

It seems a little like the cryptocurrency hype, where nobody really knows what the true value is, the price keeps increasing with the hype and........well we all know how that ended!

bowlhead99

stphnstevey wrote: »

It seems a little like the cryptocurrency hype, where nobody really knows what the true value is, the price keeps increasing with the hype and........well we all know how that ended!

Looking at the April factsheet the market cap is £343m when at a price that's 80% above the NAV. So the NAV was £190m. 46% of that was the holding of the management company. So the holding of the management company was valued at £87.6m. And the trust owns 24.23% of the management company so the whole management company was valued at about 365 million. Which seems an undemanding valuation, as it's only about 6.6x their annual profit before interest and tax.

If L&T were to sell the trust's stake in their management company to a strategic buyer, you might expect it to command a significantly higher multiple than 6.6x in the current market - assuming those individuals were to stay within the business and not retire shortly thereafter.

However, the 80m revenues and 55m EBIT and 30m dividends won't be sustained during a market crash and recessionary conditions etc so the valuation of 6.6x will take some of that into account and not assume the profit growth will continue ad infinitum.

Then,

In round terms if we guesstimate that the rest of the portfolio that isn't the 46% represented by the management company (ie the other approx £103m of NAV in the April factsheet) is valued at a premium by the market because they like LT and love what they are doing with the portfolio, perhaps that bit is being valued by the market at £110m vs £203m NAV. So if total market cap is £343m and £110 is the external holdings, the holding in the management co is being valued at £233m by the market (instead of at £86.7m by the Trust in its own books). Scale the £233m up for the fact that the trust owns 24.2% of the business, and the whole business is being valued at £963m. Whereas the trust was reflecting only a £365m business valuation in its April accounts.

So the market is valuing the LT management company at more than 2.6x what the trust accounts are valuing it at. Or over 17x EBIT instead of 6.6x EBIT.

That is a somewhat more challenging valuation than the undemanding valuation used to create the Trust's financial statements. But is it entirely implausible? The management company is a business that paid £30m of dividends last year, which would be over 3% of a £960m valuation, yet still added £10m to its cash reserves. And if there is revenue growth to come, a lot of it will go straight to the bottom line profit, as an investment management advisory business doesn't have a lot of capital cost associated with taking on new mandates.

All sorts of things could go wrong though. Market crash/ recession, significant strengthening of GBP, key man incapacity, marketing partners such as HL take the LT products off the best buys lists, etc etc. It's hard to value something at 17x EBIT when revenues are declining even if you think it's ok at the moment.

I don't hold this one but take a look in every so often. My parents have the open ended UK and Global funds between their ISAs so I hope they keep their magic touch.