Equities remain in vogue as bond yields adjust, the spread on SB/Junk continuing to narrow, this dynamic should be enough to see appetite remain for equity investments. The gains in the S&P 500 were the broadest since 1994, every instance where 80% of the 500 companies gained was followed by additional gains the following year. Caution against unbridled optimism, corporate valuations are the richest since 2000 and margins the highest on record. Shiller P/E, the cycle adjusted P/E ratio, is now at 25.6, 55.2% higher than the historical mean of 16.5.

1. BEST IDEAS 2014
December 2013

SOCO International

Co-Op Bank renewable energy division

Genus PLC

Knowles

RPX Corp

Starwood Waypoint Residential Trust

2. Companies
Research Picks
SOCO International
Buy
575p
Vietnam assets drive shareholder return and stoke M&A interest
Co-Op Bank
Spin-off of non-core renewable energy investment division
Genus PLC
Buy
1550p
Improving margins for 2014 bode well for trading results
Knowles
Buy
Spin-off of the audio equipment division from Dover Corp
RPX Corp
Buy
$24.11
Cove v2.0, Frontier Explorer in Industry Hotspots
Starwood Waypoint RT
Buy
Carve out of a distressed property and mortgage company at discount to NAV
3
4
5
6
7
8

3. SOCO International: Buy, Target 575p
Current 392.7p, Market Cap £1,290m
Vietnam assets drive shareholder return and stoke M&A interest
Production for the first five months of the year averaged 18,070 BOEPD net to the Company’s WI, approximately 60% higher than the
same period last year. The Vietnam Cuu long basin continues to drive cash flow with the completion of the H5 well due in the next 18
months expected to increase production by c. 30%. Exploration studies in Central Africa are at advanced stages however attract
negative publicity, the uncertainty surrounding the development leaves an upside catalyst of 130mmboe in reserves. Importantly the
firm redeemed the last of its outstanding convertible bonds and will enter 2014 debt free, which compares favourably to the gearing of
Premier Oil and Afren. On potential of a predatory takeover, the recent farm-in sends out a signal that anyone interested in buying the
whole co in order to get hold of the Vietnam assets could achieve a cleaner deal by moving in the near future rather than waiting.
With over 5 projects due to come online in the next 24 months we expect improved EBT, cashflow & facility use over the next 12 months
and management to focus on delivering growth and pursuing efficient shareholder returns. Despite sector leading ROCE, operating
margins and FCFE, this valuation is not priced in, with a 40% discount (median 15.7x) 9.7x ’13 P/E (3.3x EV/EBITDA). Buy.
Key Investment Drivers





Performance is improving, driven by Vietnam extraction
Management comments cite M&A interest, with recent private transactions implying a large premium would be required
Board instating a 40p/share cash return over the next 12 months, 50% payout target of FCF
An EPS CAGR of 24% over the next 3 years still leaves the group EBIT margin at 70%
Target price raised from 450p to 575p (+28%), a 10x prospective P/E (4x EV/EBITDA) in 12 months
Year End Dec.
2010
2011
2012
2013E
2014E
Revenue (£m)
48.4
234.2
621.6
638.7
686.7
EBT (Adj.) (£m)
29.1
157.2
448.2
446.6
480.7
EPS (Adj., FD) (p)
0.04
0.27
0.63
0.64
0.70
DPS (p)
-
-
-
0.4
0.42
EV/EBITDA (x)
-
-
3
3.3
3.7
14.3
11.6
10.1
9.9
9.1
2.6
12.9
33.6
32.1
-
-8.4
-4.8
17.3
13.9
13.8
P/E (x)
ROCE (%)
FCF Yield (%)
Source: Company Accounts and Thomson Financial

4. Co-Op Bank: Corporate
Sales Valuation est. £13,275m, Book Value £3,547 / Spin-off (Gross Assets) £600m est., Market Value sub-£100m est.
Co-Op Bank to spin-off non-core renewable energy investment division
The Co-op Bank is seeking to exit the renewable energy sector as part of a its restructuring plan as it no longer sees the renewable
energy asset investment division as a "core" part of the business. The catalyst would be if the division is divested through an exchange
listing as opposed to an outright sale. As a standalone lender the division would be well placed to embark on new lending to compete
with RWE in larger projects whilst maintaining its position as the market leader in community sustainable project investment. The
original intent was to double lending to in excess of £1,000m by the start of 2014, portfolio of renewable energy assets acco unts for
3.5% of the Co-op Bank’s total non-core book - with less than 2% of the £500m-plus portfolio deemed to be “non-performing”.
Any listing is would attract interest due to the status of the event, however market value would likely be sub £100m. A possible lack of
demand due to the small size of any offering and investors repelled by typically low sector yields could present an opportunity for an
undervalued asset.
Key Investment Drivers



Industry leader with a 30% CAGR sector
Potential to significantly increase lending in a low single-digit non-performing market
Uncertainty of listing options, group going-concern and market value size could provide a discounted opportunity

5. Genus PLC: Buy, Target 1550p
Current 1274p, Market Cap £774.5m
Improving margins for 2014 bode well for potential upside earnings results
2013 was far from an impressive year for Genus, finishing down 20% for the 12m period partly due to poor weather in South America,
higher feed costs and increased capex. Despite this, Genus maintains the leading market share in the Bovine and Porcine segments,
a successful push into Asia will be aided by the new Chun Hua nucleus farm and Besun JV. Additional pipeline JV’s in China, India
and Brazil could see significant growth in operations through 2014 and potential synergy targets of £20-30m.
Management have forecast decent harvests in the Northern Hemisphere in H1 2014, this should contribute to a c.300-400bps decline
in feed costs, combined with single digit growth in global Pork, Beef and Dairy demand with moderately rising prices, a target of midto-high single digit Adj. EBT growth seems conservative. Buy.
Key Investment Drivers





Improving global harvests should see reduced feed costs filter into operating margins
New expansion programs and JV’s will add to product differentiation and growth in 10 key markets identified by management
Suppressed share price through 2013 leaves the name as a contrarian/turn-around play in 2014
Stable balance sheet, interest cover and dividend cover looks attractive
Target price raised from 1300p to 1550p (+19%), a 25.8x prospective P/E (20x EV/EBITDA) in 12 months
Year End Dec.
2010
2011
2012
2013
2014E
Revenue (£m)
285.30
309.90
341.80
345.30
385.0
40.80
40.80
54.40
38.10
60.37
EPS (Adj., FD) (p)
0.03
0.46
0.63
0.36
0.60
DPS (p)
0.11
0.12
0.19
0.15
0.18
EV/EBITDA (x)
-
-
-
18.5
20.0
P/E (x)
-
23.24
23.33
21.66
25.8
5.57
12.39
14.10
8.65
-
EBT (Adj.) (£m)
ROCE (%)
Source: Company Accounts and Thomson Financial

6. XXX: Buy, Target 575p
Knowles: Buy
Spin-off of the audio equipment division from Dover Corp
In H1 2014, Dover Corp plan to spin-off their audio equipment division in a 1:2 tax efficient distribution, the leading MEM position has
been established over 20 years, formed through acquisitions and organic growth. The unit, which will be publicly traded as Knowles, is
an industry leading manufacturer of mobile consumer electronics and medical audio technology, with a 6.5-7.5% revenue spend on
R&D, a 300bps spread on the industry average.
The spin-off will allow Knowles to pursue a focused and a more aggressive growth strategy as it will have sole discretion to fund those
opportunities it deems value-enhancing, rather than having to compete for capital from its parent company. Dynamic research and
development, fast product cycles, customer interest in the telecommunications industry and high-volume manufacturing are
characteristics that Knowles has developed and intends to continue to enhance. Buy.
Key Investment Drivers




Achieving 20% CAGR in sales, with aspirations to increase growth as a separate company
Pureplay on Obama Care with sales in US medical products comprising 25% of the revenue mix
Aggressive management equity incentives for future performance
Capitalising on increased demand for high-end acoustic and audio products in smartphones and tablets globally
Year End Dec.
2010
2011
2012
2013E
2014E
Revenue ($m)
730.4
983.3
1,117.9
1263.3
-
EBT (Adj.) ($m)
141.5
146.4
136.0
-
-
Net Inc (Adj.) ($)
109.2
98.4
79.0
-
-
DPS ($)
-
-
-
-
-
EV/EBITDA (x)
-
-
-
-
-
P/E (x)
-
-
-
-
-
ROCE (%)
-
-
-
-
-
FCF Yield (%)
-
-
-
-
-
Source: Company Accounts and Thomson Financial

7. RPX Corp: Buy, Target $24.11
Current $16.92, Market Cap $885.3m
NPE Patents: The growing threat to operating companies
Technology patents have seen an 80% increase in annual issuance from USPTO since 2000, the rise of NPE patents has seen zeroasset litigation cases increase 500% since 2008 and is seen as a significant threat to a stable patent ecosystem. RPX special ise in
patent databases and advisory, the firm also provides patent insurance and the structured acquisition of patent blocks as a defensive
mechanism for corporate risk management. As of September 30, 2013, RPX had successfully negotiated more than 414 releases and
dismissals from 62 litigations, this is expected to increase as a combination to over 700 through 2014 according to management.
The company’s pipeline remains very strong and their renewal rate remained c. 90% in 2013. The firm has identified a potential 450
clients who could benefit from avoiding the increasing cost of patent litigation and utilise the firms burgeoning insurance product and
vertical push into financial services patents. Competition within the patent litigation market remains muted which will allow RPX to
continue as a pioneer, future growth could however see new entrants but this is unlikely at least in the near term.
We expect improved EBT, cash flow & net margins over the next 12 months and management to focus on adding clients. Despite
impressive metrics in ROCE, operating margins and FCFE, this valuation is not priced in, with a 45% discount (median 15.9x) 8.8x
EV/EBITDA). Buy.
Key Investment Drivers




Achieving 48% CAGR in sales, within a developing market
Industry leader in establishing a defensive patent chest
Decrease in patent amortisation period should increase efficiency turnover and improve cash flow
Target price raised from $20 to $24 (+20%), a 22x prospective P/E (12x EV/EBITDA) in 12 months
Year End Dec.
2010
2011
2012
2013E
Revenue ($m)
95
154
198
237.6
EBT (Adj.) ($m)
27
46
62
69.4
0.37
0.61
0.77
0.90
DPS ($)
-
-
-
-
EV/EBITDA (x)
-
3.64
4.65
8.90
EPS (Adj.) ($)
P/E (x)
ROCE (%)
FCF Yield (%)
Source: Company Accounts and Thomson Financial
-
24.36
13.44
20.30
3.85
10.90
11.82
10.80
-
-
-
-

8. Starwood Waypoint Residential Trust: Buy
Carve out of a distressed property and mortgage company
On January 31, 2014, Starwood Property Trust plan to separate their real estate investment trust in a 1:5 distribution. The unit, which
will be publicly traded as Starwood Waypoint Residential Trust, acquires single-family homes below market value to renovate and lease
to qualified residents, the firm also purchases pools of distressed and non-performing residential mortgages.
Current exposure lies in the demographically favourable Texas region and the distressed Florida market, plans are in place to expand
into seven additional states through 2014. Synergies intend to be strengthened with Barry Sternlicht’s private equity group, a given
reason for the distribution being to increase parent and management equity-based compensation. The structure of the mortgage loan
pools is such at a 100bps increase in short-term interest rates equates to a c. 10% increase in interest income. The firm is expecting
to be granted REIT status in 2014, terms implying a minimum of 90% EBT will be distributed to common shareholders, the typical
industry yield is 6.5-7.0%. Currently the structure of the distribution and the limited track record of the business increase the near-term
investment risk, which could produce a substantial discount to NAV upon commencement of regular-way trading. We are always
interested in businesses that look particularly unappealing to potential shareholders yet are structured to benefit management when
their interests are served as shareholders.
Key Investment Drivers




Aggressive growth targets, c. 50% in the acquisition of targeted distressed rental properties
Pureplay on continued US housing recovery, growth in the US rental market and projected increase in interest rates
Effective purchase of a decreasing supply in distressed assets with expertise from Starwood Capital
Achieving REIT status for attractive tax-efficient distribution of income, unknown yield remains a headwind

9. Appendix: Top Picks 2013
Recommendation
Prothena
MSCI Sector
5th January
Price at
Rec
Price at 2013
end
% Return 2013
MSCI Global
% Return
Relative %
performance
$6.55
$26.52
305%
20.25%
285%
January
$15.69
$29.24
86%
20.25%
66%
Engineering
25th June
$15.72
$27.56
75%
20.25%
55%
Software
25th June
$9.27
$14.71
59%
20.25%
38%
Biotechnology
9th January
$34.00
$52.81
55%
20.25%
35%
Education
25th June
$19.19
$27.32
42%
20.25%
22%
Consumer Disc.
28th June
€17.20
€23.84
39%
20.25%
18%
Smith & Wesson
Defense
26th June
$9.68
$13.49
39%
20.25%
19%
Navios Maritime
Transport
26th June
$14.22
$19.12
34%
20.25%
14%
CST Brands
Consumer Goods
4th May
$29.80
$36.72
23%
20.25%
3%
Mallinckrodt
Pharmaceutical
3rd July
$43.10
$52.26
21%
20.25%
1%
36%
20.25%
15.75%
Starz
Argan
Ebix
AbbVie
Apollo Education
Groupe Fnac
Twenty-First C. Fox
Vera Bradley
Biotechnology
Date Added
Media
19th
Media
30th June
$29.53
$34.60
17%
20.25%
-3%
Consumer Disc.
26th June
$20.79
$24.04
16%
20.25%
-5%
25th
June
$16.97
$19.51
15%
20.25%
-5%
Booz Allen Hamilton
Business Serv.
Crimson Wine Group
Consumer Disc.
2nd March
$8.01
$8.84
10%
20.25%
-10%
Financial Serv.
4th November
£14.55
£15.60
7%
20.25%
-13%
Melexis
Technology
4th November
€22.99
€23.18
1%
20.25%
-19%
Budimex
Construction
24th November
PLN 138
PLN 137.50
0%
20.25%
-21%
Industrial
4th November
€47.15
€45.00
-5%
20.25%
-25%
17th
April
$21.69
$19.94
-8%
20.25%
-28%
S&U PLC
H.E.S. Beheer
Brookfield Property
Real Estate
Frigoglass
Consumer Disc.
2nd November
€5.65
€5.11
-10%
20.25%
-30%
Weight Watchers
Consumer Serv.
26th June
$45.38
$32.93
-27%
20.25%
-48%
Source: Thomson Financial
Important Disclosures
The analyst(s) responsible for preparing this research report or sections of this report, in whole or in part, hereby certifies that, with respect to any
and all of the securities or issuers that the analyst(s) cover(s) in this report, the views expressed in this report accurately reflect the individual research
analyst's personal views. In addition, no part of the research analyst's compensation was, is, or will be directly or indirectly, related to the specific
recommendations or view expressed in this report or summary.
THIS IS INDEPENDENT RESEARCH AND A MARKETING COMMUNICATION under the FSA Conduct of Business rules. It has not been prepared in
accordance with legal requirements designed to promote the independence of investment research and it is not subject to any regulatory prohibition on
dealing ahead of the dissemination of investment research. Please see the important disclosures and disclaimers in this section which form an integral
part of this report.
This publication is a brief summary and does not purport to contain all available information on the subjects covered. Further information may be available
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