The document summarizes an investment thesis for Spark Infrastructure Group. The key points missed by the market were: 1) the potential impact of a tax dispute was overplayed and limited, 2) regulatory growth would drive significant cash flow growth, and 3) detailed modeling showed underappreciated free cash flow potential. The thesis identified catalysts like earnings releases and potential tax resolution. Extensive research and modeling was conducted to support the thesis and mitigate cognitive biases.
Changes to Basel Regulation Post 2008 CrisisIshan Jain
Subprime crisis
Basel Committee objectives and history
Pillars of Basel 2 and Basel 3
Basel 3 Capital Requirements
capital Rations
Capital Buffers
Leverage Ratios
Global Liquidity Standards
macroeconomic factors
Value at Risk
Expected Shortfall
Changes to Basel Regulation Post 2008 CrisisIshan Jain
Subprime crisis
Basel Committee objectives and history
Pillars of Basel 2 and Basel 3
Basel 3 Capital Requirements
capital Rations
Capital Buffers
Leverage Ratios
Global Liquidity Standards
macroeconomic factors
Value at Risk
Expected Shortfall
HML's Mortgage Investor Report provides unique insight into the UK mortgage industry, including the rise of arrears rates through the recession and the fall during the
subsequent recovery.
This insight on account performance, including arrears, redemption and repossession, enables our clients to make confident and effective decisions in areas such as new
lending, portfolio and strategy benchmarking, risk management and capital calculations.
In the backdrop of the buzz that Interest Rate Risk in the Banking Book (IRRBB) has generated in the banking industry, Aptivaa is pleased to launch a series of articles providing our perspective on various issues highlighted by our esteemed clients during interactions in the recent months. This post gives an overview of the revised guidelines on IRRBB which has been issued by the Basel Committee, the approaches and the associated challenges in the implementation of IRRBB framework for all internationally active banks.We look forward to your valuable feedback on the current article or the challenges faced by you in IRRBB implementation.
Assessing the strictness of portfolio-related regulation of pension funds: Re...Marcin Senderski
The presentation wrapping up the article "Assessing the strictness of portfolio-related regulation of pension funds: Rethinking the definition of prudent", presented at the Business and Social Science Research Conference held in Paris 2013 on 21 December 2013.
In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the IFRS 9 framework. In this blog, we have discussed the methodologies for adjusting PDs for the ‘forward-looking’ macroeconomic scenarios and development of PD Term Structure.
Non Performing Loans (NPL‘s) – how to handle and optimizeLászló Árvai
NPL portfolios across Europe
2.
• Outcome and treatment in the AQR test of ECB
3.
• Relevance for banks‘ equity and P&L account
4.
• Possible solution strategies: restructure, liquidate, sale
5.
• Sale of NPL‘s
6.
• NPL‘s of corporates, real estate and retail
7.
• Most successful recoveries for corporate loans
Attached please find our monthly market perspectives piece for September. In light of the recent market volatility, we outline alternative investments, in particular market neutral investments. Currently, our preference is to use market neutral strategies for portfolio defense. In today’s market conditions, particularly in fixed income, traditional asset allocation strategies comprised solely of stocks and bonds may be challenged to provide an adequate balance of investment risk and return.
As the race against time to comply with IFRS 9 guidelines begins, several software solutions are being bandied about as a quick fix solution for automating the entire impairment modelling process. While automating is definitely the way to go in initiatives such as these, the question remains as to whether the software architecture should be of a strategic integrated nature or one that is decoupled and modular. In Aptivaa, we believe the answer to this lies in the 4Rs question: Readiness, Reflectiveness, Redundancy and Regularity.
Aptivaa is pleased to launch a series of blogs to apprise readers of some of the key aspects related mostly to Impairment Modeling, for compliance with the new accounting standards (IFRS 9), as well as to have a conversation with the readers about the challenges that banks are facing in their implementation efforts.
HML's Mortgage Investor Report provides unique insight into the UK mortgage industry, including the rise of arrears rates through the recession and the fall during the
subsequent recovery.
This insight on account performance, including arrears, redemption and repossession, enables our clients to make confident and effective decisions in areas such as new
lending, portfolio and strategy benchmarking, risk management and capital calculations.
In the backdrop of the buzz that Interest Rate Risk in the Banking Book (IRRBB) has generated in the banking industry, Aptivaa is pleased to launch a series of articles providing our perspective on various issues highlighted by our esteemed clients during interactions in the recent months. This post gives an overview of the revised guidelines on IRRBB which has been issued by the Basel Committee, the approaches and the associated challenges in the implementation of IRRBB framework for all internationally active banks.We look forward to your valuable feedback on the current article or the challenges faced by you in IRRBB implementation.
Assessing the strictness of portfolio-related regulation of pension funds: Re...Marcin Senderski
The presentation wrapping up the article "Assessing the strictness of portfolio-related regulation of pension funds: Rethinking the definition of prudent", presented at the Business and Social Science Research Conference held in Paris 2013 on 21 December 2013.
In our earlier blog, we discussed PD terminology and PD calibration approaches as applicable to the IFRS 9 framework. In this blog, we have discussed the methodologies for adjusting PDs for the ‘forward-looking’ macroeconomic scenarios and development of PD Term Structure.
Non Performing Loans (NPL‘s) – how to handle and optimizeLászló Árvai
NPL portfolios across Europe
2.
• Outcome and treatment in the AQR test of ECB
3.
• Relevance for banks‘ equity and P&L account
4.
• Possible solution strategies: restructure, liquidate, sale
5.
• Sale of NPL‘s
6.
• NPL‘s of corporates, real estate and retail
7.
• Most successful recoveries for corporate loans
Attached please find our monthly market perspectives piece for September. In light of the recent market volatility, we outline alternative investments, in particular market neutral investments. Currently, our preference is to use market neutral strategies for portfolio defense. In today’s market conditions, particularly in fixed income, traditional asset allocation strategies comprised solely of stocks and bonds may be challenged to provide an adequate balance of investment risk and return.
As the race against time to comply with IFRS 9 guidelines begins, several software solutions are being bandied about as a quick fix solution for automating the entire impairment modelling process. While automating is definitely the way to go in initiatives such as these, the question remains as to whether the software architecture should be of a strategic integrated nature or one that is decoupled and modular. In Aptivaa, we believe the answer to this lies in the 4Rs question: Readiness, Reflectiveness, Redundancy and Regularity.
Aptivaa is pleased to launch a series of blogs to apprise readers of some of the key aspects related mostly to Impairment Modeling, for compliance with the new accounting standards (IFRS 9), as well as to have a conversation with the readers about the challenges that banks are facing in their implementation efforts.
*Join our MeetUp group for timely event updates: https://www.meetup.com/Chaintech-Ventures/*
The past September was a special and busy one. Thanks to the Consensus Week held from Sep 17, almost all key players and practitioners in this industry have come to Singapore for this carnival.
The Chaintech Ventures team took on several challenging missions since the beginning of September. Within 3 weeks of intense combat, we strove to reap victories as follows:
1. We won as the tied 1st runner up in TEDC 2018, the competition organised and hosted by celebrated fund Fenbushi Capital in Shanghai.
2. Among thousands of projects submitted to SWITCH (Singapore Week of Innovation and Technology), our incubated company ROMAD made it into the final round to be presented among the 15 outstanding projects in Demo Asia Summit. We won as the 1st runner up with only a mere difference of 0.4 in score (79.6) comparing to the champion (80).
3. During the glamorous Pitch Fest event on 2019 Sep 22nd, we managed to have 3 of our advised portfolio companies (ROMAD, VeloxChain and SWIPE) enrolled in a selected line of 15 venture projects.
In this special episode of our talk, we will share our award-winning compositions from TEDC and Demo Asia with you guys and continue our discussion on markets and most recent insights gained from our on-hand experiences.
The ROMAD team is invited as special guests to the event so you could know more about this unique project.
May 12 lecture by Keith Townsend, King & Spalding, covering Special Purpose Acquisition Company (SPAC) dynamics, for the mHealth Israel community. The lecture incluces public company considerations, SPAC Targets, SPAC Execution and Process, sample term sheet, securities law, considerations / differences for SPACs, etc.
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends Newsletter provides a brief digest and commentary of some of the most relevant market trends influencing the fair value regarding private equity portfolio investments.
MaRS Best Practices: Valuations in the cleantech Industry - Rupert MererMaRS Discovery District
Rupert Merer (National Bank Financial) discusses investor interest and valuations in the cleantech industry at MaRS on Nov. 19 as part of MaRS Best Practices Special Valuations Series in partnership with the TSX. More event information here: http://www.marsdd.com/events/details.html?uuid=f2771438-817d-4554-aaa2-ef5f12edf6c6
MaRS Best Practices: Valuations in the cleantech Industry - Rupert MererMaRS Discovery District
Rupert Merer (National Bank Financial) discusses investor interest and valuations in the cleantech industry at MaRS on Nov. 19 as part of MaRS Best Practices Special Valuations Series in partnership with the TSX. More event information here: http://www.marsdd.com/events/details.html?uuid=f2771438-817d-4554-aaa2-ef5f12edf6c6
A project report on construction of balanced portfolio comprising of equity a...
SKI Story
1. Market perception of the stock
An unresolved tax dispute dominated the market debate for SKI in late 2013. The dispute related primarily to the capital structure of the asset companies where interest tax deductibility on shareholder loans was being challenged by the tax office
Notwithstanding the dispute, consensus was positive on the stock, underpinned by the high cash covered dividend yield and growth profile. Investors were reportedly staying on the sideline however
SKI was priced on ~7.2x EV/EBITDA (cons) and a 7.2% dividend yield that relative to 'quality & yield' defensive peers offered attractive prima facie value
Where the market was wrong
1. The materiality of the tax issue was significantly overplayed in the market: Detailed modelling a reasonable ‘worst case’ outcome indicated a 9 cps (5% of market price) impact. This appeared to be more than discounted in the price after deduction from valuation
2. Regulatory growth trajectory underappreciated: Regulatory tariff increases of ~9% p.a. over the next 2.5 years would drive EBITDA growth of 11% p.a. High quality growth where defensive peers were more limited
3. Latent value from significant cash-flow generation: A proportionate operating cash-flow multiple of just ~5x underscored an improving FCF yield of 10%+ as capex peaked in FY14. The improving FCF profile provided positive dividend surprise potential that consensus was missing entirely
4. Market valuation approaches missing the material FCF growth profile: EV/EBITDA multiples failed to appreciate the confluence of strong OCF growth over the medium-term coupled with peaking capital intensity that was better captured by detailed DCF analysis. Given FCF at the asset co’s was swept for distributions, this method was credible
Long idea: Spark Infrastructure Group (SKI.ASX)
Significant latent cash flow profile underappreciated by the market
Fundamental idea case study
Mark Cox, CFA
Spark Infrastructure (SKI.ASX) is a mid-cap infrastructure vehicle that retained 49% interests in two regulated electricity distribution assets: SA Power Networks and Victoria Power Networks. Distributors are the ‘poles and wires’ piece of the supply chain converting high voltage transmission into lower voltage current for residential, commercial and industrial end users. Critical factors for the stock are: regulatory developments, volumes, regulated tariffs, funding and capital expenditure.
Pulling it all together
Forecast - strong cash-flow outlook: A modelled proportionate cash-flow multiple ~5x over the medium-term driven by regulatory mandated growth provided a significant and underappreciated ‘cash-cow’ profile particularly with capital intensity peaking
Valuation – Asset level DCF analysis provided a more granular appreciation of free-cash flow to investors than market EV/EBITDA multiple approaches: Undervalued with 21% upside on conservative DCF methodology and 22% on EV/EBITDA basis vs. comparables
Sentiment - tax issue overhang dominated market the debate but materiality limited: Estimate of reasonable worst-case 9cps impact more than priced in - excessive margin of safety
Catalyst - full year earnings to highlight significant cash-flow growth: Market underplaying generous regulatory growth trajectory and upside to distributions
Outcome
From the average entry price SKI produced a total return of 30%, exceeding the ASX200 total return by 22%. SKI also outperformed the funding stock (WES) by 24%
Spark Infrastructure Group
2. 1. What was the idea’s ‘edge’? What was new or unique the market was missing?
Asset co tax disputes were significantly overplayed - impact likely limited to 9cps in a reasonable bear case (subsequently development was in line with forecasts) > market myopic on improbable tax ‘bear’ case
A comprehensive forecast revealed the market was missing the upside potential for distributions: SKI had significant latent capacity to increase yield > beat on DPS guidance probable given yield mandate
Consensus typically applied simplistic ‘sum of the parts’ approaches to valuing the stock using nebulous EV/EBITDA multiples > more detailed modelling of the asset companies provided a more granular and cash-flow centric approach
2. Identifiable future catalysts to move the market towards the investment thesis:
Growing cash pile – In FY14 SKI would need to explain to investors what it is doing with a payout ratio below 80% (note acquisition risk), or, increase DPS (it subsequently invested a portion in another listed vehicle). A DPS increase above guidance should drive a rerating
Potential conclusion of the tax issue during FY14 removing disproportionate sentiment overhang
3. Research backed by sound analysis – mitigate heuristic and cognitive error probability:
Consulted with two external experts on key industry debates – A discussion with the AER Chairman particularly insightful given regulatory risks factors at the time (Better Regulation review)
Met with management multiple times yielding significant insights on ownership, motivations and risk profile
Work shopped idea with sell-side panel and internal peers (PM, investment committee expert, CIO) for reasonableness of assumptions
Conducted discovery and decomposition on 20+ major documents from co, regulator, industry submissions, and peer stocks
Built highly detailed models on both asset co's and hold-co to support financial forecasts. Considered ~72 input factors when building forecasting framework
Wrote a detailed initiation report with accompanying pitch book exploring investment thesis, critical factor forecasts, tail scenarios, valuation and risk factors
4. Expose and consider risk factors. Acknowledge an idea conviction level:
Explicitly considered and commented on where the thesis could be wrong on each key critical investment issue
Considered scenarios (tail risk scenario model) to understand dispersion of potential outcomes. SWOT analysis of investment thesis. Listed key downside risk factors
Long idea: Spark Infrastructure Group (SKI.ASX)
Internal testing: Quality of investment thesis
Fundamental idea case study
Mark Cox, CFA