Undervalued Growth
TheopportunityinUKandEuropeansmallcaps
GarethRudd&HenryBotting
Twoteams,onesharedbelief.
Smaller
companies deliver significant excess returns in the long term.
ChelvertonEuropean SelectFund
UKEquity GrowthFund
GarethRudd
HenryBotting
Chelverton
Why look for Undervalued Growth?
• TraditionaldefinitionsofGrowth andValuestylesaretoonarrow
• Notallgrowthiscreatedequal
“Growth&Value areinextricablylinked”
WarrenBuffett,BerkshireHathaway AnnualLetter,1993
What is Undervalued Growth?
Notallgrowthis createdequal → Growthin cashflowiskey
Theriseandfallof ‘Growthatanycost’
Higherrealinterest rates–focuson CostofCapital
Profits are an opinion, cash is a fact
Aggressive Revenue
Recognition
Share
Option Charges
Dilutive M&A
Capitalising R&D
Hiding Overheads inInventory Frequent Exceptional Charges
Why we use FCF & NOPAT
200%Revenuegrowth2014-2023to£2.8bn …butoverthisperiodFCFwas -£2.5bn
FY2023generated£51.6m AdjustedEBITDA,which ignoresthefollowingcosts…
• £205.1mIntangibleCapex
• £331.3mTangibleCapex
• £25.7mLeaseInterest
• £33.3mShareBasedPaymentscharge
• £15.5mrestructuringcharge
NOPATafterthesecost =-£559m
Where to find Undervalued Growth….
Hewhoturnsover themoststones….
Cheap relative to history
Even cheaper relative to growth rates…
B2Bdocument management
SAASwithhigh recurringrevenues
NetworkedIdea
Highgrowth, cashgenerative
3-waybidwar,wonby ThomsonReutersCorp
Videogameoutsourcer
x3nearestcompetitor
Buy&Buildmodelwith strongrecordofgrowth
BUTreflectedinhistoric valuationpremium
‘AI
Risk’–opportunity tostartposition
Outlook
Whyhavethey underperformed?
Inflation,rates, ‘riskoff’environment
Begreedywhen othersarefearful Catalysts
“Willanyoneinvestin smallercompaniesagain?”
LowerRates,stable inflation,economicrecovery
ChelvertonUKEquityGrowthFund
ChelvertonEuropeanSelectFund
MI
MI
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