Tag: Small Caps

Management projects the deals to propel an AUD 30 to 40 million EBITDA uplift in fiscal 2022 for the publishing unit. Some of this increase will likely be driven by continuing cost cuts and efficiency improvements. However, we believe the bulk of it is from the new content supply deals—juicy high margin arrangements which finally shift the image of the much-maligned and structurally-challenged division to one that can now much better monetise its (albeit still dwindling) journalistic resources.

Our fiscal 2021 earnings forecasts for Nine are largely intact. But we have increased our EBITDA estimates from fiscal 2022 by 6% on average, giving effect to the uplift from the new content supply agreements (up to three years with Facebook, five years with Google), as well as lifting the expected benefits from management’s relentless focus on costs in the publishing business. More specifically, from our fiscal 2021 publishing EBITDA forecast base of AUD 124 million, we now expect fiscal 2022 EBITDA to be AUD 158 million, up from AUD 120 million. Investors and, more importantly, the journalist community will be keenly watching how these digital platform deals change management’s resource and capital allocation to the publishing division in the future. Judging by the 26% premium that no-moat-rated Nine shares are trading at relative to our intrinsic assessment, it appears investors are betting the publishing unit will become an even bigger cash cow that Nine will milk, in order to fund its growth ambitions for the digital-centric units such as 9Now and Stan. On the other hand, competition is intensifying in the digital space, and we prefer to remain on the conservative side.

Company Profile

Nine Entertainment operates Nine Network, a free-to-air television network spread across five capital cities, as well as in regional Northern New South Wales and Darwin. It also owns Australia’s third-largest portfolio of online digital properties, one that reaches more than 60% of the country’s active online audience. The merger with Fairfax combines Nine’s top-ranked TV

network and the second-largest newspaper group, topped with a collection of quality digital assets in Nine Digital, subscription video on demand operator Stan, and Fairfax’s 59%-owned Domain. It ensures the merged entity remains relevant in the eyes of audiences and advertisers.

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

He is responsible for the model and research and draws on seven managers/analysts. Frederick Konopka also became a manager in 2008 and handles portfolio construction and trading for the team. MDT looks to group companies into different baskets producing various streams of alpha potential using valuation, growth, momentum, and quality indicators.

By using classification and regression tree analysis, the team can test thousands of potential combinations of factors based on 30-plus years of U.S. stock data to find the best mixtures of alpha using a three-month investment horizon. Still, such a short investment horizon can be difficult to implement. It leads to annual portfolio turnover that can be lofty and varies greatly. Over the past five years, turnover ranged from 188% to 227%, well above the 59%-66% range for the typical small-growth. The portfolio’s holdings have varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless they’re spread out across more holdings.

Since Mahr became lead manager in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 lagged the small growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. The fund has performed better since the team’s 2013 process switch to multiple decision trees, but the fund’s high volatility has kept its risk-adjusted results in line with the index.

Quantitative approach with short focus

MDT groups companies into different baskets of alpha potential. The team forecasts three month returns using valuation factors based on structural earnings, tangible book value, and forward earnings estimates; growth factors like analyst conviction and long-term earnings growth; quality factors measuring free cash flow, leverage, and reliance on external capital; and momentum factors like relative stock price trend. The team uses classification and regression tree analysis to test thousands of potential combinations based on 30-plus years of U.S. stock data.

Prior to 2013, the team used one large decision tree to forecast alpha, but that approach was subject to overfitting issues. Switching to regression analysis using multiple decision trees resulted in combinations of subsets of the factors with the best alpha potential. This leads to the fund holding stocks with different avenues to produce alpha, potentially leading to more opportunities to outperform. The MDT team continues to refine its model, usually updating the model twice a year. These revisions are typically on the margin, though. In 2020, for example, they adjusted their structural earnings indicator by using an industry relative basis.

Diversified, but high turnover

The strategy’s short-term approach has led to higher turnover than most smallgrowth peers. Its annual portfolio turnover range of 118%-227% the past five years is much higher than the median range of 59%-66%. The fund might struggle to maintain its fast-trading ways if assets hit the team’s $8 billion-$10 billion estimate of its small-cap capacity, which includes this strategy, Federated MDT Small Cap Core QISCX, and Federated MDT Small Cap Value. So far, the team is not near that limit, with around $2 billion across its small-cap charges. However, the portfolio’s number of holdings has varied from 150 to 250, suggesting some opportunities may be too illiquid and costly to pursue unless their potential alpha is spread out across more holdings. This could become more pronounced as the asset base grows

Performance – Volatile

The fund’s absolute and risk-adjusted returns lag the Russell 2000 Growth Index during lead manager Dan Mahr’s tenure. Since Mahr took over in August 2008, the Institutional shares’ 11.9% annualized return through April 2021 trailed the small-growth category’s 12.2% gain and the Russell 2000 Growth Index’s 12.2% rise. It has done so with more volatility than the benchmark, resulting in subpar riskadjusted performance measures, like the Sharpe ratio. Most of the fund’s underperformance has come during market turbulence. Mahr’s Aug. 31, 2008,start date means he took over amid the credit crisis, and the fund barely edged the benchmark through that period’s March 9, 2009, bottom. The fund lagged the bogy’s ensuing trough-to-peak (April 23, 2010) performance by 26.6 percentage points, annualized.

(Source: Morning star)

Disclaimer

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.