The L1 Capital (L1) investment process combines valuation (primarily discounted cash flow) with qualitative considerations (management quality, industry & company structure and business trends) to identify attractive investment opportunities. The core of the investment approach is a high level of interaction with a wide range of market participants.
L1 uses a fundamental, bottom-up approach to identify securities with the potential to provide attractive risk-adjusted returns. While this involves many stages of analysis which can occur concurrently, below is an outline of the process from general research to the formation and maintenance of the L1 portfolio.
Comprehensive research schedule
We believe in identifying stock and industry opportunities primarily from direct contact with companies, detailed company analysis and observing broader industry trends. At the heart of this approach, we spend the majority of our time conducting one on one visits with company management, listed & unlisted competitors, customers, suppliers, operational personnel, regulators, consultants, unions and other parties that can provide a deeper insight.
Extensive Travel Program
At L1, we find that one on one meetings are far superior to conference calls or group presentations when researching a company or industry. To develop and maintain close relationships with relevant parties we spend a lot of time travelling and meeting people face to face. This program extends globally as we seek first hand, on the ground knowledge of conditions that will impact our assessment of a company.
Detailed Bottom-Up Analysis
We spend a large proportion of our time reading and analysing annual reports, company announcements, industry publications, broker reports and other relevant material. This assists both in our search for new opportunities and in preparation for meetings with companies we invest with.
Valuation and Qualitative Scoring
In preparing our investment thesis we use a combination of quantitative and qualitative measures to ensure we have a deep understanding of the companies we invest in. The qualitative metrics are uploaded into our proprietary database on a live basis, allowing us to view our analysis relative to broker and consensus forecasts.
L1 prepares its own profit & loss, balance sheet and cashflow statements for companies in our investment universe.
Valuation & Discounted Cash Flow (“DCF”)
We use realistic estimates for each metric in the model (ie. not conservative “worst case” or optimistic “best case” scenario). We then cross check the DCF valuation with peer and historical multiples such as P/E, EV/ EBITDA.
A qualitative score of 1 to 5 (1 = excellent and 5 = poor) is given to each company in the categories outlined below so as to conclude on our judgement of their strengths and weaknesses.
- Management quality – We assess a wide range of factors including managements track record, operational capability, shareholder focus, transparency, governance and honesty.
- Industry & company structure – In assessing the attractiveness of the industry and company structure we assess the industry growth profile, barriers to entry, the competition, substitution alternatives, community engagement and the cost of production versus peers.
- Business trends – In assigning a score for this category some of the dynamics we analyse include the supply/demand profile, asset utilisation, the regulatory landscape, potential for innovation and industry consolidation.
Once scores are assigned to each segment they are tallied to give an overall rating of the business. Each of the three qualitative factors is given an equal weighting in determining the overall quality score for the business.
L1 Capital Ranking Sheet
Using the qualitative and quantitative criteria described above, companies are given an overall rating. Valuation comprises 50% of the rating, while the total qualitative assessment comprises the remaining 50%. This overall rating is used to form a percentile ranking for all stocks in our investment universe.
The final stage of the investment process is the portfolio construction, which brings together all elements of the investment process outlined above. Top ranking stocks form the basis of our ‘theoretical portfolio’ against which we run our risk control measures to determine if any adjustments need to be made in constructing our actual portfolio. The final portfolio is heavily reliant on the fundamental bottom up evaluation of the companies we research. It is also cognisant of the broader economic conditions that are prevalent at any given time.