Bestinver - Francisco Garcia Parames

8/8/2019 Bestinver - Francisco Garcia Parames

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GO EAST: VALUE INVESTING IN EUROPE

New York, October 2010


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ABOUT US

Incorporated in 1987. Shareholder structure: 100%-owned by Acciona Group (Quoted andIbex-35 member). Three fund managers and three analysts (one based in Shanghai).Fund managers: Profit sharing agreement and 100% of financial assets invested in the funds.

Spains leading independent fund manager 4,8Bn AUM and 37,000 customers (95% equities).

Focused on returns not volumes under management. No marketing or distribution agreements.

Investment philosophy based on Value Investing. Long only. No leverage. No derivatives.No activism.

Two portfolios: 25% AUM Iberian (Spain and Portugal) and 75% AUM Global (mainlyEurope).


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BESTINVER: OUR PERFORMANCE


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* Returns for BESTINFOND to 31/12/1997 and B. BOLSA from 01/01/1998* IGBM = Madrid SE General Index* All Bestinver returns are expressed as net, after expenses and commissions.

BESTINVER SPANISH EQUITIES vs. IGBM INDEX

COMPARATIVE PERFORMANCE

YEAR BESTINVER IBERIAN EQUITY BENCHMARK Relative perf.

1993 43,91% 46,67% -2,76%

1994 5,28% -11,70% 16,98%

1995 10,33% 12,30% -1,97%

1996 41,01% 38,96% 2,05%

1997 41,01% 42,22% -1,21%

1998 29,03% 37,19% -8,16%

1999 -10,98% 16,22% -27,20%

2000 13,91% -12,68% 26,59%2001 21,22% -6,39% 27,61%

2002 8,25% -23,10% 31,35%

2003 38,31% 27,44% 10,87%

2004 29,97% 18,70% 11,27%

2005 27,07% 20,56% 6,51%

2006 37,36% 34,49% 2,87%

2007 4,84% 5,60% -0,76%

2008 -35,16% -40,56% 5,40%

2009 34,56% 26,64% 7,33%

30/09/2010 -0,28% -11,22% 10,94%

Return since 1993 1533,66% 393,07% 1140,59%

Average annual return 17,08% 9,43% 7,66%


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* Returnsfor BESTINVER INTERNACIONAL* MSCI = Morgan Stanley global stock market index* All Bestinver returns are expressed as net, after expenses and commissions.

COMPARATIVE PERFORMANCE

BESTINVER INTERNATIONAL EQUITIES vs. MSCI

YEAR B.GLOBAL EQUITY MSCI World Index Relative perf.

1998 -14,13% 16,51% -30,64%

1999 47,87% 44,75% 3,12%

2000 18,39% -8,24% 26,63%

2001 16,59% -13,36% 29,95%

2002 -26,95% -33,02% 6,07%

2003 32,70% 8,83% 23,87%

2004 19,01% 4,71% 14,30%

2005 30,47% 23,95% 6,52%

2006 24,05% 5,51% 17,98%

2007 -4,61% -3,41% -1,20%

2008 -44,71% -39,08% -5,63%

2009 71,85% 23,02% 48,83%

30/09/2010 14,21% 6,06% 8,16%Return since 1998 238,77% 2,76% 236,01%

Average annual return 10,04% 0,21% 9,83%


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WHAT MAKES OUR STRATEGY SIMILAR TO THATOF OUR VALUE PEERS?


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We seek profitability in absolute terms and not in relation to benchmarkindices.

Equally, we consider risk in absolute terms, defining it as the possibility of losing the money invested and not in terms of volatility or deviation withrespect to a particular benchmark index.

We are asset managers , not asset gatherers.

We invest in companies that are trading at a reasonable discount to their true economic value .

Patience. We are in it for the long term and we are happy to wait.

WHAT MAKES OUR STRATEGY SIMILAR TO THAT OF OUR VALUE PEERS?


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STRONG MANAGEMENT TEAM

Operating track record Reinvesting surplus cash Suitable incentive scheme Prioritizes shareholders

GOOD PRICE

Price < 70% value DCF Comparable transactions Net asset value

GOOD BUSINESS

Easy to understand Competitive advantage (High ROCE) CF generator Growth

INVESTMENT PHILOSOPHY: BASIC FEATURES

WHAT MAKES OUR STRATEGY SIMILAR TO THAT OF OUR VALUE PEERS?


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WHAT MAKES OUR STRATEGY DIFFERENT TOTHAT OF OUR VALUE PEERS?

THE AUSTRIAN SCHOOL

EUROPE


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THE AUSTRIAN SCHOOL

Essential differences between the Austrian and neoclassical schools

Points of comparison Austrian paradigm Neoclassical paradigm

1. Concept of economics(essential principle)

A theory of human action, understood as adynamic process (praxeology).

A theory of decision : maximization subject torestrictions (narrow concept of rationality).

2. Methodogical outlook Subjectivism Stereotype of methodological individualism(objectivist).

3. Protagonist of social processes Creative entrepreneur. Homo economicus.

4. Possibility that actors may err a priori, andnature of entrepreneurial profit.

Actors may conceivably commit pureentrepreneurial errors that they could haveavoided had they shown greater entrepreneurialalertness to identify profit opportunities.

Regrettable errors are not regarded as such,since all past decisions are rationalized in terms of costs and benefits; entrepreneurial profits areviewed as rent on a factor of production.

5. Concept of information Knowledge and information are subjective anddispersed, and they change constantly(entrepreneurial creativity); a radical distinction isdrawn between scientific knowledge (objective)and practical knowledge (subjective).

Complete, objective, and constant information (incertain or probabilistic terms) on ends and meansis assumed; practical (entrepreneurial) knowledgeis not distinguished from scientific knowledge.

6. Reference point General process which tends towardscoordination; no distinction is made betweenmicro and macroeconomics, each economic

problem is studied in relation to others.

Model of equilibrium (general or partial);separation between micro and macroeconomics.

7. Concept of competition Process of entrepreneurial rivalry. State or model of perfect competition.

8. Concept of cost Subjective (depends on entrepreneurial alertnessand the resulting discovery of new, alternativeends).

Objective and constant (such that a third party canknow and measure it).


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(continued)

Source: The Austrian School, Jess Huerta de SotoOther sources: Mises Institute (www.mises.org)

Points of comparison Austrian paradigm Neoclassical paradigm

9. Formalism Verbal (abstract and formal) logic whichintroduces subjective time and human creativity.

Mathematical formalism (symbolic languagetypical of the analysis of atemporal and constantphenomena).

10. Relationship with the empirical world Aprioristic-deductive reasoning: radical separationand simultaneous coordination between theory(science) and history (art); history cannot validatetheories.

Empirical validation of hypotheses (at leastrhetorically).

11. Possibilities of specific prediction Impossible, since future events depend onentrepreneurial knowledge which has not yet beencreated; only qualitative, theoretical patternpredictions about the discoordinatingconsequences of interventionism are possible.

Prediction is an objective which is deliberatelypursued

12. Person responsible for making predictions The entrepreneur The economic analyst (social engineer).

13. Amount of human capital invested A minority, though it is increasing The majority, though there are signs of dispersaland disintegration.

14. Type of human capital invested Multidisciplinary theorists and philosophers;radical libertarians

Specialists in economic intervention (piecemealsocial engineering); and extremely variabledegree of commitment to freedom.

15. Most recent contributions Critical analysis of institutional coercion(socialism and interventionism).Theory of free banking and economic cycles.

Evolutionary theory of (juridical, moral)institutions.Theory of entrepreneurship.Critical analysis of social justice.

Public choice theory.Economic analysis of the family.Economic analysis of law.

New classical macroeconomics.Economics of information.New Keynesians.

16. Relative position of different authors Rothbard, Mises, Hayek, Kirzner Coase, Friedman, Becker, Samuelson, Stiglitz.

THE AUSTRIAN SCHOOL


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THE AUSTRIAN SCHOOL

Practical points from the schoolAustrian concepts Aplications

Markets are never in equilibrium:

o Excess returns are squeezed by investor down tothe opportunity costs.Exceptions: sustainable competitive advantages.

o No returns: Capital leaves the industry, to searchfor better profitability.

Profit from these adjustments.

Search for sustainable competitive advantages.

Growth is based on division of labour (via productivity)and savings to finance it.

Growth in China is sustainable.

Manipulation of interest rates by governments lead tooverinvestment and bubbles. USA, Spain, Ireland, etc.

Avoid those countries that are not tacklingoverinvestment and lack of real savings.

The natural state of an economy is deflationary:Thanks to productivity increases we produce moregoods with the same amount of money every year.But governments do not like deflation because theyare leveraged.

Most probable outcome is inflation. The extent of which will depend on the confidence in eachcurrency.

Lack of anchor currency (gold or similar) implies apermanently depreciating currency.

Avoid monetary investments. They do not protectfrom currency depreciation additional risk.

Own real assets (at reasonable prices): Equities,Commodities, Real Estate.


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EUROPE VS. USA

Europe is a less efficient market:

Banks control distribution networks. Different goals Asset gatherers. Less developed financial culture. Fewer value investors.

Significant public family-controlled companies:

Long term view. Major shareholders supervise management directly. Organic growth, with prudent M&A. Less attention from investors.

80% of our investments are in family-controlled businesses.

Technical factor: Most of the European Funds are quasi tax-exempted within the Fund.Easy to rebalance portfolios.


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PORTFOLIOS MAIN FEATURES

Global Portfolio

Companies based mostly in Europe

Average ROCE: 36.2%Earnings Yield: 17.2%P/E: 6.5xUpside: 100%

Sales Breakdown

Europe: 47.2%- Northern Europe 29.0%- South Europe 18.1%

USA 13.2%UK 12.5%Switzerland 7.1%

Emerging markets 14.7%Cash 5.3%

Iberian Portfolio

Average ROCE: 15.6%Earnings Yield: 13.8%P/E: 7.2xUpside: 100%

Sales Breakdown:Spain 24.4%Portugal 10.9%ROW 59.0%Cash 5.6%


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BUSINESS:Holding company controlled by De Benedetti family, with a long tradition of entrepreneurship focusedon value creation, always working for the interest of the shareholders.Sorgenia: Italys fifth largest electricity company. It mainly operates gas-powered electricity plants butalso participates in the commercialization of electricity and gas.LEspresso: one of the leading media companies in Italy, principally in national and regional press,furthermore it has interests in TV and radio.Sogefi: leading European supplier of automotive filters and leader in Europe and South America in

suspensions.Holding Sanit e Servizi: runs geriatric clinics, hospitals and rehabilitation units.

SHAREHOLDERS:

De Benedetti Family (46%), the rest is free float.

MANAGEMENT TEAM:

Capital Allocation:

Close to 20% increase in NAV in 15 years. CIR set up Sorgenia ten years ago, investing up to

73 M.Last year it was assessed by its partner Verbund at 3,800 M.

VALUATION:

Our valuation implies an upside potential of 211%.

CIR


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Source : Bestinver

CIR

(*) SORGENIA : Increased capital in 2008-2009 by 300 mill. and the minority partner Verbund, fullyunderwrote the rights issue, valuing the company at 3.800 mill. . Cir owns 52% of Sorgenia.

CIR

Asset Valuation mn Weight %

Sorgenia (PMV) (*) 1.883 54%L'Espresso (15x earnings) 732 21%Sogefi (15 x earnings, 18% ROCE) 359 10%Holding Sanit e Servizi 129 4%

Others and Cash 379 11%

Total Valuation mn 3.483 100%Per Share 4,66

Market Cap mn 1.120Price per share 1,5

Upside 211%

VALUATION OF CIR


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FERROVIAL

Source : Bestinver

Asset Valuation mn Weight %

Cintra 5.995 48%407 ETR Toronto 3.103 25%Toll Roads USA 481 4%Toll Roads Spain 432 3%

Toll Roads Chile 348 3%Others 1.502 12%Cash & Holding cost 129 1%

BAA 2.820 23%Contracting 1.375 11%Services 1.342 11%Swissport, Amey y Tubelines 2.442 20%Debt & others -1.455 -12%Total Valuation 12.519 100%

TARGET PRICE 17,1

CURRENT PRICE 7,2

Valuation of Ferrovial


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BESTINVER C/ Juan de Mena, 8

28014 Madrid - SpainTef.:+34.91.595.91.00

[email protected]

www.bestinver.com


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This document has been prepared by Bestinver Gestin, S.A. SGIIC for informational purposes only and can be in no way considered an offerto participate in its investment funds. The information contained herein was compiled by Bestinver Gestin, S.A. SGIIC from sources itbelieves are reliable. However, while appropriate measures have been taken to verify its accuracy, Bestinver Gestin, S.A. SGIIC in no wayguarantees that it is accurate, complete or up to date.

All opinions and estimates included in this document reflect the best judgment of Bestinver Gestin, S.A. SGIIC as of the date they refer toand may be changed without prior notification. All opinions issued herein are general in nature and do not take into consideration individualspecific investment objectives or financial circumstances.

Under no circumstances can Bestinver Gestin, S.A. SGIIC, its managers, employees or authorized personnel be held responsible for anydamage resulting, directly or indirectly, from the use of the information contained within this document. Information regarding past returnsdoes not in any way constitute a promise or guarantee as to future performance.

All Bestinver returns are expressed as net, afte r expenses and commissions. They are denominated in euros. Share redemptions and transfers of securities held for less than one year are penalised with a commission Source of Bestinver return and fees data: BESTINVER Source of sector return and fees data: INVERCO Source of national and international rankings: BESTINVER. Bestinver funds, third-party mutual funds and equity index returns (Madrid SE,

IBEX, S&P 500 and MSCI) are calculated based on the closing level on the date appearing at the bottom of this page. Source of fund P/Es: BESTINVER Source of market P/Es and Argentina Charts: Bloomberg Source of Value Investors: The Superinvestors of Graham-and-Doddsville Sources of Performance of diferent assets since 1800: Jeremy Siegel "Stocks for the long run" Irwin Professional

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Bestinver - Francisco Garcia Parames