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beneficial tax treatment. This gives greater clarity over the potential value of the Openreach business which we have long felt should be viewed as other utilities are and valued using a regulatory asset base approach which today has a value of c.£12.7bn. This accounts for almost the entire current market capitalisation of just over £15 billion at month end. It should also be noted that they acquired the rival mobile network operator EE for £12.5 billion in 2015. The shares currently trade on a forward price to earnings ratio of just 9 times and on an enterprise value to EBITDA ratio of just 4.5 times. This is low in absolute terms, compared to its history and remains at a very large discount to its European peers. Despite the large increase in the share price in the month we still envisage a return of around 50% from here.
In the month we initiated a new holding in the German listed healthcare conglomerate Fresenius SE & Co. The share price has been under a cloud given the COVID pandemic which has meant a decline in the number of patients receiving dialysis in its US business and a deferral of elective procedures impacting its hospital and injectables businesses. The shares trade on a forward price to earnings ratio of around 11 times 2021 earnings, falling to just over 10 times for 2022. Its ten-year median price to earnings ratio has been c.18 times, over which time revenue grew at an average 8.5% per annum. We expect revenue growth of 4.5% per annum over the next three years with the group constrained on mergers and acquisitions by the sizeable net debt position. We are comfortable with the debt position given the recovery expected in its profit and relatively defensive cash flows and assets. The shares are valued by the market today on just over 7 times enterprise value to EBITDA for 2022. Fresenius has several businesses that are quite different, but individually have very attractive attributes. Helios operates a managed hospitals business in Germany and Spain. This is a relatively stable business which should grow at mid-single digits. Kabi is a hospital supply business that specializes in lifesaving medicines and technologies for infusion, transfusion and clinical nutrition. Kabi generates operating margins in the mid-teens and mid-single digit growth. However, growth is expected to taper mid-decade as the number of new product launches in the injectables business will decline. Kabi is making investments in biosimilars to offset those declines and provide the next platform for growth. The dialysis business, Fresenius Medical Care (FMC), is publicly listed in Germany, but generates most of its revenues in the US. FMC trades on c.14 times price to earnings to 2022 and Fresenius holds a 32% stake. We view Kabi and Helios as worth c.10 times EV/EBITDA on a standalone basis, looking at the underlying fundamentals and outlook. Management is focussed in the first instance on returning the group to growth and have mooted a potential breakup of the group to unlock value. Management are also focussed on reducing financial leveraging within the group that should benefit shareholders. With the lower growth expected we view fair value at 12.5 times 2023 net income given the lower than historic growth and returns expected. This suggests a fair valuation of over €50, which generates a potential total return of c.40% from purchase.
Whilst it is pleasing to be able to report better relative and absolute performance numbers over the last six months, we are well aware that there is still a lot of ground to be made up. We believe that the opportunity in Value investing remains as great as perhaps at any time in our careers. In our unwavering hunt for value opportunities, we continue to focus on essentially sound companies trading at valuations that are low relative to the market and low relative to the growth and returns we think the companies are capable of. There remains all manner of speculative behaviour in the financial markets today that relies on the underpinning from the largesse of the world’s central banks. We think this is reckless and the blow up at Archegos Capital is perhaps a ‘canary in the coal mine’. The overall valuation of the portfolio is on a forward price to earnings ratio of just over 12 times and this compares favourably with the MSCI World benchmark on 20 times.
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Over the last 6 months there has been a clear rotation to Value. The fund was up 29.7% versus the MSCI World index up 19.6% from the end of September 2020 to the end of March 2021. Over this period, the MSCI World Value index is up 26.8% versus the MSCI World Growth index up just 12.8%. In the month, the fund was up 5.1% versus 3.3% for the MSCI World index. This style rotation is very supportive for our approach and this is coming off an historically wide dispersion (in relative valuation and performance terms) between Growth and Value.
On 29th March, Nomura Holdings announced that one of its US subsidiaries had made a possible loss of $2.0 billion from transactions with a US client, based on market prices as of March 26th. This estimate is subject to change depending on the unwinding of the transactions and fluctuations in market prices. The share price of Nomura fell sharply, wiping out c.$4 billion in market value. For the month their share price was down 6% in local currency terms. The client is widely reported as Archegos Capital, a hedge fund that has been forced to liquidate positions in several media companies including ViacomCBS and Discovery and several Chinese internet stocks including Baidu and Tencent. Credit Suisse also warned of a potentially ‘significant’ hit to its first quarter results and its shares fell by a similar amount. Before this loss we had forecast Nomura’s net income for the full year to March 2021 of Yen 289 billion ($2.6 billion) with significant improvements coming through in its core Retail operations and the Wholesale bank. Given this underlying profitability, the losses as stated should not reduce shareholders’ equity and the Tier One capital ratio remains at over 17%. We had been expecting an increase in capital return to shareholders and these losses have certainly wiped out a substantial part of the profit generation in the current financial year and raises serious concerns around risk controls within the Wholesale division. Nomura is currently trading on 0.6x price to book and we were forecasting a 7.0% return on equity for the next financial year to March 2022. It must be acknowledged that there might be some further impact on profitability from the curtailing of their US prime brokerage activities which will now follow. Assuming the inevitable tightening of risk controls do not impinge significantly on underlying profit, then the share price correction leaves the current valuation looking attractive.
BT has been an investment that has required a great deal of patience but at last it seems to have turned a corner, with the share price up 25% in the month in local currency terms. Regulatory uncertainty has cast a shadow over BT’s share price, especially given its commitment of large amounts of capital to the roll out of Fibre To The Home (FTTH). In the month, the UK regulator laid out a framework that will allow BT to earn a ‘fair bet’ and generate economically attractive returns on this investment. BT can now push ahead with its plans to invest roughly £12 billion of capital and roll out FTTH to over 20 million homes by the middle of the decade. There was also some positive news from the UK Government with this investment receiving
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beneficial tax treatment. This gives greater clarity over the potential value of the Openreach business which we have long felt should be viewed as other utilities are and valued using a regulatory asset base approach which today has a value of c.£12.7bn. This accounts for almost the entire current market capitalisation of just over £15 billion at month end. It should also be noted that they acquired the rival mobile network operator EE for £12.5 billion in 2015. The shares currently trade on a forward price to earnings ratio of just 9 times and on an enterprise value to EBITDA ratio of just 4.5 times. This is low in absolute terms, compared to its history and remains at a very large discount to its European peers. Despite the large increase in the share price in the month we still envisage a return of around 50% from here.
In the month we initiated a new holding in the German listed healthcare conglomerate Fresenius SE & Co. The share price has been under a cloud given the COVID pandemic which has meant a decline in the number of patients receiving dialysis in its US business and a deferral of elective procedures impacting its hospital and injectables businesses. The shares trade on a forward price to earnings ratio of around 11 times 2021 earnings, falling to just over 10 times for 2022. Its ten-year median price to earnings ratio has been c.18 times, over which time revenue grew at an average 8.5% per annum. We expect revenue growth of 4.5% per annum over the next three years with the group constrained on mergers and acquisitions by the sizeable net debt position. We are comfortable with the debt position given the recovery expected in its profit and relatively defensive cash flows and assets. The shares are valued by the market today on just over 7 times enterprise value to EBITDA for 2022. Fresenius has several businesses that are quite different, but individually have very attractive attributes. Helios operates a managed hospitals business in Germany and Spain. This is a relatively stable business which should grow at mid-single digits. Kabi is a hospital supply business that specializes in lifesaving medicines and technologies for infusion, transfusion and clinical nutrition. Kabi generates operating margins in the mid-teens and mid-single digit growth. However, growth is expected to taper mid-decade as the number of new product launches in the injectables business will decline. Kabi is making investments in biosimilars to offset those declines and provide the next platform for growth. The dialysis business, Fresenius Medical Care (FMC), is publicly listed in Germany, but generates most of its revenues in the US. FMC trades on c.14 times price to earnings to 2022 and Fresenius holds a 32% stake. We view Kabi and Helios as worth c.10 times EV/EBITDA on a standalone basis, looking at the underlying fundamentals and outlook. Management is focussed in the first instance on returning the group to growth and have mooted a potential breakup of the group to unlock value. Management are also focussed on reducing financial leveraging within the group that should benefit shareholders. With the lower growth expected we view fair value at 12.5 times 2023 net income given the lower than historic growth and returns expected. This suggests a fair valuation of over €50, which generates a potential total return of c.40% from purchase.
Whilst it is pleasing to be able to report better relative and absolute performance numbers over the last six months, we are well aware that there is still a lot of ground to be made up. We believe that the opportunity in Value investing remains as great as perhaps at any time in our careers. In our unwavering hunt for value opportunities, we continue to focus on essentially sound companies trading at valuations that are low relative to the market and low relative to the growth and returns we think the companies are capable of. There remains all manner of speculative behaviour in the financial markets today that relies on the underpinning from the largesse of the world’s central banks. We think this is reckless and the blow up at Archegos Capital is perhaps a ‘canary in the coal mine’. The overall valuation of the portfolio is on a forward price to earnings ratio of just over 12 times and this compares favourably with the MSCI World benchmark on 20 times.
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