The volume and velocity of information in the world today, especially in financial markets, continues to increase exponentially. Deciphering the noise and understanding key facts is critical for the idea generation process. At K2 Asset Management, we generate ideas from numerous information channels, however getting out and meeting with companies and their management is one of the most effective ways for us. In addition to providing important insights into the performance of their own business, management can also share their views into the industry in which they operate and how the industry is evolving. It also gives us the opportunity to cross-examine competitor behaviour and validate information from other sources. Companies that are ‘cheap’ can be easily identified using quantitative screens. However understanding why they are cheap and, more importantly, identifying a catalyst which may unlock this value is the critical part of the investment process.
Drawing on K2’s eighteen years of investment experience, we determine the best opportunities by using a combination of top-down industry research along with bottom up fundamental analysis. Meeting company management also plays a key role in the investment process as does establishing expectations from the investment community. Identifying a catalyst can come in many forms and over various time frames. However the focus will always be on specific event/s that will drive the market to re-rate the stock. Companies can remain undervalued for long periods, and therefore timing will also play a key part of our investment approach.
Think Childcare Limited as a company is well placed to deliver strong shareholder returns. The company owns, manages and operates 35 premium childcare facilities with a clear focus on centres located within 100km’s of Melbourne CBD. The company recently delivered a strong set of results for the Half Year 2016 of Revenues +19% and Profits +45%. The key growth drivers come from their successful strategy execution, targeted at improving occupancy and efficiency in its current portfolio, complemented by further acquisitions. With favourable industry dynamics and a proven strategy, management has the opportunity to grow the business substantially. The company trades on a 1year forward PE-14x and a ~4.5% Fully Franked Dividend Yield. We feel this represents compelling value and the ongoing delivery of earnings growth will prove to be the catalyst for a re-rating.