Quick win: Segments

Our core objective as investment professionals is to analyse the fundamental drivers of long-term shareholder value for particular companies, recognising that growth prospects, profitability dynamics, inherent business and product risks, and management’s ability to allocate capital effectively all underpin the ultimate performance of a company in the long run.

Why segmental information is important to the CRUF

Companies are typically made up of a portfolio of strategic business units (SBUs), each focused on a defined customer, product, and geographic target market. Each of these markets face different growth, return and risk profiles, which change in response to prevailing economic, political and regulatory dynamics. This particularly applies to multinationals and conglomerate businesses.  

These factors mean we take a ‘bottom up’ view in building an investment thesis for a company and our quantitative models follow that same ‘bottom up’ approach. In certain instances, given the varying risk and return dynamics across SBUs, we value significant SBUs separately, determining a value for a combined company on a ‘sum-of-the-parts’ (SOTP) basis. 

We therefore rely on management to provide the financial and non-financial metrics that will allow us to: (1) assess an SBUs historical operational and financial performance; (2) forecast financial performance for an SBU, underpinned by relevant fundamental drivers; and (3) determine an appropriate valuation or valuation range. 

Relative comparisons of the above to other SBUs within the company, as well as similar peers, are critical to our analysis. This information allows us to judge management’s ability to effectively allocate capital within a company, as well as the company’s ability to compete successfully in a particular market.

In the absence of consistent and comparable segmental disclosure, markets tend to value companies in a broad-based manner and discount SBU-level competitive advantages. This is punitive to both the company and investors. The company’s investment case slowly diminishes over time, which is reflected in weak valuation metrics and makes raising capital expensive. Investors, on the other hand, may miss potential returns, as weak market sentiment inhibits a re-rating in the stock. 

For the benefit of companies and investors alike, the CRUF would welcome more comprehensive, consistent segmental disclosure.

The current problem with disclosures and what the CRUF would like to see

Click the tabs below to reveal what CRUF would like to see for each of these current problems

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