I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

The UK has around 440 homes for every 1,000 people.

France has 556.

Germany has 511.

The Netherlands has 495.

The EU average is 542.

Even after adjusting for empty properties and second homes, Britain still has materially fewer available homes per person than almost all European countries.

Depending on the method used, the housing shortfall is somewhere between 2.1m and 6.5m homes.

This shortage has been building for decades.

In fact, to close that gap by 2040, the UK needs to accelerate new-builds to over double the current rate, immediately.

The centre for policy studies showed that people in London earn 17% more than the median UK worker, but after rental costs, they are actually 3% worse off.

The pain of the shortage is almost palpable.

At the same time, the companies capable of building homes at scale have become more entrenched.

Large housebuilders produced around 13% of English housing completions in 1980.

By 2024, their share had risen to roughly 35%.

The number of small housebuilders has fallen from 12,215 in 1988 to around 2,500 today.

No genuinely new company has reached the top tier of UK housebuilding in roughly half a century.

The newest major incumbent was founded in 1974.

Planning delays, access to land, financing requirements and rising regulation have made the industry harder to enter.

It actually reminds me of trying to launch a fund or money management business.

The largest companies can spread technical, legal, environmental and compliance costs across thousands of homes.

They buy materials nationally.

They operate large planning departments.

They control land pipelines that would take a new entrant decades to recreate.

Britain needs millions more homes.

The companies capable of producing them sit behind some of the strongest barriers to entry in the UK market.

You’d expect these businesses to be expensive.

They are not.

Barratt Redrow, the UK’s largest housebuilder, is a classic example.

The business ended FY2025 with net-cash and a land bank containing approximately 100,000 plots.

Its TBV was around 437p per share.

The shares were trading at roughly 260p.

You can buy £1 of stated land, inventory, cash and other tangible assets for approximately 60p.

Taylor Wimpey is very similar, as are smaller operators such as Watkin Jones.

It seems almost endemic to UK housebuilding companies.

But, the market is applying these discounts indiscriminately to businesses operating in the midst of a desperate shortage, with virtually no new competition.

Call me old fashioned, but that seems a bit strange.

Or, perhaps the market is right.

The land could be overstated.

Margins could remain below the cycle average forever.

Mortgage affordability could stay weak.

Remediation costs, taxes and regulation could continue absorbing cash.

And cheap deep-value investors like me could just stay in their parents’ basements, and stop buying houses.

But still, the current valuation seems a bit….negative.

It’s pricing actual land and houses as being worth half their stated value while the actual operating business of housebuilders will never generate any profit ever again.

After researching multiple housebuilding companies, this disconnect only seemed to look more absurd.

So, I thought I’d try and figure out what was going on…

Subscribe now

What Needs To Be True?

A share price below TBV does not automatically create an opportunity.

I’ve seen enough cash-burning, biotech freakshows and family controlled, Japanese manufacturing businesses to know that much.

A business that earns a 5% return on capital should be worth considerably less than one capable of earning 15%.

For the current valuation of Barratt Redrow (and the rest) to make sense, its assets must be worth less than stated, its future returns must remain poor, or shareholders will never receive the value.

The current housing downturn gives the market plenty of evidence to support that view.

Completions have fallen.

Margins have compressed.

Mortgage affordability remains stretched.

Builders are using incentives to help buyers complete purchases.

Legacy building-safety obligations continue consuming cash.

The difficult part is figuring out how much of this is permanent.

Subscribe now

The Current Cycle

A typical UK first-time-buyer-property costs around £230k.

The households actually buying these properties have an average gross income of approximately £65k.

The property therefore costs around 3.5x household income, with mortgage payments consuming roughly 24% of take-home pay.

That may sound manageable.

But the deposit is often the hardest part.

A 10% deposit requires approximately £23k before legal fees, surveys, moving costs and furnishing the property.

More than a third of first-time buyers now receive help from their families.

This explains why higher mortgage rates have such a large impact on new-build demand.

A relatively modest increase in monthly repayments can remove thousands of buyers from the market.

Housebuilders then reduce production to match the lower sales rate.

This is happening despite a continued need for housing.

A young couple living with parents may still want their own home.

A family renting a property that is too small may still want to move.

They just can’t actually do it with all the extra interest and tax costs.

Affordability has taken a hit in recent years, but there are some signs that it’s stopped getting worse.

Real wages have grown faster than real house prices since 2023, while lenders have gradually increased the flexibility available to some borrowers.

Buyers just need monthly payments to become affordable again.

That can happen through lower mortgage rates or taxes, higher wages, lower house prices, or some combination of all three.

Subscribe now

Unofficial Demand Is Larger

Housing demand is often discussed in terms of population growth.

But it’s worth looking at the concept of household formation.

One family of four needs one home.

Four adults living independently may require four homes.

An ageing population tends to create more one-person households.

Children eventually leave home.

Couples separate.

People marry later.

Older partners die at different times, leaving the survivor living alone.

The number of homes required can actually increase even when population growth slows.

Japan provides a useful example.

Its population began declining, yet the number of households continued to rise.

Britain has many of the same demographic pressures, but its overall population is actually increasing.

Official household-formation figures probably understate the underlying demand because a household cannot form without somewhere to live.

The official statistics only record the households that successfully formed.

They cannot directly count every household that would exist if suitable housing were available at an affordable cost.

This is why weak completions should not be confused with a lack of demand.

Britain can have a large housing shortage and a weak new-build market at the same time.

It looks like we are seeing exactly that right now imo.

Subscribe now

Just Build More houses

If I owned a large UK housebuilder, I’d be on the phone to my CEO telling them to build more homes and cash in on this pent up demand.

Sadly, as with all regulated industries, it’s not that simple.

The biggest constraint is obtaining permission to build.

Only 29% of English councils had an up-to-date local plan in late 2024.

These plans determine where new homes can be built.

When they become outdated, land allocation slows and individual applications face greater uncertainty.

Planning departments are also under-resourced.

Applications can take years.

Environmental requirements change.

Infrastructure agreements must be negotiated.

Local opposition creates further delays.

A piece of land suitable for housing is not automatically developed land.

Its value depends heavily on whether planning permission can be secured.

The process favours companies with established planning teams, local knowledge and the capital required to wait.

Regulation creates another advantage.

Compliance costs are often fixed at the site level.

A national builder can spread those costs across hundreds of homes.

A small builder operating one or two small sites cannot.

The largest businesses also negotiate national material contracts, maintain in-house legal and environmental teams, and control land pipelines that smaller competitors struggle to match.

The 11 largest builders collectively hold around 1.1m plots.

These advantages make the largest housebuilders difficult to replace.

Skanska is a good example.

The Swedish construction group launched Homes by Skanska in 2011.

It planned to bring Scandinavian design, sustainability and customer service into the UK housing market.

Within two years, it closed the entire operation.

Its CEO explained that housebuilding tied up large amounts of capital and required that capital to turn over quickly to generate acceptable returns.

Skanska had construction expertise, access to finance and a well-known international brand.

Even with all that, it couldn’t break into the UK house-building market.

Capital-backed modular builders also promised to manufacture homes more efficiently in factories.

Several launched and then collapsed after consuming large amounts of cash without reaching sustainable scale.

The incumbent builders have spent decades assembling land pipelines, regional teams, supplier relationships and planning expertise.

This illustrates the absurd nonsense of the UK industry, but it also reaffirms the value of the incumbent businesses.

Subscribe now

The Industry’s Returns

A cyclical business should be judged across a complete cycle.

Housebuilder profits rise sharply when selling prices increase, build costs remain controlled and volumes are strong.

They also fall quickly when those conditions reverse.

Looking only at the best years produces an inflated view of economics.

Looking only at the current downturn produces the opposite mistake imo.

The Competition and Markets Authority collected twenty years of financial information from 12 large UK housebuilders.

That period included the global financial crisis, the collapse in mortgage availability, the pandemic and the beginning of the current interest-rate downturn.

Across the full period, the industry produced an estimated average return on capital of around 18% before tax and 14% after tax.

Removing the single best and worst years barely changes the average.

Removing the three best and three worst years actually increases the post-tax return.

Every rolling five-year period remained profitable, including the years covering the worst housing downturn in a generation.

Over the twenty years to 2022, the industry generated more than £64bn of cumulative operating profit.

Someone investing from 2003 to 2022, including distributions and remaining capital, earned an estimated annual return of around 14%.

This seems incredible when you look at current stock prices and sentiment on Fintwit.

These results came from companies that supposedly produce an undifferentiated product, operate in a terrible industry and have no meaningful competitive advantage.

The historical record shows that these assumptions are basically just wrong.

Large UK housebuilders have operated as profitable, cyclical businesses serving a supply-constrained market.

Subscribe now

Why Profits Collapse So Quickly

Housebuilding contains considerable operating leverage.

Land is normally purchased years before the finished home is sold.

The builder then commits money to roads, drainage, planning obligations, labour, materials and site overheads.

Many of these costs cannot be reduced immediately when demand slows.

A home that was sold in 2025 may sit on land purchased several years earlier under completely different assumptions.

This creates a delay between changing market conditions and the reported financial results.

A relatively small movement in selling prices or construction costs can produce a much larger movement in profit.

Generally speaking the normal operating pre-tax margin of the largest housebuilders is around 18%.

Taylor Wimpey targets 21%, and has averaged roughly 16% over the last cycle.

Barratt Redrow is similar.

Because land and overhead costs are largely fixed, a 5% to 10% movement in price or build costs can have 2x to 3x the impact on the margin.

This works in both directions.

A small increase in selling prices can create a large recovery in profits.

A small decline can destroy them.

That volatility is one reason people tend to be terrified of housebuilding stocks.

It also makes trough profits a poor estimate of what the business can earn across the full life of its land bank.

Subscribe now

Land Takes Most Of The Pain

Housebuilders normally decide what they can pay for land using a residual calculation.

They estimate the revenue from selling the completed homes.

They deduct construction costs, infrastructure, overheads and the profit margin required to justify the project.

The amount left is the maximum value of the land.

When house prices rise faster than construction costs, landowners capture much of the improvement through higher land prices.

When selling prices weaken or build costs rise, the amount builders can afford to pay for new land falls.

History shows how violent this adjustment can be.

Development land values fell by around 43% during the early 1990s housing downturn and 46% during the 2008 financial crisis.

Despite subsequent house-price growth, land values remain around 48% below their 2007 peak in real terms(!)

Existing land can still cause problems.

A builder that paid too much during the peak may be forced to accept lower margins or record an impairment.

This is where management discipline becomes very important.

Every management team claims to buy land ‘selectively’.

The evidence appears several years later when that land is finally built on and sold.

The strongest builders enter a downturn with conservative assumptions, a manageable land bank and enough cash to keep operating.

They can then purchase future sites at prices that reflect the weaker market.

In other words, the downturn that damages yesterday’s land value can improve the economics of tomorrow’s.

Taylor Wimpey is one of the best at this imo.

They seem disciplined at not overpaying for land, from the research I’ve done.

Subscribe now

Cash-Flows Explained

Housebuilder cash flow often moves differently from accounting profit.

This is true with most businesses to be honest, but housebuilders are a prime example.

During an expansion, builders purchase more land and increase construction activity.

Cash disappears into inventory long before the resulting profit is recognised.

When the market slows, they reduce land purchases and complete homes already under construction.

Working capital begins converting back into cash.

This is why a housebuilder can report falling earnings while generating substantial cash.

In 2009, the large builders recorded an aggregate post-tax loss of approximately £603m.

Despite that loss, the reduction in capital employed allowed them to produce around £654m of owner cash flow.

In 2010, the industry recorded another post-tax loss of approximately £412m.

Owner cash flow reached roughly £1.89bn as a further £2.3bn was released from the asset base.

That cash was real, but it requires careful interpretation.

A builder can generate cash by purchasing less land and allowing the future business to shrink.

This is known as running off the balance sheet.

This is one of the lenses I look at housebuilders through.

In other words, how much cash I could extract if I bought the business at today’s price and slowly liquidated all the existing assets through the operating business.

That cash should not automatically be treated as sustainable free cash flow though, because once it’s gone, it’s gone.

So, we need to separate the two types of cash (run off and sustainable).

Both types of cash end up in our pocket, but only one is repeatable, year after year.

When I analyse any housebuilder I want to know two things.

First, how much cash could I extract each year if we just kept the business standing still, without trying to grow the land bank.

Second, how much cash could I extract if we simply ran off the balance sheet and closed the operation down in an orderly fashion.

This helps me figure out how healthy the business is and whether it could survive the next cycle trough.

If you’re a rational, business-minded investor, this is really the only way to value these businesses.

Subscribe now

Barratt Redrow

Barratt Redrow is the biggest so I’ll just use this as an example

It has many of the characteristics needed to survive a difficult cycle.

Its scale lowers procurement and compliance costs.

Its national site network provides geographic diversification.

Its brands cover different parts of the market.

Its balance sheet gives management room to reduce land spending without negotiating with lenders from a position of weakness.

It holds net-cash and consistently generates owner-cash.

The business also has a long operating history.

BR has retained the Home Builders Federation’s five-star customer satisfaction rating for 16 consecutive years.

At least 90% of customers must say they would recommend the builder to achieve that rating.

In FY2025, the company’s brand-level recommendation scores were close to 96%.

Its site managers have also won more ‘NHBC Pride in the Job quality’ awards than any other builder for 21 consecutive years.

Obviously, these awards don’t generate cash, but they do indicate a good business.

It has a national organisation capable of buying land, navigating planning, managing hundreds of sites and selling thousands of homes every year.

Replicating that organisation is pretty much impossible, even for large, well-capitalised businesses.

And, today, the market is saying that it’s essentially worthless.

Subscribe now

The Risks Real

The low price is there for a reason and it’s important to understand exactly what those reasons are.

One thing is that the industry faces substantial costs relating to building safety.

Barratt Redrow’s estimated legacy remediation cost is around £1bn.

The company must also pay the Residential Property Developer Tax, which adds a 4% surcharge to qualifying profits above £25m.

A further Building Safety Levy is expected to add approximately £3k per plot.

The estimated annual cost to Barratt Redrow is around £40m to £50m.

Planning reform creates another uncertainty.

If the government succeeds in releasing much more development land, incumbent builders could increase volumes.

More available land could also weaken one of the main sources of their historical returns.

Higher supply would be good for the country and helpful for buyers.

But the actual outcome depends on how reform is implemented.

Permission to build more homes has limited value if planning departments remain under-resourced, infrastructure cannot be delivered and buyers still cannot obtain affordable mortgages.

The risk to shareholders is also a factor.

Bad management can allocate capital to the wrong things at the wrong times while paying the wrong price.

This is true even in a structurally advantageous market, let alone current conditions.

Therefore it’s important not to just buy every housebuilder you see trading below TBV.

The more selective we are, the more money we will make over the next 2-4 years.

Subscribe now

Finding The Opportunities

The first thing I always look for is survival.

A housebuilder should be able to withstand several years of weak demand without issuing shares at a distressed price.

Net cash is a great sign, especially at the trough.

Moderate debt may be acceptable when the assets are conservatively valued and maturities are distant, but it’s a risk I don’t bother taking.

Large borrowings, heavy land-creditor balances and fixed cash commitments make the valuation much harder to trust imo.

The next step is adjusting the asset value.

I like to know when the land was purchased, where it is located, whether it has planning permission and what selling prices are required to earn an acceptable margin.

A large land bank is only useful when it can produce profitable homes.

Land bought at the wrong price can trap capital for decades.

Reading historical reports helps here because we can literally see how previous acquisitions played out.

I then examine cash generation across the full cycle, and especially in the worst years.

A five-year average is my favourite figure to use against a valuation but I also want to make sure the business is still generating positive cash flows at the bottom (even if they’re tiny).

This comes back to survivability more than assessing value.

If the market is pricing a business like its operating business is dead, all we need is for that not to be true.

If the business looks cheap across a range of scenarios this is also a great sign.

Finally, I study past capital allocation.

The strongest balance sheet in the sector has limited value when management repeatedly pays too much for land or acquisitions.

A disciplined, rational management team underscores survivability and maximises our chances of making good money on the re-rating.

Subscribe now

Has The Market Overreacted?

The market has good reasons to dislike UK housebuilders.

We all do.

The businesses are cyclical.

Their accounts and assets are annoying to interpret.

Mortgage rates directly affect demand.

Land values can (and do) fall sharply.

Regulation and political intervention create suffocating costs and conditions.

A severe downturn can produce impairments, falling profits and dividend cuts at the same time.

In fact, several companies have had to cut their dividend this year.

Those risks deserve a discount.

However, the current pricing appears to assume something much more serious.

It implies that the existing assets are worth materially less than stated and that the businesses owning them will never generate any meaningful cash ever again.

Given all the evidence I’ve looked at, this seems like an overreaction.

The UK needs more homes.

A lot more.

Planning and regulation make it virtually impossible to create a new national competitor.

Many have already tried and failed.

The largest builders have historically earned attractive returns across complete housing cycles.

Their land banks can release cash when construction activity slows.

Strong balance sheets allow the best operators to survive until land prices and mortgage affordability adjust.

The industry looks mispriced to me.

Buying any old cheap housebuilder because the sector appears cheap would be silly.

The opportunity lies in finding businesses with the same broad characteristics that make Barratt Redrow and Taylor Wimpey (and others) interesting.

Net cash.

Conservatively valued land and inventory.

A history of producing cash across the cycle, including the bottom.

Enough scale to navigate planning and regulation.

Management willing to protect returns rather than chase volume.

Those companies do not need a housing boom to create value.

They just need to not die and trundle along.

At today’s prices, that’s almost certainly enough to generate a multibagger return.

If you enjoy business-minded analysis you might enjoy the premium newsletter.

I regularly find businesses being similarly mispriced with asymmetric upside potential.

A paid subscription gives you access to all of them.

An annual subscription also includes exclusive bonus content such as my personal stock portfolio, that you might also find valuable.

Subscribe now

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Today’s company is a dream for anyone well versed in the trials and tribulations of operating a business.

Nearly 70% of revenue is recurring.

Customer churn is around 1%.

Existing customers are still spending more each year, with net revenue retention above 100%.

Contracts typically run for five years or longer.

The products sit inside legally required, mission-critical workflows that some of the UKs largest businesses rely on every day.

Replacing them would mean changing physical hardware, migrating years of data, rebuilding integrations and retraining staff across entire operations.

The best part is that we can buy this business for roughly 5x its current owner-FCF.

Despite operating for 40 years and being deeply embedded into some of the world’s largest organisations, the market is pricing it like it will soon be dead.

But, above all, it has the coolest stock-ticker I’ve ever seen.

Let’s take a look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Today’s business has operated for 110 years.

It generates more than ¥50bn of annual revenue.

It has approximately one year of revenue already secured through signed contracts.

The balance sheet contains ¥7.84bn of cash equivalents and another ¥1.59bn of investment securities.

The entire thing can currently be purchased for approximately ¥11.66bn, in market cap terms.

After adjusting for cash, investments, debt and leases, the enterprise value is approximately ¥4.02bn.

This all gives us the following valuation ratios:

NCAV Ratio = 1.2

TBV Ratio = 0.6

EV/FCF Ratio = 3.1

P/FCF Ratio = 8.9

The operating business has generated an average owner-FCF of roughly ¥1.31bn over the last five years.

That operating business is also pretty durable and consistently cash-generative.

In other words, I would happily buy this business in the real world.

Let’s take a look….

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Today’s business is an interesting little find.

It operates in a cyclical industry and suffers lumpy FCF, but generally remains profitable even at the trough.

It has stacked up so much cash that the EV is now negative.

If we strip out the excess capital from the balance sheet, the adjusted ROCE is over 27%.

The EV calculation includes marketable securities that are held under non-current assets.

If I bought the business I would include all forms of cash and securities.

The FCF figure is basically just the 5Y average.

This helps smooth out the cyclical element and is a pretty good proxy for the next 5 years imo.

This business is not a grower, but it is a stable cash-cow.

Given the negative EV, literally any cash we get from the operating business is free.

In these cases, the only thing that matters is whether or not the business really is healthy and likely to continue, and whether it’s a value trap.

The business is a little cash machine that I would definitely like to own in the real world.

It’s certainly not dying.

And the ownership structure does allow for an activist to build a stake.

In fact, a couple of notorious Japanese activists already have stakes.

The best part is that management is already paying dividends and buying back stock.

When we factor in SBC and all other forms of dilution, the total SH Yield today and going forward is roughly 5% per year.

This makes the set up much more compelling because we get paid something while we wait for that re-rating to occur.

Let’s take a look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Imagine buying an entire business for less than 4 years of normal cash flow.

Nearly three quarters of the equity value is backed by cash and listed securities.

The business remained profitable through COVID, supply-chain disruption and raw-material inflation.

Shareholders are being paid roughly 9% a year while they wait.

And the largest external investor controls enough votes to exert real pressure on management.

It looks like a classic Japanese value trap, except the value is already being unlocked.

Let’s take a look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Every deep-value investor eventually runs into the same problem.

You find a business trading below the value of its net current assets.

The balance sheet is pristine.

The company still makes money.

The dividend is well covered.

You’d definitely buy the business in the real-world, at the absurd market cap or EV.

But the market calls it a value trap.

The weird truth is that many cigar butts and net-nets never rerate.

The reason the strategy works has never been that every individual investment turns into a winner.

The portfolio does most of the heavy lifting.

You build a collection of businesses where the downside is protected by cash, working capital, property and conservative balance sheets.

Most continue operating exactly as they always have.

Some quietly send cash back to shareholders for years.

Then one or two receive an unexpected tailwind.

An activist arrives.

Management changes course.

Assets are sold.

Capital is returned.

The market suddenly notices what had been sitting in plain sight all along.

Those few re-ratings generate pretty much all of the overall return.

The beauty of the others is that we don’t lose very much while we hold them.

Today’s business is classic portfolio fodder.

It has been operating for more than sixty years.

It carries virtually no financial risk.

And its net current assets exceed the entire market value of the business.

Let’s take a closer look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Today’s business is being priced for decline and death.

In fact, according to the market, the business will be completely gone in less than 6 years.

Never to generate any more cash, ever again.

If you understand how businesses work, the reality looks a little bit different.

For example, 70% of revenue is recurring and embedded deeply into customer work-flows.

The business is net-cash, has virtually no debt, and stable margins, despite some decline in top-line revenue.

The management team appears to be solid.

They don’t waste money and only make acquisitions where they underpay.

Oh, and they have also increased the dividend for 18 years straight.

This year’s base-dividend yield alone is now higher than the 5Y average, which was inflated by a large special dividend back in 2021.

The current market cap is $866.68m, and the EV is $610m.

The 5Y average FCF is roughly $105m per year, and I believe it’s reasonable to expect that to continue going forward.

This all gives us the following ratios:

NCAV = 6.5

TBV = 6.4

EV/FCF = 5.8

P/FCF = 8.2

These show that the balance sheet is a financial fortress of cash that gives the operating business a solid foundation.

When we combine this with the durability of the operating business, 5.8x FCF seems a bit cheap.

This is exacerbated by the fact that the SH yield is around 9% going forward.

Most of this comes from dividends, with the odd little buyback thrown in when management determines the stock price to be cheap.

The ownership structure also looks good.

An activist could build a stake, but they would probably have to align with at least a couple of existing shareholders to make any changes.

None of these existing shareholders have anywhere near enough votes to pull any kind of involuntary delisting at low prices.

Minority shareholders are protected.

Best of all, one of Canada’s most successful investors owns a 10% chunk of the stock, which indicates there is value in the business.

The core set up here is simple:

The market is pricing the earnings like they’re going to zero imminently, but the reason for the sell off doesn’t fully align with the cash-generation of the business in reality.

If we can build conviction in the durability of the FCF, then this looks like a pretty decent set up.

Let’s take a look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Warren Buffett once said that if you go A-Z on all the companies in the market, you’ll find things.

He meant perfectly good businesses being given away for nothing.

There are actually many different ways to do this.

My personal favourite is to screen for net-cash businesses and then look at them one by one.

A net-cash business is strange.

If there is net-cash, there is also usually a story to go along with it.

And, as you dig into that story, little asymmetric opportunities start revealing themselves.

Today’s business is one such example.

Here’s the story:

The business has recently suffered a double whammy in the accounting.

First, they have a massive liability that they owe to a major supplier.

This was totally self inflicted, and they agreed to pay a fixed sum, regardless of performance of the project.

The project is functional and cash-flowing, but the repayment of this liability is sucking up all the cash.

Accounting profits just hit multi-year lows.

The liability itself sits on the balance sheet, but is debt-like in nature.

It’s not strictly a debt, but the company has to pay it no matter what happens, so it also kind of is.

This inflates my EV, despite there being a huge amount of net-cash on the balance sheet.

The notes reveal that this liability is to be paid off rapidly, out of revenues generated by the related project.

So rapidly in fact that they already paid roughly a third of it in the last year, and will likely have it completely gone in under 2 years.

In this scenario, the FCF is then fully available to the business to spend how it wishes.

The FCF figure, including the new revenues that are already flowing, is roughly ¥4b per year.

The current market cap is ¥16b.

The EV is where it gets interesting.

If the company just paid off the liability tomorrow, from the net-cash, they would immediately free up the ¥4b in annual FCF.

The EV/FCF ratio, in that scenario would be 3x.

The P/FCF ratio would be 4x.

If the company kept their cash instead and just carried on paying it down with the recurring revenues from the project, the EV/FCF ratio would be closer to 0.1x.

The important part here is that the ¥4b FCF is real and actively being generated.

We don’t need to ‘project’ anything other than what happens once the liability is finally gone within the next couple of years.

But, there’s more.

The company is also conducting a pivot that is designed to generate additional revenue from the ongoing AI boom.

This is completely free, capex light, bonus revenue on top of what they’re already producing.

There is no downside from the AI stuff, because it’s already being priced at zero.

However, recent updates seem to show the whole thing is gathering solid momentum and that this could be reflected in the financials during the next couple of quarters.

Let’s take a look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

If you’ve been following me for a while, you’ll know I like to mix things up.

At any given time, my portfolio is composed of set ups that are cheap to FCF but also cheap to assets.

I like having solid downside protection.

It’s good for sleep.

Some of my favourite set-ups are Japanese companies that trade ridiculously cheaply to their hard assets.

These are the classic ‘cigar-butts’.

Most of them have weird ownership structures that essentially lock the business up from activists or external forces.

People will argue that these are classic ‘value traps’ because the cash will never be released.

This is partially true, but also fundamentally wrong, imo.

It’s true the stock itself could be a value trap, but it’s not true that you can’t make money from them.

One of the most interesting aspects of deep-value investing is the group-dynamic that drives overall performance.

It’s not the stock that generates the returns, it’s the group of stocks.

In other words, it’s perfectly fine to hold a bunch of cheap Japanese cigar butts, because some of them will inevitably re-rate.

Meanwhile the rest of them will most likely do nothing, which also means you don’t lose much.

The re-ratings occur for many reasons.

Sometimes the management unexpectedly returns excess cash.

Sometimes the underlying business does something magical or catches a tailwind (AI etc).

And, sometimes, the price is so low and stretched to the downside that the only direction it can go next is up.

I’m not joking.

Anyway, today’s business is a classic cigar butt.

It’s a business I’d snap up in the real world, if I could (at today’s price), and it’s the kind of stock that would do well in a basket of similarly cheap stocks.

You get the hard-assets at a significant discount and the healthy, cash-flowing operating business for free.

If you’re into dirty, cheap Japanese stocks, you might like this one.

Let’s take a look…

Read more

I found a way to access Bloomberg’s no.1 competitor for 90% less. Here’s how →

Subscribe now

Today’s business was founded in 1956 and has operated successfully ever since.

It sells branded products that you’ve almost certainly purchased, let alone heard of.

The market is currently pricing it as a melting ice cube that is already dead.

We can purchase the tangible assets for almost half price and get the operating business for nothing.

Here are the valuation ratios:

NCAV = 2.2

TBV = 0.6

EV/FCF = 5.8

P/FCF =6.2

If this was offered to me in the real world, and I could buy it with a fraction of my capital base, I believe it would be a very low risk deal.

The balance sheet is a fortress of net-cash, gross margins are actually improving, and the assets are worth considerably more than the stated book value.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

Today’s business is classically Japanese.

It’s a bit weird, but it has loads of cash and seems to be a money-printing machine.

In simple terms, the market is pricing the company as if it will die imminently.

The reality is that revenues have indeed fallen, but this drop hasn’t actually filtered down to the bottom-line.

Management seems pretty good at maintaining the cash-generation.

After digging into it, it seems to me that the most likely outcome is a business that will just kind of stay where it is.

Which is fine when we’re only paying 4.2x FCF using EV, and 5.3x FCF using market cap.

For the market to be correct requires this 18-year-old digital platform with over 9 million registered users and 2.5 billion cumulative downloads to collapse within a few years.

It requires management to destroy a fortress balance sheet.

It requires one of Japan’s most cash-generative digital publishing businesses to suddenly stop producing cash.

None of that appears particularly likely.

This is not an asset-backed cigar butt, it’s a pure earnings play.

Having said that, the balance sheet itself remains exceptionally strong.

Even after paying a huge dividend and aggressively repaying debt, the business is net-cash positive.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

Today’s idea is pretty simple.

The market used to price it for exponential growth but then the business didn’t grow much.

The stock price now sits 70% off where it once was.

Now, it’s priced for imminent death, despite being a perfectly healthy cash-machine with a fortress balance sheet of net-cash.

Here are the valuation ratios:

TBV = 5.4

EV/FCF = 3.3

P/FCF = 4.4

It might be true that it won’t grow much, but it almost certainly won’t die either.

And that, ladies and gentlemen, is how you end up with an asymmetric bet with 100% upside potential.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

As I search through the sewers of the global stock market, I find all sorts of weird little scenarios.

Most of the time it’s just a healthy business being mispriced because the market can’t tolerate uncertainty.

Sometimes it’s some kind of special situation that offers downside protection and massive upside potential.

Today’s set-up is in this camp.

This type of situation is definitely not for everyone, but I do enjoy researching them, and the upside here is immense.

Here are the valuation ratios:

TBV = 1

EV/FCF = 4.5

P/FCF = 5.5

What this tells us is that we have considerable downside protection from the asset base, while the FCF yield is very high.

One of my favourite parts of this idea is that the management team are very keen to return those cash-flows back to the owners.

Last year, for example, the dividend yield (after SBC) was over 8%.

TTM it’s 6%, but there is a very specific and temporary reason for that.

So, if you enjoy businesses with a bit of hair on them, gather round, and let’s take a closer look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

If you’re a business-minded investor, today’s set-up is pretty compelling.

This is one of those situations where the income statement makes the business look far worse than it is in reality.

And, by ‘reality’ I mean much cash it consistently generates for its owners.

Here are the valuation ratios:

NCAV = 2.1

TBV = 0.67

EV/FCF = 4

P/FCF = 4.6

As you can see, it’s trading below the net-value of its tangible assets (minus all liabilities).

These assets are mostly cash, land and buildings.

The FCF figure I used was essentially the 5Y average, because that seems the most appropriate reflection of the next few years.

Last year was triple this number, but included a one-off inventory liquidation.

Aside from the downside protection, the operating business has tax carry-forwards worth €44.64m.

This means the business can earn €178.5m in tax free revenue from here.

All on a market cap of just €25m.

Juicy.

Also, the ownership structure isn’t locked up by family or insiders. The free-float is almost 60%.

There’s room for an activist and protection for minority investors here.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

Today’s business is being priced for significant decline.

In fact, the market is currently implying that the operating business will cease to generate any meaningful FCF beyond the next 5 years.

Here are the valuation ratios:

EV/FCF = 5.3

P/FCF = 5.6

There is no protection in tangible assets, both NCAV and TBV are negative when we strip out all the stuff you couldn’t actually sell in the real world.

However, there is an asset, valued at $0 on the balance sheet that is almost certainly worth the current market cap in its own right.

This gives us the rest of the operating business ($124m FCF per year), and all the other assets for free.

A pretty solid margin of safety, to protect against any liquidation scenario.

On top of this, the total shareholder yield is almost 18%, even after factoring in dilution and SBC activity.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

This isn’t an idea, for a change.

It’s an analysis of the current AI boom, from the perspective of a business owner.

Deep-value isn’t really about buying stocks that are cheap.

It’s about assessing the downside risk above anything else, and buying hard when that risk is virtually zero.

It’s about rational capital allocation.

This is purest when using your own hard-earned money, and maybe even debt that has real-world consequences if you fail to pay it back, with interest.

Because, when you buy things this way, you think long and hard about the risk of things going wrong.

But first, a story…

A few weeks ago we took the kids to a canal museum.

Contrary to what you’re almost certainly thinking, it was actually quite interesting.

Most importantly, it was free, and my kids are not old enough to know any better.

Anyway, in the UK we have an extensive canal system.

It’s just always been ‘there’ and I never really questioned it.

But going around the museum taught me some interesting things.

For example, one of the first canals was the Bridgewater Canal in Manchester.

It was built by a guy called Francis Egerton to transport coal from his mines, and reduce costs.

The project was an incredible success.

Coal prices literally dropped 50% as a direct result.

The savings allowed them to maintain margins but massively expand volume, while customers got cheaper coal.

Many other famous industrialists of the time copied the model and leaned into the canal boom.

These included brands like Wedgewood (pottery) and Cadbury (chocolate).

For those guys, the investment was almost always a raging success.

This was simply down to the massive increase in efficiency.

For instance, on a road, a horse can pull around one ton of goods at a time.

When pulling a canal barge, that same horse could pull more like 50 tons of cargo at a time.

We don’t need my big-buttoned calculator to figure out what this means for the bottom-line.

All in all, the UK built 4,000 miles of canals, all over the country.

It was an integral part of the UK industrial revolution.

Subscribe now

Canal Mania

Investors soon piled into this boom.

In 1790, parliament authorised one new canal to be built.

By 1793, it authorised over twenty new canals.

The appeal was obvious.

Build a canal and charge businesses to transport their goods along them, and receive fat dividends forever.

Simple.

Sadly, it didn’t quite work out for most of those investors, because other people figured out how to build railways.

Trains were just as stable and reliable, but much faster, and operated all year round.

Within 40 years, the canals were on the brink of death and railways started buying them up just to totally eliminate the competition.

It seems weird that there would be a ‘canal mania’ but that’s exactly what happened.

If I was around in 1795, watching all these businesses generate massive gains, I would most likely have become interested in canals.

Business people (generally) made lots of money, and then switched to railways, and made even more money.

The UK economy experienced a very similar benefit.

Almost everyone else, basically lost money, because they were trying to ride a wave that flattened out and died.

And that brings me back to AI.

Subscribe now

The Scale Of Spending

The adoption of generative AI has been astonishing.

ChatGPT reached 100 million users in roughly two months and achieved a level of adoption that appears faster than almost any previous technology.

The demand is obviously real.

However, unlike many internet businesses that came before it, AI requires vast amounts of physical infrastructure.

Every query requires computing power.

Every image generated requires computing power.

Every video generated requires computing power.

The result is an enormous global construction programme centred around data centres.

Recent estimates suggest that building a single 1GW AI data centre costs approximately $38bn.

Around 55% of that cost is spent on servers alone.

This means the AI boom is not simply a software story.

It is a story involving land, steel, electricity, water, transformers, networking equipment, memory chips and specialised processors.

Unlike traditional software businesses where marginal costs are tiny, AI requires continuous investment simply to keep serving growing demand.

This makes future extrapolations tricky, to say the least.

Subscribe now

Inference Is The Key

Much attention has been given to the cost of training large language models.

Training a new foundational model reportedly costs between $50m and $200m and can take several months.

These figures sound enormous, but in reality they are relatively small compared to the scale of the big tech companies.

The far bigger issue is inference.

Inference is what happens every time a user interacts with an AI model.

Every question.

Every response.

Every image.

Every video.

Unlike training, which happens once, inference-costs scale directly with usage.

As adoption increases, the infrastructure required to support that activity expands with it.

This is why capital expenditure plans continue to rise so aggressively.

The real spending is no longer about creating models.

It is about building the infrastructure required to run them at scale.

Subscribe now

The Economics Look Difficult

The question that concerns me most is simple:

“How much revenue will all this infrastructure actually generate?”

The answer is surprisingly difficult to justify.

Capex at Microsoft, Alphabet, Amazon, Meta and Oracle is expected to exceed $600b annually by 2026 and remain around that level for several years.

To justify those investments using current economics requires an extraordinary increase in future revenues.

I saw one estimate suggesting that maintaining current returns on invested capital would require roughly $413bn of additional annual revenue across those companies.

That equates to approximately $50 of additional spending for every person on the planet.

Maybe that will happen.

Maybe it won’t.

What I find most interesting is how the investment community seems to discuss the spending itself rather than the economic returns it must eventually generate.

To me, or any business owner, this is the only question worth asking.

Subscribe now

Forecast Optimism

One of the most interesting analyses I have seen examined projected capex and projected future-revenues through 2030.

The conclusion was a bit worrying.

Even under highly optimistic assumptions, where future revenues flow almost entirely through to profits, most of the major AI infrastructure investors still struggle to generate attractive returns on the capital being deployed.

That analysis does not prove the investments are wrong.

But it does highlight how dependent the entire thesis is on future outcomes that remain highly uncertain.

The current spending is clearly not justified by near-term revenue expectations.

The only credible justification is that these assets will generate substantial profits many years into the future.

Investors are effectively underwriting a future that does not yet exist, and has shown very little signs of existing so far.

Subscribe now

Infrastructure Monopolies

My little trip to the canal museum provides a useful framework here.

During Britain’s canal mania, investors poured huge amounts of money into canal construction.

The underlying economic logic appeared sound.

The demand for transporting goods was real.

The infrastructure was useful.

The total addressable market was enormous.

Yet many investors still earned disappointing returns.

Some canals proved valuable.

Many did not.

Then railways arrived and changed everything.

Useful infrastructure does not guarantee monopoly profits.

I see obvious parallels with AI infrastructure today.

Investors are assuming that massive spending on data centres will create enormous economic value.

It probably will.

But history suggests that building infrastructure and earning monopoly profits are two very different things.

Subscribe now

Asset Lifetime

Another concern (for me) is asset longevity.

Much of the cost of AI data centres is concentrated in servers and computing equipment.

I saw some other analysis that suggests these assets may only have useful lives of three to five years.

That feels like an impossibly short period in which to earn back the original investment.

Land and buildings may endure.

Grid connections may endure.

But the most expensive components apparently depreciate rapidly.

This creates a very different economic profile from traditional infrastructure.

Investors are effectively betting that today’s spending can be recovered before the next generation of technology makes current hardware obsolete.

This is another tricky assumption, given the sheer pace of the advancement.

Subscribe now

AI Is Still Being Subsidised

Another concern I have is that many AI services remain heavily subsidised.

The objective appears to be acquiring users and market share rather than generating profits.

OpenAI’s video platform Sora reportedly generated lifetime revenue of around $2.1m while costing approximately $15m per day in inference expenses.

The economics were so unfavourable that the service was recently shut down.

It’s a reminder that technological capability and economic viability are not the same thing.

Many AI applications are impressive.

The harder question (which no one seems to be worrying about) is whether they can ever become sufficiently profitable.

Subscribe now

Cheaper Alternatives May Emerge

The bullish case for AI infrastructure rests on the idea that demand for intelligence is effectively unlimited.

Maybe that is true.

But even if demand is unlimited, that does not mean demand for expensive infrastructure is unlimited.

Many tasks can potentially be solved using smaller, specialised models that require only a fraction of the computing power.

Another piece of analysis I read involved podcast transcription for a company called Overcast.

Using a large commercial AI model would reportedly have cost them approximately $30m per year.

Using a specialised smaller model apparently reduced the cost to roughly $10,000.

The productivity gain was achieved either way.

The expensive infrastructure was not necessary.

This is another thing that would keep me awake at night (if I was betting my money on AI infrastructure).

Subscribe now

The Financing Structure

The financing arrangements behind the AI boom are becoming increasingly complex.

We’ve all seen the ‘circle-jerk’ memes on social media.

Large technology companies are funding construction from operating cash flow.

However, substantial amounts of debt and private credit are also entering the system.

Special purpose vehicles are becoming common.

Suppliers are financing customers.

Capital is moving through increasingly complicated structures.

Leverage, opaque financing structures and circular funding arrangements have appeared repeatedly throughout financial history during periods of speculative excess.

When I see risk being shifted around the financial system in creative ways, I become more cautious rather than less.

Subscribe now

Useful Isn’t Necessarily Profitable

This is really my ‘bottom-line’ concern.

I have no doubt that AI will be useful.

I have no doubt that automation will continue expanding.

I have no doubt that important new businesses will emerge.

But usefulness does not automatically translate into attractive shareholder returns.

The current market narrative often assumes that because AI is transformative, the infrastructure being built today must therefore be enormously valuable.

History suggests that conclusion is far from certain.

Canals were useful.

Railways were useful.

The internet was useful.

Yet many investors who financed those booms earned disappointing returns.

The winners often emerged later and in unexpected places.

Subscribe now

The Missing Downside Protection

The core issue is not whether AI changes the world.

The core issue is whether today’s infrastructure spending can generate returns that justify today’s valuations.

At present, I struggle to answer that question confidently.

What I see is:

• Massive capital expenditure.

• Extremely optimistic assumptions about future demand.

• Short-lived hardware assets.

• Subsidised economics.

• Complex financing structures.

• Returns on invested capital that already look difficult to justify.

That does not mean AI is a fraud.

It does not mean the technology will fail.

It simply means that investors may be confusing technological success with investment success.

History repeatedly shows that the two are not the same thing.

My concern is that the infrastructure boom currently underway may eventually look more like the canal mania than investors realise:

Useful, transformative and economically important, but incapable of generating the monopoly profits required to justify the capital invested.

For a deep-value, business-minded investor like me, there is just far too much uncertainty and not enough downside protection to get involved at this point.

If, like me, you prefer investments with full downside protection and a massive margin of safety, you might like my newsletter.

An annual subscription also gets you access to exclusive bonus content that you might also enjoy.

Subscribe now

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

The market is valuing today’s business as though its operating business is already dead.

At today’s price, we can buy the entire company for just 0.6x TBV.

The market cap is ¥12.45b despite the business owning approximately ¥21.3b of conservatively calculated real-world tangible assets.

Even after stripping out questionable assets and deducting every liability, investors are paying roughly 60 cents for every ¥1 of hard asset value.

The absurdity becomes even clearer when you look at the operating business.

After netting out cash and marketable securities, the effective enterprise value falls to roughly ¥3.38b.

The sustainable owner-adjusted FCF is ¥900m per year.

In other words, the entire operating business could theoretically repay its acquisition cost in less than four years through normal cash generation alone.

Yet this is not a distressed company.

Over the last five years, revenue has increased from ¥11.6b to ¥14.79b.

Operating margins have expanded materially.

Operating cash flow has remained consistently positive through inflation shocks, supply chain disruption, geopolitical turmoil and industry headwinds.

The balance sheet has accumulated more than ¥12b of combined cash and liquid securities.

Here are the valuation ratios:

NCAV = 2

TBV = 0.6

EV/FCF = 3.7

P/FCF = 13.8

For the current valuation to be rational, the market must be correct that the business is entering terminal decline.

The reality appears very different.

At this point, it seems far easier for the stock price to re-rate upwards than for the business to actually die.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

The market is pricing today’s business as though it’s already dead.

Today, we can acquire the entire thing for ¥5.68b.

Yet the balance sheet alone contains ¥7.21b of extractable cash after adjusting for restricted balances, fulfilment obligations and other non-owner claims.

The market is effectively saying that management will destroy all that excess capital and that the operating business itself is worth nothing.

This is not a distressed business.

It has remained profitable through multiple cycles.

It has just completed a heavy investment period.

It now appears capable of producing roughly ¥1.0b of sustainable owner FCF each year.

At today’s price that implies a 17.6% owner earnings yield, and roughly 5% annual shareholder yield before any change in capital allocation behaviour.

Here are the valuation ratios:

NCAV = 5.1

TBV = 0.5

EV/FCF = 7

P/FCF = 5.6

These tell us the business is liquid and healthy.

The real attraction is the significant discount to the value of its net-tangible assets.

This is supported by the fact that operating margins are actually stable, and positive, despite falling revenue.

For this price to make sense, you have to believe several things happen simultaneously:

The cash never escapes.

The operating business enters a permanent decline.

And a business that has historically converted accounting earnings into real cash suddenly loses that ability indefinitely.

Of course, anything is possible, but healthy cash-generative businesses almost never just die, in real-life.

This is one of those situations where even the slightest bit of positive news from the business generates a large re-rating.

Let’s take a look…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

At today’s price, the market appears to believe this business is a capital-heavy operator with volatile economics, poor capital allocation and a bleak future.

The valuation implies the operating business itself is worth almost nothing.

That implication becomes difficult to reconcile with the underlying economics.

Today, you can effectively acquire the operating business for an enterprise value of roughly ¥3.37b.

A strict liquidation analysis suggests approximately ¥3.29b of recoverable value already exists on the balance sheet.

In other words, almost the entire purchase price appears covered before assigning any value to growth, customer relationships, operational know-how or future cash generation.

And this is not a distressed business.

Over the most recent year:

• Revenue grew 14.6%

• Operating profit grew 38.8%

• Net income grew 52.0%

• Gross margins reached 27.0%

• Return on equity reached 12.7%

The business also sits on a record pipeline.

Current contracted and in-progress activity totals approximately ¥12.13b, almost 3x the current market value of the entire business.

The market cap is ¥4.1b

Meanwhile, the business generates roughly ¥511m of sustainable owner FCF.

That’s a 15.2% owner-adjusted FCF yield against enterprise value.

To justify today’s valuation, several things likely need to be true simultaneously:

• Future profitability must collapse materially

• The forward pipeline must fail to convert into cash

• Asset values must deteriorate sharply

• And the operating business itself will generate no cash again

However, the reports describe something else entirely.

They describe a business with growing profitability, unusually high forward visibility, structurally attractive economics, cash generation and a fortress balance sheet.

The ownership structure is not locked up by any founders, insiders or family owners, which means the cash can (theoretically) be unlocked.

Let’s dig in…

Read more

I found a way to access a Bloomberg-level terminal for 90% less. Here’s how →

Subscribe now

My goal is to find businesses that I would love to own in the real-world.

Not fancy businesses, or exciting businesses, just the ones that throw off cash consistently every year.

When something looks like it could last forever, I’m even more interested.

When it’s priced cheaply I start buying.

Today’s business is a classic example of the type of business I love to find.

It’s also a great case study in how to figure out the real-world value and whether or not it’s trading at a good price.

If you search for cheap stocks, you’ve probably encountered this business.

The EV/FCF ratio is currently around 2.5x while the P/FCF ratio is roughly 3x.

The balance sheet is also a fortress, with net-cash equivalent to roughly 30% of the market cap, which is currently $3.65b.

When a massive business like this is trading so cheaply, I get interested.

Let’s take a look…

Read more