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Valuing Good Quality GEM Companies for the Long term

  • Sep 2023
  • | Jonathan Asante
  • | Global Emerging Markets team

"Price is what you pay, value is what you get" - Warren Buffet

Valuing Good Quality GEM Companies for the Long term

We are often asked how we value companies for the GEM strategy. We came up with the above chart many years ago to show what is useful for us and just as importantly, what isn’t.  We spend most of our time making sure the companies we own are good enough quality to benefit our clients over the long term.  Minimising the number of times we have to sell a company after a share price fall is an important part of building clients’ wealth. Owning good quality stocks when their share price declines should provide an opportunity for us to buy more.

As owners of our own funds, we’ve always felt it is important to hold companies which offer acceptable long-term rewards for the risk taken in owning them.  There are several excellent companies that we would like to own at some point, but which do not currently earn sufficient returns under reasonable long-term assumptions.


Yield    +    Growth    =    Approximate Return

Luckily, we can often use the formulae that fall out of dividend discounting because these are so transparent.  The assumption of yield + growth = approximate return is useful for many steadily growing companies.  For faster growing companies we often estimate what a ten or twenty-year growth period could be, and then apply the dividend discounting formula once it seems reasonable to assume growth has slowed somewhat.

The above yield + growth formula is interesting.  It suggests that a simple Price Earnings ratio or PE (the inverse of which is the earnings yield) lacks any real meaning in valuing an individual company. For us to own the company, there should be reference to both the returns we want to earn and the growth we think that the company may achieve.

We routinely check a long history of ranges for metrics like price to earnings and price to equity for companies.  These are at best sense checks for a company, indicating how optimistic and pessimistic markets have been. Unfortunately, they do little to inform us how much we might earn over the long term from owning the company’s shares today.

The table below shows the results of valuing some of the companies we may own for clients in coming years.  Assessing the quality of the company determines the return we want to earn for owning it.  The lowest return we will accept for the largest company position in the portfolio is approximately 8% per annum. However, we also believe we need to earn above this in many holdings to adequately reward the risk for both clients and ourselves. 

A decade hence we will no doubt have been wrong about several of our valuations. We may have been too optimistic or too pessimistic about a company’s prospects or demanded too high or too low a return. We err on the side of caution in our valuations. We expect this makes us more likely to miss out at the peaks of exuberant markets than to lose actual client money through over-ambition. It is important to remember that unless a company is one of the top few percent in terms of quality in our universe that we don’t even begin to imagine what it might be worth – we see that the risk to clients of losing everything is simply too great.


Valuation Date

Valuation Method(s)

Sales Growth Assumptions

Annualised Total Return Earned in local currency

Leading price comparison site

Sep 2023

2-stage dividend discounting, market cap comparison to a UK peer as a sense check

20% for 10 years, then 5%

8% per annum

Trusted life insurance and savings provider

June 2023

Based on the company’s own DCF on its existing business – known as embedded value

16% growth in Embedded value for twenty years and 20% per annum growth in pension assets for twenty years

9% per annum

Leading diagnostics and medical testing provider

March 2023

2-stage free cashflow discounting, market cap comparison to a US peer as a sense check

10% for 10 years, then 5%

20% per annum

Specialist retail/distribution

August 2023

2-stage dividend discounting

5% for the stationery business and 20% for office supplies for ten years.

8% per annum

Leading branded food and personal care

Sep 2023

Single stage dividend discounting on a 10% earnings yield

5% in perpetuity

15% per annum

Conservative, technology-focussed conglomerate

March 2023

2-stage dividend discounting

20% growth in BVPS per annum over ten years (half the rate of the last ten years)

13% per annum

Leading maker of adhesives and consumer staples

April 2023

2-stage dividend discounting

5% per annum

11% per annum

Leading personal care company

July 2023

2-stage dividend discounting

10% per annum for a decade

11% per annum

Fast growing pharmacy chain

Sep 2023

2 stage dividend discounting

22% per annum for a decade off a very low base

9% per annum

Leading maker of kitchen appliances



2-stage dividend discounting

10% for 10 years, then 5%

13% per annum

Important Information

This document does not purport to provide investment advice and should not be relied on for the purposes of any investment decision. It is not an offer to sell or the solicitation of an offer to purchase shares. In particular this document is not intended for distribution in the United States or for the account of U.S. persons (as defined in Regulation S under the United States Securities Act of 1933, as amended (the Securities Act)) except to persons who are "accredited investors" (as defined in Rule 501(a) under the Securities Act).  Chikara Investments LLP (Chikara) is not registered with the United States Securities and Exchange Commission as an investment adviser.  This document and its contents are confidential and must not be copied or otherwise circulated to any other person. Certain assumptions may have been made in the calculations and analysis in this document which have resulted in returns detailed herein. This document is based upon information which Chikara Investments LLP (Chikara) considers reliable, but no representation is made that it is accurate or complete and nor should it be relied upon as such. All information and research material provided herein is subject to change and this document does not purport to provide a complete description of the funds, securities or other investments or markets referred to or the performance thereof. All expressions of opinion are subject to change without notice. This document is issued for the purposes of section21 of the Financial Services and Markets Act 2000 by Chikara Investments LLP (Chikara), 31-32 St. James’s Street, London SW1A 1HD, who are authorised and regulated by the Financial Conduct Authority.