Lloyds was trading at a distressed valuation of 0.3x book due to a drastic slowdown in the macro environment. This led to a collapse in loan growth along with accelerated losses from asset impairments in Lloyds’ non-core assets.
Legatum’s investment team analysed the core and non-core businesses separately. Recognising the value of Lloyds’ core retail business, the team concluded that the key impediment to realising Lloyds’ intrinsic value was the significant uncertainty around how to price the risk from Lloyds’ non-core business.
Taking this into consideration, our team believed that the Lloyds shares were worth at least 2x their market price.
Our investment thesis was based on reducing this uncertainty, enabling the investment community to revalue the stock more favourably. Legatum engaged with Lloyds’ senior management and encouraged them to provide clarity to the market on their strategy for managing non-core assets, even if it meant recognising impairments and publishing ‘bad news’ in the short-term.
Following a concerted effort by Lloyds to manage non-core assets and educate investors on the substantial disconnect between Lloyds’ market value and intrinsic value, the company’s stock price more than doubled in the 24 months that followed.