Gresham House Strategic PLC (LON:GHS) Managing Director Graham Bird caught up with DirectorsTalk for an exclusive interview to discuss their latest interim results, the main drivers & detractors for the performance and the outlook for the fund in 2018
Q1: Last week we saw the announcement of your interim results for the six months to the end of September, how has the portfolio performed over that period?
A1: The period we’re talking about here is 31st March through to the end of September and I think I would characterise it in three areas.
From a NAV perspective, actually the NAV was relatively flat in the period and that masks some underlying good performance which I’ll come back to in a second. We had a very strong first quarter with the NAV was up 7.5% in the 3 months to the end of June and we saw some of that good performance reverse in the second quarter, notwithstanding strong operational performances in some of the underlying businesses.
We’ve been quite busy during the period as well, we’ve invested £7.3 million of that cash that we had so quite a busy period in terms of investment activity. Coming back to the operational performances of the business, we’ve had very strong operating statements coming out from IMImobile PLC (LON:IMO) with their results in late June, coming into July. Their share price has actually weakened in the second quarter, really driven by overhang on the shares as the largest shareholder Tosca has been selling some shares so we remain very confident that IMImobile will drive performance as we move forward from here. So, that had impact on the NAV in the second quarter and we saw that coming back to end up pretty flat in the period.
Likewise, Be Heard Group PLC (LON:BHRD) came out with very strong interim results at the back end of August, early September, strong revenue performance and good growth coming through in the underlying business. The share price has been quite weak, again really driven by some retail selling and I think possibly some concern about the media sector with some of the bigger players, WPP and some of the bigger advertising agencies, announcing weaker or challenging conditions. However, we think strong rotation into digital marketing and allocation of marketing budgets to these sorts of things that Be Heard are doing but the share price didn’t affect the underlying performance, we are very confident that that business is performing very well.
Overall, reasonably pleased with most of the businesses performing to plan. I think the one exception that I think I should call out was Quarto and it had a difficult first half of the year and we’ve seen forecasts come down quite materially and they’ve had a negative impact on the performance.
Since the end of the period, that’s since 30th September, we did see a recovery in one or two share prices, notably in IMImobile which pushed the NAV back up, but we are in an interesting place in the market, I think, so we’ll see where see how that goes from here.
Q2: I think you’ve touched on this really but what have been the main drivers and detractors for the performance?
A2: If you look at what actually pushed the attribution, I think the ones I would call out, I mentioned IMImobile, they had a strong Q1, we saw a little bit of share price weakness in the Q2 but nonetheless, contributed 2.6% to attribution in the period so that was a good contributor.
Northbridge Industrial Services Plc (LON:NBI), share price has been a bit stronger during the period, so we saw that contribute a reasonable 1.6% to the attribution. I think Northbridge is very well positioned to recover as we are seeing a slightly stronger oil price, I think activity in the oil and gas services sector should start to pick up and Northbridge is very well positioned for that. However, it has been a more protracted period of slow activity in that sector so it’s undoubtedly that Northbridge, the business, has been pushed out a bit but looking pretty positive from here.
We also saw strong position in Revolution Bars Group PLC (LON:RBG), we bought into that company in Q1 following a profits warning or a downgrade expectation, but we felt that the market had hugely overdone that, that was borne out when a few weeks later it was bid for by Stonegate Pubs, backed by their private equity owners. So, that was a strong performer and in fact, we sold two thirds of our position in Revolution Bars when it looked like there was a contested bid going on and the share price was actually above what the offer price had been made by Stonegate so that contributed another 1.3% to the attribution.
SpaceandPeople Plc (LON:SAL), which is a relatively small holding, that was a good contributor in the period. In May, they announced that the turnaround activity that they have undertaken in the business was really starting to be bare fruit, taking significant cost out of the business, and activity in the UK market, notably in promotional business has really picked up. So, they were able to reiterate their guidance for the full year which saw a significant turnaround and return to profitability and on the back they’re able to say that they’re confident that as we move into 2018 they’ll be returning to paying dividends again. So, that saw the share price rise quite materially, if you remember we had invested further amounts into SpaceandPeople back in January when the share price had been very weak so since then it’s performed really strongly.
The other one I should mention on the positive side was Alpha FX Group PLC (LON:AFX), which we bought into it on the IPO, the share price has performed very strongly and it hit our target price, so we came out of that.
The two negatives that we should mention, Quarto, I did mention, had a difficult first half and subsequent to that, we’ve seen the forecasts revised won quite materially. It was then approached by an international buyer although that didn’t turn into anything, the regulatory requirements to culminate a bid were quite complicated so that got pushed back. As we moved into November, they subsequently announced that H2 has shown good performance but it’s not enough to make up the weak first half. So, I was quite pleased that the performance in H2 is looking quite strong, it’s significantly up in terms of where it was last year, H2 on H2, but it’s quite clear that the first half performance was very weak. So, we’re working very closely with them on understanding their options and how they’re going to make sure that the business is managed effectively as we move into the new year.
Q3: Talking about next year for Gresham House Strategic, what is the outlook like for the fund going into 2018?
A3: I’m pretty bullish on where we are, really for a couple of reasons. The first is if you look at how value and growth have performed over the long term, certainly if you back look over 40/50 years, we’re at a situation now where the underperformance of value versus growth is at an almost all-time extreme. So, whenever it has been this far out of kilter, there has been a strong performance of shares with value characteristics, so I think it’s quite an interesting time from a market perspective to be looking at strategies which focus a bit more on value.
So, looking at what’s in our portfolio, if you take into account the fact that you can buy Gresham House Strategic shares at 20 odd percent discount to NAV, and we’ve got a little bit of cash left in the portfolio, you can buy a portfolio with underlying assets which is on 5.3 times EBITDA and that compares to buying shares in the All-Share which is on 8.7 times EBITDA. The growth in our portfolio, again this is weighted average across the holdings it has forecast us in the market, the weighted average growth is 16% of the sales line and that compares to 4% in the All-Share so effectively, you can buy a much higher growth for a much lower price.
The final point in our portfolio is that we’re sitting on average on net cash whereas compared to the All-Share on average is modestly geared so you’ve got a portfolio on a lower rating with higher growth and a strong balance sheet that you can access through Gresham House Strategic.
So, I think that positions us quite well, if you look at intra-stock correlations have fallen significantly over the last six months and that’s started to point more towards stock picking. You’ve seen tremendous momentum in the market over the last few years, driving valuations higher and higher and we’ve started now to see that correlation breaking down and I think that bodes well for a stock picking strategy.
So, that leaves me positive for the outlook, as I said, I think the strongest argument here is around the valuation and the growth characteristics of the businesses that we own so that should bode well for performance in the future.
