Gresham House Strategic plc (LON:GHS) has announced its unaudited half year results for the period ended 30 September 2020.
Financial highlights
- Strong NAV recovery, with NAV Total Return of 15.1% in the period versus the FTSE All Share Total Return of 7.3% and in line with the FTSE Small Cap Index Total Return of 15.2%
- £9.1m of new investments during the period
- 20% increase in the proposed interim dividend
- NAV Total Return of 29.9% since inception – outperforming comparator indices such as the FTSE Small Cap Index ex-Investment Trusts by 28.1%
Investment Management highlights
- Four significant investments – £2.4m equity investment into Flowtech Fluidpower plc, £2.6m into RPS Group plc, £2.1m into Van Elle Holdings plc and a significant upweighting of Fulcrum Utility Services plc. Three further new initial investments
- Full exit of IMImobile plc shares, generating a +23.8% IRR and 1.85x Money Multiple – £14.6m realised profit
- Further portfolio re-balancing progress within the period with three other investments fully exited, including receiving a premium on the Convertible Loan Note held in Be Heard Group plc which was subject to a takeover
- Re-negotiation of Convertible Loan Note at Northbridge Industrial Services plc, reducing conversion price
- Material engagement across the portfolio supporting the unlocking and driving of shareholder value
- Positive share price performances from recent new investments Fulcrum Utility Services plc, Van Elle Holdings plc and ULS Technology plc and resilient financial results from Augean plc
David Potter, Chairman of Gresham House Strategic plc, commented:
“In difficult times for markets and the economy, we have full confidence in the investment team, strategy and portfolio. We look forward to further NAV growth, while narrowing the share price discount and are pleased to continue growing our dividends ahead of the market.”
Richard Staveley, Fund Manager and Managing Director of Strategic Public Equity, Gresham House, said:
“It has rarely been more important for investors to have a strong investment philosophy and process to tackle the challenges presented in 2020, fortunately we have one in the Strategic Public Equity strategy. This means we are able to cut through the market noise and focus on business fundamentals, the medium-term outlook for companies, not only the immediate issues, and spend focused time on severely undervalued and under researched small companies. UK Equities have rarely been cheaper compared to history, other international markets and different asset classes. We have grasped this rare opportunity with both hands and deployed capital to drive material NAV growth in the years ahead.”
The full version of the GHS interim report will be available on its website shortly at www.ghsplc.com.
Chairman’s statement for the half year to 30 September 2020
The six months since the depths of the “COVID crash” in March have seen two major trends. Firstly, share prices have in general recovered although the sectors most affected by COVID-19 driven restrictions (such as travel and hospitality) have continued to be depressed. As mentioned in March, GHS is invested in only one company exposed to these sectors. As is so often the case after a market sell-off, share prices of smaller companies take longer to rebound. Secondly, there is often an abundance of investment opportunities created, especially in under researched smaller companies which is our area of focus.
After the initial COVID panic in March, the willingness of the UK Government to support individuals and companies undoubtedly stabilised both markets and future expectations. Whether the optimism created will be maintained throughout a long winter of discontent, is not clear.
Against this background GHS made three new investments as described in the Investment Managers’ Report. At the end of the period the Company had £3.9m in cash.
Whilst the performance of the Company has continued to exceed many benchmarks and indices, it was disappointing to see the discount to NAV widen to 18% as at 2 October 2020 but pleasing since to see this narrow again to 8.35% (as at 6 November 2020). The biggest problem this creates is that it inhibits our ability to raise new funds, which under City conventions, can only be done at a premium to, or at NAV. The Investment Managers, who have rarely seen so many attractive investment possibilities, have investment capacity and a well-resourced team in place and so we will have to continue to be highly selective in choosing which opportunities to pursue.
The small size of the Company can also be an inhibitor to some larger wealth managers and institutional investors. We have devoted much effort to widening and increasing the shareholder base through marketing, roadshows, the coverage of Edison Research, direct advertising and PR. The Board expects that these efforts will, in conjunction with continued good performance, eventually narrow the discount sufficiently to be able to increase our size via fundraisings. We are also constantly alert to opportunities to grow by acquisition and merger although such transactions occur infrequently in the investment trust world.
The success of the Company depends on the investment decisions made by the Manager. Recent investments have been made during a period of significant market volatility and temporary economic stress, usually an opportunity for the patient and careful investor. Over the last three years GHS’s outperformance can be measured by NAV growth of 17.7% vs the FTSE Small Cap ex-Investment Trusts which has fallen 19%.
The Board remains confident that the Company will continue to prosper and provide above average returns, given its focused investment strategy. This confidence was demonstrated by raising the dividend target for next year by a further 5%. Over the last four years, since dividends have been initiated, the annual dividends have increased from 15p to 22.9p.
During the period, the Board has observed the transition to largely ‘virtual’ operations of both the Investment Manager and investee companies which happened rapidly and largely seamlessly. The longer-term ramifications of remote working remain unclear. While Board members and longer-serving staff at listed companies “know everybody on the zoom calls”, how those newer to the firm develop their networks, learnings, experience, information feeds and social and cultural interactions will be a challenge.
The Board have reviewed all the Company’s operations and the operations of the Company’s investee companies from an ESG perspective and will continue to strive for the best levels of corporate governance. These are set out on the website in our updated statements, and we encourage active discussion regarding ESG best practice in our investee companies.
I would also like to congratulate the Investment Managers for navigating an incredibly difficult and unprecedented six months. I would like to thank my Board colleagues and all our stakeholders for their continued support.
David Potter
Chairman, Gresham House Strategic plc
10 November 2020
Investment Manager’s Report
Introduction
We are pleased to be able to report to shareholders that during a challenging and unprecedented six months for equity markets we have navigated the investment and operational challenges of the COVID-19 virus well. While the UK equity market and small cap investment sentiment have been downbeat, we have used this period to provide capital to a number of businesses, valued at highly-attractive discounts to our view of their intrinsic worth and made a number of new investments which will drive NAV growth in future years. The investment team have re-allocated over 30% of NAV into new opportunities during the past nine months.
We are pleased to deliver relatively strong NAV returns for our investors in the period with a GHS NAV Total Return of 15.1% versus the FTSE All Share Total Return of 7.3% and matching the FTSE Small Cap Index ex-Investment Trusts Total Return of 15.2%. The share price has had a more muted six months, yet still produced a 10.2% Total Shareholder Return, set against a tough market environment for UK investment companies where discounts to NAV widened across the sector (see market commentary) and a strong preceding 12 months where the shares reached an all-time high of 1,355p.
Highlights for the period include:
- Strong NAV performance, with NAV Total Return of 15.1% in the period
- 20% increase in the proposed dividend – GHS shares now offer a prospective 2.8% yield
- NAV Total Return of 29.9% since inception – outperforming comparator indices materially
- Four significant investments – £2.4m equity investment into Flowtech Fluidpower plc, £2.6m into RPS Group plc, £2.1m into Van Elle Holdings plc and a significant upweighting of Fulcrum Utility Services plc
- Three further new initial investments via re-financing opportunities at Bonhill Group plc, Ted Baker plc and Infrastrata plc and additional investment into Centaur Media
- Full exit of IMImobile plc shares, generating a +23.8% IRR and 1.85x Money Multiple – £14.6m realised profit
- Full exits of Be Heard plc Convertible Loan Note IRR +22.2%, Equity IRR -37%, Brand Architekts Group plc IRR -38.2% and MJ Hudson plc IRR +8.8%
- Re-negotiation of Convertible Loan Note at Northbridge Industrial Services plc, reducing conversion price
- Material engagement with a range of holdings, supporting the unlocking and driving of shareholder value
In this Investment Manager’s Report, we write to shareholders about our high-level views of the UK economy and equity markets, summarise the NAV performance, portfolio and major dealing activity in the first half of the financial year. The report ends with our outlook for GHS.
Market Commentary
1. This six-month period of investment encompasses one of the fastest stockmarket recoveries on record (S&P500 +51.7% from a low point on 23 March to the end of September) after the COVID-19 pandemic induced the market crash of March 2020. The UK market recovery has lagged other countries (FTSE All Share +20.7% from a low point on 24 March to the end of September). The main market dynamics have been as follows:
– Fast growing companies have accelerated their recent outperformance of the rest of the market. This has driven the dispersion in the valuation of fast growing versus slower growing companies within the market to extreme levels compared to stock market history
– These fast growing companies have been alighted upon across industry sectors but have been heavily weighted towards Technology, eCommerce and Healthcare. The AIM market has more of these companies than the FTSE All Share and has therefore outperformed
– Retail investor activity has materially increased, both in the US (often through the use of single-stock options) and in the UK, evidenced by market operator reports. Passive Index trackers have continued to acquire more shares in their underlying indices, irrespective of valuations or, particularly in the case of the US, higher concentration in a handful of market leaders
– Companies with excess leverage have underperformed. The economic impact of COVID-19 has forced a range of businesses to address balance sheet debt levels and loss of cash liquidity through the issuance of new equity, often highly dilutive to existing investors. This phase has accompanied net outflows from UK equities. Less AUM, but more requests for capital
– Certain industry sectors are facing incredible business model stress, mainly in Transportation, Consumer Leisure activities and physical Retail. Commercial property rent collection and tenant strength has been severely tested. The vast majority of companies have cut dividends to shareholders materially, despite many having the capability to continue to distribute, accessing government schemes being a sensitive factor
– There have been pockets of winners in the face of the crisis; including the computer games industry, DIY and gardening retail, vaccine developers, food delivery, online retail, gold miners, video conferencing and cycling. The UK Government policy has stimulated the housing market
– Banks’ shares have performed very poorly around the world, despite strong capital positions, whilst sustained weakness in the oil price and mass investor adoption of the ESG agenda has meant traditional Energy shares have also been out of favour
– Regional economic activity has broadly reflected differences in lockdown rules and efficacy with the UK GDP in Q2 down a huge, estimated -20.4%, whilst Chinese GDP, where the virus originated, is expected to grow its economy overall in 2020 by c.4%
– The level of monetary and fiscal stimulus has been enormous around the world. As a result, M2 and saving rates have soared and government bond yields have been kept extremely low with many territories negative (e.g. Germany, France, Switzerland), indeed total negatively yielding debt now exceeds a record $16 trillion. Bonds aren’t the investment they once were
– UK Government debt has ballooned to the highest ever, now above £2 trillion and is on track compared to GDP to WW2 levels, above 100%. These are genuinely rare economic times. The fiscal outlook has therefore deteriorated markedly with tax collection down and government spending up. Governments around the world will be grappling with how to solve this in the coming years, without choking off economic recovery, alongside central banks who will surely be considering further innovative policies to meet their mandates, which are being re-orientated to allow for more inflation
– In Q3, concerns over a second wave of the virus and likely renewed lockdown restrictions, impending easing of fiscal help and the inevitable pick-up in unemployment weighed on sentiment and confidence in the strength and timing of recovery. In the UK this is combined with worries over the likelihood of a hard Brexit, scheduled for the end of the year
– A range of government leaders contracted and recovered from COVID-19. Data suggests death rates are highly concentrated in the very old and those with pre-existing conditions. The UK Government has pre-ordered over 400 million doses of potential vaccines currently in various stages of development. Insolvency and unemployment rates began to rise by the end of the period. ‘Lives’ versus ‘livelihoods’ will dominate national debate for at least the rest of the financial year
2. Portfolio Performance
The portfolio is very concentrated and therefore it should be expected that over any shorter period, such as a year, a dominant stock or two will drive performance.
http://www.rns-pdf.londonstockexchange.com/rns/9064E_1-2020-11-10.pdf
Source: Bloomberg, as at 30 September 2020
| Performance (all indices are excluding investment trusts) | H1 2020(Mar – Sept) | 1 years | 3 years | From inception (Aug 2015 – Sep 2020) |
| GHS Share Price Total Return | 10.2% | (6.4%) | 22.7% | 37.2% |
| GHS NAV Total Return | 15.1% | (1.3%) | 17.7% | 29.9% |
| FTSE Small Cap Total Return ex-Investment Trusts | 15.2% | (12.7%) | (19.0%) | 1.8% |
| FTSE All Share Total Return | 7.3% | (16.5%) | (9.3%) | 10.6% |
| Relative performance | ||||
| vs FTSE Small Cap Total Return ex-Investment Trusts | -0.1% | +11.4% | +36.8% | +28.1% |
| vs FTSE All Share Total Return | +7.8% | +15.2% | +27.1% | +19.3% |
The NAV Total Return per share rose to 15.1% in the half year to 30 September 2020, including the 12.8p dividend paid in September. Performance was materially ahead of the FTSE All Share Total Return Index, which rebounded 7.3% in the same period. From inception, in August 2015, to the end of September, NAV Total Return has been 29.9%, outperforming the FTSE Small Cap Total Return Index ex-investment trusts by 28.1% in the same period.
The H1 performance share price reflected two distinct quarters with a strong bounce back, during lockdown in the quarter to June, matched by NAV recovery, followed by a resilient NAV during the three months to the end of September 2020, but a weakening share price causing a widening of the discount, broadly in-line with the wider investment trust market.
We currently hold investments in 15 UK companies (13 >2.0% NAV) with 9.3% of the portfolio in cash and other working capital items.
| Top ten shareholdings | £m | Shareholding in the company | Portfolio NAV |
| Augean plc | 10.8 | 6.1% | 25.6% |
| Northbridge Industrial Services plc | 4.5 | 11.8% | 10.7% |
| RPS Group plc | 2.6 | 2.1% | 6.1% |
| The Lakes Distillery Company plc | 2.5 | – | 5.9% |
| ULS Technology plc | 2.4 | 6.6% | 5.6% |
| Fulcrum Utility Services plc | 2.3 | 2.8% | 5.5% |
| Flowtech Fluidpower plc | 2.2 | 4.8% | 5.2% |
| Van Elle Holdings plc | 2.1 | 5.5% | 4.9% |
| Pressure Technologies plc | 1.8 | 15.2% | 4.2% |
| Centaur Media plc | 1.7 | 5.9% | 4.1% |
| Other investments | 5.3 | – | 12.9% |
| Cash and other working capital items | 3.9 | – | 9.3% |
| Total NAV | 42.1 | 100.0% |
Top contributors to returns:
| Investment | Total Contribution (£m) | Uplift to NAV |
| Augean plc | 2.2 | 5.8% |
| Be Heard Group plc | 1.7 | 4.6% |
| Fulcrum Utility Services plc | 1.0 | 2.6% |
| ULS Technologies plc | 0.9 | 2.3% |
| Van Elle Holdings plc | 0.5 | 1.3% |
Top detractors from returns:
| Investment | Total Contribution (£m) | Detraction |
| Pressure Technologies plc | (0.7) | (1.9%) |
| MJ Hudson Group plc | (0.3) | (0.7%) |
| Centaur Media plc | (0.2) | (0.4%) |
| IMImobile plc | (0.1) | (0.3%) |
| PCF Group | (0.2) | (0.5%) |
During the period our largest holding, Augean, announced very solid interim results. These demonstrated the economic resilience of the business, its excellent recovery in profitability and impressive cash generation, leading to a fully repaired balance sheet, and the shares responded accordingly.
Be Heard Group plc received a takeover offer (accepted in June 2020). We have been heavily engaged with the company helping drive a positive outcome for our investment. We received an attractive premium on our Convertible Loan Note holding and some recovery on our equity investment.
We have an investment horizon of three to five years and are therefore delighted to benefit relatively early in the investment period from new investments contributing to NAV growth such as Fulcrum Utility Services plc, ULS Technologies plc and Van Elle Holdings plc. One common feature of all three is end-market exposure to the housing sector which has been recovering strongly and is clearly heavily supported by government policy. However, we would also point to positive management and Board changes in all three companies since our involvement.
Pressure Technologies plc and Centaur Media plc have been more affected than the other holdings with regard to COVID-19. The former has meaningful sales into the oil & gas industry and experienced a severe reduction in demand, and more generally sales cycles have lengthened. The potentially huge opportunity the company has in hydrogen infrastructure is too early a stage to offset this in the near-term.
Centaur Media plc has a meaningful B2B events business which like its peers has been impacted heavily by lockdown and travel restrictions, however its wider activities have been more resilient, and it retains a strong balance sheet position to enable patience for recovery. MJ Hudson plc achieved a full valuation at IPO in December 2019 when our pre-IPO convertible instrument converted to equity. A partial de-rating of the shares has since occurred, despite solid financial performance and we have chosen to realise this holding to rotate into new investments.
3. Investment activity
Since the start of the Company’s financial year, we have invested £9.2m cash whilst realising £7.2m from sales and redemptions of investments.
Flowtech Fluidpower plc
The dramatic market correction at the start of the period created an opportunity for us to build a significant stake in Flowtech Fluidpower; a specialist distribution business on which we had been conducting due diligence for several months pre-COVID. We are targeting significant returns for our investors from a combination of improved operational and financial management, sales and profit recovery and a valuation re-rating of the shares to the levels paid by the private equity market for these sorts of businesses. Once the successful integration of past acquisitions has been demonstrated, the opportunity to re-start value accretive corporate activity will emerge. This process is being overseen by new Chairman, Roger McDowell, who sits on the Board of another of our investments, Augean plc, and who has significant relevant industry experience.
RPS Group plc
We added another core holding to the portfolio in September, participating in the £20m liquidity raise by RPS Group plc and built a c.6% weighting in the company in the process. RPS Group plc is an environmental planning and consultancy business serving the infrastructure, energy, transport and property sectors, tapping into some key growth drivers such as urbanisation, infrastructure spend and renewables. Significant revenues are derived from the public sector which should benefit from increased government spending. Our investment case centres around operational improvements driving margin recovery to sector averages, a repaired balance sheet and, following post-COVID recovered sales levels, improved organic growth delivery. There has been significant consolidation activity in the sector. RPS Group plc was two years into a turnaround under a new management and Board, with green shoots emerging just as COVID-19 struck. The fundraise has allowed us to gain exposure to the upside that the earnings recovery can deliver after much of the ‘heavy lifting’ has already been undertaken.
Van Elle Holdings plc
We also used the crisis to build a significant 7% stake in Van Elle Holdings plc, a specialist piling business focused on rail, infrastructure and housebuilding. We are targeting improved returns from the introduction of a new management team and Chairman who are overseeing strategic and operational changes within the business to recover operating margins and revenues. In this instance, these self-help initiatives are supported by a thematic structural trend of anticipated significant infrastructure and construction spend supported by the UK Government over the next five years including smart motorways, wind-power, HS2, housing and rail electrification.
Fulcrum Utility Services plc
Fulcrum Utility Services plc became a core position during the COVID crisis at attractive valuations and has quickly started to deliver returns for the company. Having identified a value opportunity based on the potential to dispose of utility assets and recover margins while growing the top line, we started engaging with the company pre-Christmas. This process accelerated during lockdown and the investment is emerging as a clear ‘COVID winner’ as Fulcrum is a direct play on the push for net-zero emissions and a ‘green’ recovery. The company specialises in designing and constructing electricity connections such as EV charging points, smart meters, housing developments and infrastructure as well as fibre optics. Over the next five years we envisage material earnings growth supplemented by returns of cash to shareholders from disposals driving our targeted investment returns.
Other investments
During the period we participated in re-financing opportunities in three companies, two of which were brought on by the economic effects of COVID-19.
– Bonhill plc: A leading international B2B media company providing analysis, insight, networking and research to international business, financial services and governance communities. Key brands include InvestmentNews, Portfolio Adviser, ESG Clarity, DiversityQ amongst others. The business has been hit hard by the inability to hold physical events; however, its dynamic management team have been pivoting to digital solutions and re-structuring costs aggressively. The company has been driving out synergies from its various acquisitions and we expect material profit recovery in future years.
– Ted Baker plc: The company’s strategic review had begun prior to COVID-19 and is being driven by a new management team and Board. With a strong international brand, there is material scope to enhance profitability across a huge range of identified initiatives. A material re-financing and sale of the Head Office freehold has re-capitalised the business. With historic sales of over £600m we see a significant recovery opportunity.
– Infrastrata plc: Under new and dynamic management, the company has taken its strategic gas storage project to the edge of commercialisation. However, we are mainly excited about the potential to build a new domestic industry player in UK shipbuilding/refurbishment and maintenance. The iconic Harland & Wolff yard in Belfast and the Appledore yard in Devon, should be able to access the government’s and commercial sectors’ desire for more competition and we expect their multi-sector business plan to generate meaningful contracts to support a re-launch in the years ahead.
Divestments
During the period we exited the last of our IMImobile plc position, realising £14.6m profits in total at a +23.8% IRR. The shares have been an important driver of NAV growth in recent years, and the position dominated the portfolio historically. The valuation now far better reflects the company’s future prospects, there are limited strategic or engagement angles remaining after our material involvement in past years, and a positive IRR was locked-in via secondary market sales.
We have also exited Be Heard Group plc. This has been a more challenging investment, however through heavy levels of involvement and engagement we contributed to management and Board evolution, steadying of the business and an eventual takeover approach which was successful in the period. The flexibility of our investment mandate was such that our investment was via both a Convertible Loan Note and equity ownership. Whilst a loss was booked on the equity, we received a premium on takeover on the Convertible Loan Note which is generating a profit of £1.2m.
Finally, we exited Brand Architekts Group plc and MJ Hudson plc. The former has been heavily affected by the COVID-19 pandemic while it has been going through a period of management and Board change. While the business has retained material cash balances from its strategic divisional sale, we have re-assessed the risks inherent in future unidentified M&A, the large pension deficit and the disrupted industry, and chose to re-allocate capital. MJ Hudson successful concluded its IPO in 2019 upon which we converted our Convertible Loan Note into equity. We retained limited influence post this event and have sold.
4. Outlook
Governments around the world have had a novel but material issue to deal with during the last six months. The policy response has unsurprisingly been difficult to calibrate effectively, particularly with many competing demands and perspectives from different parts of society. What has been uniform, is a massive fiscal and monetary response from government institutions.
The direct impact of ‘lockdowns’ and restricted economic activity and movement will clearly leave permanent ‘scarring’ in many regions, industries and companies. However, given time, many behaviours will return to ‘normal’. It seems credible though that for a number of trends initiated or accelerated by the pandemic, long-lasting change will occur. It will be critical for investors to identify and differentiate therefore the opportunities for mean-reversion, the underappreciated longer-term changes to the nature of demand and supply and most importantly any structural effects which could create ‘value traps’.
While market commentary remains focused on the very short term such as the US Presidential Election and the timing or likelihood of an effective vaccine for COVID-19, there appears to be little analysis on the medium-term effects of this historic stimulus. The burden of debt on governments and many companies will linger; austerity appears a highly unpalatable option, and tax increases across society are likely to be necessary alongside a change in perspective on inflation, which some central banks have already begun to acknowledge.
With regards to Gresham House Strategic plc:
- The biggest determinant of medium-term future returns is the entry valuation on investments made. UK equities are very good value relative to historic and other international markets. Within the UK market, the smaller company discount has widened relative to large companies and is now wider than it has been for many years. Our approach invests predominantly in UK smaller companies and is set to capitalise on the opportunities these metrics offer.
- The portfolio is now focused on a small number of companies where we see substantial profit recovery potential. Naturally, a post-vaccine/’lockdown’ environment will contribute to this, but the bulk of future profit growth will be generated by self-help measures, already identified by new management teams, incentivised to deliver them and, if achieved, will result in our view in large increases on their valuation multiples back to historic or sector norms.
- Our value-oriented approach has produced a portfolio which is attractively valued on a relative and absolute basis and we continue to see substantial upside within individual investee companies as well as the portfolio as a whole. Whilst this bias to value hasn’t stopped outperformance to date, if the market were to adjust from its extreme positioning in ‘growth’ or actively seek out more ‘value’, our holdings should benefit.
- Structural factors, such as the introduction of MiFID II in 2018 and the concentration of industry AUM have, in our view, exacerbated inefficiencies at the smaller end of the market, providing a greater number of opportunities for discerning investors to find hidden value. With Private Equity firms sitting on huge levels of cash we expect them and trade buyers to exploit these overlooked companies if the public markets continue to ignore them. COVID-19 has enabled us to recycle capital at depressed share prices, sowing the seeds of future NAV growth.
- We believe the closed-end nature of GHS allows the strategy to embrace the illiquidity of smaller companies, adopt the time horizon of genuine medium-term investors and build a concentrated portfolio of the very best opportunities that this unique market backdrop is providing.
Richard Staveley
Fund Manager, GHS plc & Strategic Public Equity Investment Committee Member
Anthony (Tony) Dalwood
Fund Manager, Gresham House Strategic plc & Chairman of the Strategic Public Equity Investment Committee
10 November 2020
