Over the year to the end of May 2015, Henderson Smaller Companies generated a 20.4% return on net assets and a 28.2% return to shareholders both of which compare well to a 10.4% return on the Numis Smaller Companies Index for the same period and the average returns for HSL’s peer group (14.3% on NAV and 16.1% on share price). The discount narrowed from 14.2% to 9.0%. The dividend was increased from 11p to 13.5p.
The fee will stay at 0.35% but will be calculated on net assets rather than gross assets going forward.
Housebuilders, Bellway and Taylor Wimpey, contributed most to the relative outperformance, adding 1.6% and 1.5% to the NAV respectively. other strong positive performances came from AA, Howden Joinery and e2v Technologies. The manager’s report says:
“Bellway is a national UK housebuilder. The UK housing market has seen an impressive recovery in the recent past aided by improving consumer confidence, low interest rates and Government initiatives, particularly Help to Buy. Margins, volumes and profits have been rising strongly and the outlook remains for continued strong growth. Bellway is looking to exploit these conditions by expanding its national footprint, whilst maintaining a strong land-bank and balance sheet. The sector outlook is aided by a benign land market as the number of competitors has reduced from the previous cycle, the structural under-supply of housing in the UK and the capital discipline Bellway and its peers are displaying.
Taylor Wimpey is a national UK housebuilder. From the depths of the housing downturn in 2007/08 Taylor Wimpey has made an impressive recovery. It has strengthened its over leveraged balance sheet through the sale of its US operation and by raising money through a rights issue. Financial returns have been improving through the acquisition of higher margin land and cost reductions in the building process. Much of the housing market commentary written above also applies to Taylor Wimpey. The major difference between the two companies’ strategies is that whilst Bellway is looking to expand its volumes (albeit from a much lower base), Taylor Wimpey is aiming to return significant amounts of cash, through dividends, to shareholders. This provides a very attractive prospective yield for investors. As noted later in the report our position in Taylor Wimpey has been sold due to size considerations.
AA is the UK’s leading provider of roadside assistance. It also provides insurance broking and financial services. AA is a very strong business with fantastic brand recognition, limited competition, strong pricing power and good cash generation. AA was floated in June 2014 and a key attraction was the incoming management team. This was led by Bob McKenzie whose career has spanned BTR, Hanson, Sea Containers, Green Flag and more recently Northgate, in which the Company has a holding. AA floated with a highly leveraged balance sheet but this was understandable given the cash generation of the business. The investment upside was provided by a combination of a transfer of value from debt to equity as cash generation was used to pay down debt, planned faster growth of the core business driven by investment in marketing and systems and cost reduction in back office processes. The share price of AA has performed very well since IPO and we have booked substantial profits on our position.
Howden Joinery is a manufacturer and retailer of kitchens in the UK. From launch in 1990 it has organically grown to over 590 branches and taken a significant market share by providing a first class service to its client, the jobbing builder, with keen prices and excellent stock availability. The company is also very cash generative but in the past this cash has been consumed by pension and property issues it inherited from its former parent, MFI. However these issues have now been effectively worked through and Howden is starting to aggressively raise the dividend to shareholders. With branch roll-out continuing and the kitchen market beginning to recover Howden is well placed to grow profitability strongly.
e2v Technologies manufactures high technology electronic components. Although e2v is a company with significant technology and high margins, it has historically struggled to deliver consistent growth. This led to a below market valuation for the business. The appointment of a new chairman and CEO has led to a re-focusing of the business with cost taken out, a new customer-focused approach and de-cluttering of the organisations processes. The initial results of this new approach have been highly encouraging with results for the last financial year above market expectations. Its shares have enjoyed a significant re-rating and prospects for further growth look strong if the company continues to deliver on its strategic aims.”
Relative to the Numis Smaller Companies Index, the two largest negative movements derived from the collapse in the oil price as Afren and Premier Oil cost the fund 1.2% and 0.7% of NAV respectively. Other detractors to relative performance were Betfair, Greggs and Moneysupermarket.com all of which were stocks that Henderson Smaller companies did not own but which appreciated in price.
HSL : Henderson Smaller shareholders get bumper year and a fee cut