Strategic Equity Capital’s interim figures, covering the six months ended 31 December 2015, show the NAV per share and the NAV total return per share decreased by 2.3% and 2.0% respectively. The Chairman’s statement says that aside from the exceptionally disappointing returns from one investment, Tribal Group, the vast majority of the remaining portfolio performed well. By comparison the FTSE 100, fell by 2.5%; AIM fell 1.6%, both on a total return basis. Both indices have considerable exposure to the resources sector, which will have had a significantly negative impact on index performance. This is highlighted in the FTSE 350 Oil & Gas and FTSE 350 Mining sectors, which delivered negative returns of 11.7% and 40.3% respectively over the period. In comparison, the FTSE 250 and FTSE SmallCap indices, both ex-investment trusts, delivered total returns of 0.6% and 1.0%.
The manager’s report says Emis, Servelec, 4imprint, Clinigen and IFG gave the biggest positive contributions to performance over the period, adding 6.3% to the fund between them.
- EMIS Group delivered a total shareholder return of 24.7% over the period. It continued to deliver resilient growth and the interim results slightly exceeded expectations. The profile of the company has improved since the initial investment and they say the shareholder register appears to have broadened. The shares have re-rated c.50% since the initial investment was made in March 2014. The forward p/e at the end of the period exceeded 23x, having re-rated by more than 15% over the period. It remains an excellent quality asset, which should continue to grow earnings at no less than 10% per annum for the foreseeable future, whilst generating cash. However, the recent pace of re-rating is unlikely to be sustained and they believe the shares now trade at close to its private market valuation.
- Servelec Group delivered a total return of 10.3% over the period. The company has continued to deliver against expectations, although strength in the healthcare technology business has compensated for relative weakness in the controls division. Towards the end of the period, the company announced that it had been awarded preferred supplier status for its Oceano product for an acute NHS Trust. This is an important win and augurs well for the forthcoming tender activity in this part of the market over the next few years. With good earnings visibility, multiple potential organic growth opportunities and a strong balance sheet, they continue to remain positive on the prospects for the company and future shareholder returns.
- 4imprint Group delivered a total return of 19.3% over the period, underpinned by strong trading results at the interims in late July 2015, and a positive trading statement in late October 2015. Organic sales growth remains in the mid to high teens. The expansion of the distribution centre and offices was completed in the autumn. This $9m investment enables the company to double sales again, potentially a very high return on capital. On a forward p/e basis, the rating was unchanged over the period.
- Clinigen Group delivered a total return of 14.4% over the period, releasing in line results in September 2015 and an in line AGM statement in late October 2015. The company also announced the acquisition of Link Healthcare in September 2015. Link is a speciality pharmaceutical and medical technology business which will strengthen Clinigen Group’s footprint in Asia, Africa and Australasia significantly. The recent transformational acquisition of IDIS, which completed in April 2015, appears to be bedding down well. Whilst organic growth may dip in the short-term as the acquisitions are integrated, they continue to believe that the company has many years of good structural growth ahead of it and say, provided management execution continues to be strong, it has the potential to generate exciting future returns.
- IFG Group delivered a total return of 24.2% over the period. The interim results showed continuing strong organic growth at Saunderson House and James Hay. The outlook for the rest of 2015 was positive and re-iterated in a comprehensive capital markets day in September 2015. The last remaining non-UK subsidiary was sold in Q4 2015. The forward p/e rating was broadly unchanged over the period. They continue to believe that the shares are under-owned by UK institutional investors (a result of the company’s primary listing being in Dublin, despite the business units being based in London and Salisbury).
The holding in Tribal Group cost the fund 6.7% however. Tribal Group delivered a brace of profit warnings in October 2015 and late December 2015, following tougher trading in the first part of 2015. The company has experienced a perfect storm during 2015 of slightly lower sales win rates, delayed project implementation at large Australian customers, an inflexible and high cost base, combined with a balance sheet which has been less resilient
than it appeared. In November, Tribal Group announced the simultaneous appointment of a new chairman and senior independent director, both of whom hold the same position at Servelec, the Company’s largest holding. At the same time as the December 2015 profit warning, it announced a fully underwritten standby rights issue of up to £35m to repair balance sheet and improve financial flexibility.
At the beginning of the period, the company was forecast to generate c.£15m profit before tax compared to the current forecast out turn of £3.1m for 2015. The £15m is a level of profitability which we believe should be largely underpinned by the sticky and highly profitable support and maintenance revenues of more than £30m generated by its electronic student record system division. These profits should be supplemented by new business wins and non-Ofsted profits from its Quality Assurance division. GVQ’s primary customer referencing suggests that the company’s products are well regarded and there is considerable ongoing demand. They acknowledge that, to date, this has clearly been an exceptionally disappointing investment. However, with a reconstituted board, and post the recapitalisation of the balance sheet, we believe that there are strong prospects for considerable value recovery over the medium-term.
SEC : Strategic Equity Capital hurt by Tribal holding