Hg Capital Trust has announced its annual results for the year ended 31 December 2015. During the year, it provided NAV and share price total returns of 14.1% and 8.6% respectively, both markedly outperforming the FTSE All-Share, which provided a total return of 1.0%. The manager say that, during the year, the portfolio provided revenue growth of 10% and EBITDA growth of 12% across the top 20 buyout investments (87% of the portfolio value). The managers also deployed £65m on behalf of the Trust, including £10m of co-investment, and whilst £64m of cash was returned to the Trust. The company is proposing a final dividend of 40p per share (2014: 32p).
The company says that there were three main contributory factors to the growth in NAV: the strong trading performance across the portfolio; realisations from the portfolio; and comparable company ratings. Aggregate growth in profits (EBITDA) was 12% in the year, an increase over the 9% recorded in 2014. The aggregate EBITDA margin was of 23% of revenue. The managers say that the accelerated profit growth reflects significant investment made into the cost base of several portfolio companies over recent years, which continues in several businesses, in order to build a platform for faster growth in later years. They say it was a busy year for realisations, with four businesses realised or partially realised during the year, all at uplifts to the December 2014 valuations. In the case of SimonsVoss, Sporting Index, e-conomic and JLA, these realisations completed during 2015. The Manager also agreed the sale of TeamSystem and Casa Reha towards the end of the year and those sales completed early in 2016; the exit valuation of these investments was fully reflected in the NAV at December 2015. The managers say that the NAV performance was also supported by a rise in the multiples of businesses comparable to much of the portfolio, especially in the software sector. This was offset to a small degree by weakness against sterling of the foreign currencies in which a part of the portfolio is valued. They say that exchange rates between sterling and these currencies (principally the euro, US dollar and Norwegian kronor) continue to be volatile, due to weakness in the European economies and that, nervousness around the referendum in the UK may potentially continue to generate volatility, affecting the NAV in the year ahead.
In terms of funding and commitments, the trust had outstanding commitments of £160m at the year-end (reduced to £117m since), and they managers say that the majority of this likely to be drawn down over the next two years. At the year-end, the Trust held £40m in liquid resources to fund these investment as well as bank borrowing facility (up to £80m) with Lloyds. The managers say that this will provide additional funding during a period when their cash flow projections indicate that the trust will be fully invested, pending the start of realisations from the HgCapital 7 vintage. They say that it will also give the Board confidence when deciding on the level of commitment to make to the Manager’s next buyout fund, a decision that is expected to be made later this year.
In terms of outlook, the managers say that the portfolio continues to trade strongly and they remain confident that they have constructed a strong portfolio of sustainable growth companies, which offer good downside protection given current economic headwinds. Furthermore, given the increased ratings and a relatively buoyant market for realisations and debt, they are continuing our focus on returning capital to our investors. They comment that, in the current market environment, they think the clarity of their investment strategy confers a number of clear advantages to a disciplined buyer. Specifically, they are maintaining a focus on businesses that provide a business-critical product or service; a fragmented loyal customer base; and strong contracted or recurring revenues. The managers believe that the robust trading performance of the portfolio, combined with further opportunities in the medium term to realise investments will continue to drive value for shareholders.
HgCapital Trust – NAV growth driven by trading performance, realisations and comparable ratings : HGT