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Henderson Smaller beats benchmark in difficult year

Henderson Smaller Companies has published results for the year ended 31 May 2016. The net assets of the company declined by 1.1% in the reporting year, outperforming the benchmark, the Numis Smaller Companies Index (excluding investment companies), by 0.5%. However the company’s discount widened, so the share price fell by 8.1%. The revenue return per share has increased to 15.9p, compared with 15.0p for the previous year. The Board is proposing a final dividend for the year of 11.0p per share, making a total dividend for the year of 15.0p (2015: 13.5p).

Neil Hermon’s manager’s report says the outperformance came from a combination of underlying positive portfolio performance and a negative contribution from gearing in the company.

The top five contributors were:

12 month return %   Relative contribution
Principal contributors                                            %
————————–  ——————  ———————-
NMC Health                              +52.1                    +0.9
Bellway                                 +20.4                    +0.8
Paysafe                                 +46.8                    +0.6
Informa                                 +20.8                    +0.5
Sanne                                   +60.7                    +0.5
————————–  ——————  ———————-

NMC is a Middle Eastern based healthcare operation. Its main facilities are in the United Arab Emirates, particularly Dubai and Abu Dhabi. NMC has grown strongly since its IPO in 2012 through the building of new facilities and acquisitions. This growth is set to continue, particularly given the positive structural opportunities in the UAE, driven by an under provision of state provided healthcare, the continued roll-out of mandatory health insurance and positive demographics. Even after a strong share price performance in the last year the shares still look good value compared to the international peer group, especially considering the strong earnings growth forecast.

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. Bellway is looking to exploit these conditions by expanding its national footprint, whilst maintaining a strong land-bank and balance sheet. The outlook for the sector 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.

Paysafe is a provider of online and mobile payment solutions. The company offers the full spectrum of online payment services including; payment processing, digital wallets, pre-paid card, white label technology and value added services such as risk management and consulting. An investment in Paysafe provides exposure to the positive trends in growth in e-commerce and online gaming. This year a transformational and highly synergistic acquisition of competitor Skrill added scale and product to Paysafe’s existing business which was taken well by the market. Strong share price performance can also be credited to a further professionalisation of the business, with a new CFO spearheading the company’s successful transition from the AIM market to a main listing. Looking ahead, buoyant end market exposures should provide for strong revenue growth and forecast momentum has been on their side. This in conjunction with further consolidation in the industry continues to make it an attractive investment.

Informa is a leading business-to-business information group. Its activities include the provision of academic journals, books, data services, trade exhibitions and conferences. The company produced a very resilient profit performance during the downturn, helped by aggressive cost cutting. Also the balance sheet has been strengthened and cash generation has been strong. A new CEO has been appointed and he has significantly strengthened the management team. The aim is to re-invest in the areas that have struggled to deliver growth whilst expanding the fast growing exhibitions division by acquisition. The last year has seen positive momentum displayed in most parts of the business and over delivery against targets. This has led to a re-rating of the company which we feel has potential to continue.

Sanne is an independent and regulated provider of outsourced specialist corporate and fund administration and reporting services to alternative asset managers, financial institutions and other organisations. The specialism and complexity involved in the service it provides has historically allowed it to earn high margins which we view as sustainable in the medium run. Our investment in Sanne provides exposure to growing regulation in financial services, growth in alternative investments as an asset class, and continued trend of outsourcing back office functions. The company also benefits from a strong balance sheet, a sticky and diversified client base (90% of revenues are recurring) and plenty of M&A opportunities as larger administrators sell off non-core assets.

12 month return     Relative contribution
Principal detractors                      %                         %
—————————  —————–  ————————
Interserve                              -43.3                      -0.7
Victrex                                 -28.8                      -0.6
e2v Technologies                        -19.1                      -0.5
JD Sports(1)                            +61.2                      -0.5
Spectris                                -26.1                      -0.4
—————————  —————–  ————————

Interserve is an international construction and support services group. Its major operations are focused in the UK and the Middle East. Interserve has been hit by a variety of problems in the last year. In support services the imposition of the minimum wage is hitting profits. The market has also become concerned by the exposure to the oil-revenue-dependent economies of the Middle East. In addition Interserve has announced substantial losses on three waste-to-energy construction contracts in the UK. These factors, combined with a leveraged balance sheet, have led to a severe fall in the share price. The shares now look very cheap and with the company exploring the potential sale of its equipment services division (which would remove concerns over the balance sheet and Middle East exposure) there is a strong potential for a sharp recovery in valuation.

Victrex is a manufacturer of a speciality thermoplastic PEEK. It is the world leader in its field with a dominant market share. Victrex has shown consistent long-term growth as demand for PEEK has grown as customers look to replace metals with lighter plastics with similar thermal properties. Although demand for PEEK is subject to the vagaries of the economic cycle, longer term its use will continue to increase. Additionally Victrex has developed a very successful medical business with PEEK used particularly in spinal and arthroscopy operations, which is growing independent of the economic cycle. The shares have performed poorly in the last year as its exposure to oil and gas and smartphone markets have proved to be a drag on volumes. An additional drag has been the strength of Sterling as Victrex is a major exporter. Victrex has recently expanded capacity as there are significant opportunities for growth in the medical, oil and gas, aerospace and smartphone markets and longer term we believe the company will return to its growth path.

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 an undervaluation of 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 organisation’s processes. The initial results of this new approach were highly encouraging and the shares enjoyed a significant re-rating. In the past year the company has continued to deliver operationally but the shares have fallen back on profit-taking and a de-rating of the industrial sector.

JD Sports is a UK retailer of sports and leisure wear. The company has delivered very strong growth in profitability driven by like for like sales growth and a store opening programme. The company has also benefited from strong support from its brand suppliers, its product being considered fashionable and a weak competitive offering. The Company has no holding in JD Sports.

Spectris manufactures, designs and markets products for the electronic control and process instrumentation sectors. The company has a number of subsidiaries which tend to be market leaders in global market niches. Cash generation is sound, the management team is well respected and the balance sheet is strong. However recent growth in profits has been muted due to softness in end markets and sterling strength. The industrial sector has also de-rated as global growth in industrial production has disappointed. Longer term the company is well positioned for growth, especially if it deploys its balance sheet on acquisitions.

HSL : Henderson Smaller beats benchmark in difficult year

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