Better Capital has published a half-year report covering the six months ended 30 September 2016. The 2009 cell is doing OK, as the sale of its largest holding nears but the 2012 cell is struggling. The 2009 Cell NAV per share was 116.08p at 30 September 2016 which compares to 116.73p at 31 March 2016 (127.77p at 30 September 2015). The 2009 Cell Adjusted NAV per share, which includes accumulated distributions, was 148.38p at 30 September 2016 which compares to 146.53p at 31 March 2016 (140.57p at 30 September 2015). The 2012 Cell NAV per share was 61.13p at 30 September 2016 which compares to 71.43p at 31 March 2016 (75.96p at 30 September 2015). The 2012 Cell Adjusted NAV per share, which includes accumulated distributions, was 62.88p at 30 September 2016 which compares to 73.18p at 31 March 2016 (77.71p at 30 September 2015).
2009 cell (BCAP)
The 2009 cell saw its overall NAV rise from £254.7m to £261.1m as an increase in the value of Gardner and Omnico offset falls in the values of m-hance and SPOT. On 16 November 2016, the manager entered into exclusive discussions with SLMR, a Chinese company quoted on the Shenzhen Stock Exchange, for the sale of Gardner on an Enterprise Value of GBP326.0 million. The 2009 Cell’s share of the proceeds net of costs and provisions could increase the 2009 Cell NAV by an estimated 7.35p to 123.43p per share based on the 2009 Cell NAV per share at 30 September 2016. completion is expected to occur in Q1 2017. The Board says it remains our intention to effect a return of capital as soon as possible following any sale of Gardner.
The progress of m-hance has been slower than planned primarily due to lower achieved sales. However, there have been new sales wins across its services (Microsoft GP and HighCloud/NetSuite) and the pipeline is stronger going into Q4 FY16. The business has been written down by GBP2.0m to reflect slower progress than formerly envisaged.
Omnico closed its FY16 financial year ended September 2016 with positive EBITDA, a considerable improvement on the loss reported for the prior year. This performance demonstrates a turnaround for the business which has successfully transitioned from the legacy custom software development and hardware manufacture to focus on core product development and delivery for Food, Beverage and Retail customers. Opportunities in Hospitality, Entertainment and Retail are looking increasingly positive, particularly in theme parks in the US, Middle East and Asia due to market expansion.
2012 cell (BC12)
They say that it is disappointing to note a further decline of GBP35.7 million or 14.1 per cent. to the 2012 Cell NAV including accumulated distributions of GBP6.1 million (1.7 per cent. of funds raised) since the Annual Report. This is principally due to write downs in Everest, Jaeger and SPOT (£23.1m! – over a third of the March 2016 value).
Everest is expected to close its FY16 financial year ended December 2016 with positive EBITDA a little better than prior year, albeit significantly below expectations and potential, and with a much improved order pipeline going into FY17. This follows on from a series of cost reduction and revenue enhancing initiatives launched during the year. The GBP6.5 million write down in Everest reflects lower than expected earnings performance and a weakening of market comparable ratings at 30 September 2016.
Recent financial performance in Jaeger has been disappointing. Having enjoyed a strong start to its FY17 financial year through its Spring/ Summer 2016 collection with like-for-likes, full price sell through and EBITDA ahead of budget, the end of season sale proved very competitive with deeper markdowns and a longer sales period. The start of Autumn/ Winter 2016 sales have been slow with the warm weather affecting sales of outerwear. The consequent increase in competitive promotional activity means that trading continues to be challenging, however trading has shown an improvement in November 2016. Pressure from the weakness in Sterling will be more prominent for the purchase of the Spring/ Summer 2017 collection.
SPOT appears to be a Brexit casualty. They say it is trading profitably with good cash generation, significantly ahead of prior year but below budgeted levels in a fiercely competitive environment. Daily sales were impacted over the summer period following Brexit and margins are under pressure mainly due to the weakness of the Pound Sterling. The business’s valuation has been written down by GBP23.1 million reflecting the underperformance in earnings.
iNTERTAIN has traded well ahead of prior year although marginally behind expectations. The business performed strongly throughout the Euro 2016 tournament but the prolonged period of hotter than usual weather in July to September was unhelpful to a business with limited outdoor areas. The business has progressed well under Fund II’s ownership and is exit ready.
CAV continues its trend of steady improvement on an operational and financial basis. Considerable progress in areas such as machine maintenance and health and safety have helped improve both product quality and the working environment. Customer arrears are significantly and consistently reducing. On 16 November 2016, the business entered into a pre-packaged administration, with its trade and assets subsequently acquired by Northern Aeropsace, a special purpose vehicle within the group. The restructuring has enabled the group to eliminate contingent past liabilities and onerous sales contracts and puts the business on a firmer footing for future growth with expectation of an improved valuation in due course. 550 jobs have been protected as a result.
The Board acknowledges that progress in the 2012 Cell has clearly been disappointing. The Board says it has sought to understand the dynamics of each business and to provide counsel to the Fund II GP and the Consultant as it progresses plans to drive improvements in operational efficiency, enhance growth potential and exit at a point appropriate for the business. The Board retains confidence in the Better Capital team’s determination to achieve the best possible outcome for the 2012 Shareholders, but it is evident that a number of the businesses still face significant challenges and that the portfolio has a bias towards consumer-facing sectors which, given the uncertain economic outlook, may represent a headwind. Valuation in such circumstances carries inherent difficulties. The Board has approved the Fund II GP’s proposed valuations, but cautions that the value ultimately realised will likely differ from these valuations due to further developments in the businesses, industries and economic environment.
BCAP / BC12 : Better Capital 2012 struggling