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Strategic Equity Capital – Jeff Harris is the natural successor

Strategic Equity Capital has published its interim report covering the six months ended 31 December 2016 – the NAV per share and the NAV total return per share increased by 13.7% and 14.1% respectively. By contrast, the benchmark returned 18.0%. The chairman’s statement attributes the underperformance to the lack of natural resource exposure in the portfolio – these sectors had a good run during the period.

The Investment Management team of Stuart Widdowson and Jeff Harris have worked together on the portfolio since 2014. The Board is pleased that Jeff Harris is taking on the role of lead manager as the Board believes Jeff to be Stuart’s natural successor. The company holds a concentrated portfolio of shares, the Board believes Jeff’s deep knowledge of the investments and his involvement in constructing the portfolio will be very valuable to the company. The Board would like to thank Stuart for his contribution to the company and his support during the handover period.

The top five positive contributors to performance

The share price of longstanding holding E2V Technologies (+3.49% to performance) was volatile over the period. Initially the shares performed well from an oversold position, as investors focused on the significant US$ sales exposure of the group. The interim results in November were slightly disappointing, and the company noted
that the non-cyclical space imaging division was experiencing delays to contract awards. High single digit earnings downgrades associated with this saw the shares de-rate materially to a level which they felt materially undervalued the business. In early December, an agreed bid from larger US peer Teledyne Technologies Inc was announced at an all time high share price, and a premium of 48% to the closing share price on the day prior to the bid. The shares delivered a total return of 37.3% over the period.

Servelec’s share price recovered well over the period following its profit warning in June 2016, delivering a total return of 24.4%. The shares were volatile over the period driven by what we perceived to be changing sentiment and low liquidity. The interim results were in line with the revised guidance. Towards the end of the period, the company announced that it had been awarded one of the delayed contracts by a major oil and gas company to automate an
offshore oil platform (+2.16% to performance).

4imprint (+2.14% to performance) delivered a total shareholder return of 37.6% over the period. The interim results showed constant current like-for-like sales growth of 15% and similar growth in underlying operating profit and earnings. 97% of sales originate in North America, and the shares performed extremely well driven by the material depreciation of Sterling and some further modest re-rating. Significant further progress was made in the ongoing de-risking of the company’s defined benefit pension scheme, with initiatives leaving a much smaller scheme with lower volatility and a reduced level of further contributions.

Equiniti (+1.65% to performance) delivered a total shareholder return of 26.2% over the period. The company’s business model generates substantial interest income. The cut in base rates in August led to small downgrades due to the forecast reduction in this profit stream. Otherwise underlying trading was in line with expectations. The shares re-rated well over the period, as former owner Advent International completed the exit of its shareholding.

Clinigen shares (+1.42% to performance) performed exceptionally well from July to September, rallying 30% following strong final results. Over the period the total return was 17.8%. Like other strong performers in the portfolio over the period, it also generates a significant proportion of its sales from outside the UK. The shares drifted between October and December, and were extremely weak into the end of December, despite no negative news over that timeframe. The company announced the anticipated retirement of the CEO, who was replaced by the Deputy CEO. It announced further commercial deals with pharmaceutical partners, as well as holding a capital markets day in November.

Outside the top five contributors, Harworth Group performed well over the period, delivering a total return of 24.3% from the point of purchase in July to the end of the period. The interim results were in line. The majority of the share price growth came from a narrowing of the discount to NAV at which the shares trade.

Bottom Contributors to Performance

There was only one material negative attributor. IFG Group’s shares were weak over the period, delivering a negative total return of 12.8%. The shares performed well at the beginning of the period, rising by c.6%, before peaking in August. James Hay, its platform subsidiary, earns considerable interest income. The reduction in base rates had a significantly negative impact on this profit stream, which led to downgrades. In addition, the short term trading outlook for James Hay was less positive than had been hoped. The company has been transitioning its commercial strategy from targeting a very large number of small advisors, to focusing on fewer, much larger advisors. Whilst they believe it has been successful in establishing a significant number of new relationships with larger advisors over the year, the flow of new SIPPs from these new relationships has taken longer to build. They believe that this is a short term issue and this commercial strategy will bear fruit over the medium to long term. They continue to believe that the shares trade at a considerable discount to the sum-of-the-parts valuation of the group.

SEC : Strategic Equity Capital – Jeff Harris is the natural successor

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