North Atlantic Smaller Companies (NAS) has announced its annual results for the year ended 31 January 2017. During the period under review, the fully diluted net asset value per share rose by 8.1% to an all time high of 2,968p. This is markedly below the rise in the sterling adjusted Standard & Poor’s Composite Index, which the company says rose 33.0%. However, the Company says that it performed broadly in line with the average for small cap companies in the United Kingdom.
Looking at the company’s quoted portfolio, the manager (Christopher Mills) says that in the UK, the Company’s largest holding, MJ Gleeson Group plc, was essentially flat during the year having risen 64% in 2015. He says that operating results good and the business significantly increased its dividend. Elsewhere in the UK, he says that Oryx rose by 11%. Life Science companies generally performed well with Quantum Pharma PLC, Bioquell PLC and EKF Diagnostics plc all outperforming the market. BBA Aviation plc also performed notably well during the period, although he says that this was partly offset by the weakness in Goals Soccer Centres plc.
The manager says that the US portfolio performed well during the period with Ambac Financial Group Inc in particular rising by 68%. However, NAS was significantly under invested in the US. The manager says that this is because valuations are very high by historical standards in an environment where interest rates were expected and in fact did rise. This was partly offset by the decision to hold a large part of the Company’s financial assets in short dated US Treasury Bills which benefited from the approximate 10% fall in the Dollar relative to Sterling.
Looking at the company’s unquoted portfolio, the manager says that the principal disappointment during the year was the need to write off Team Rock Limited despite the business achieving 4 million monthly unique users. However, the manager says that the impact of this was partly offset by the excellent performance of Indoor Bowling Equity Limited which the manager says should also assist performance in the current year. The manager comments that both Trident Private Equity Fund III LP and Harwood Private Equity IV LP continued to perform well. In the US, the manager says that the portfolio, albeit small, continues to perform well with excellent operating performance in Curtis Gilmour Equipment and Performance Chemicals Company. He says that the best performer of the year was Metropolitan Banc Group which rose nearly 200% following a takeover bid. The only disappointment was GAJV Holdings Inc. which underperformed budget and had to be modestly written down.
In terms of portfolio liquidity, the manager says that NAS held some £129m in cash and Treasury Bills at the year end which will increase further as a number of short term loans are repaid and the proceeds from the sale of Metropolitan Banc Group received during the course of the next twelve months. The manager says that he believes that the company is well placed to take full opportunity for any downturn in equity values which he believes are significantly over valued relative to their private market value.
In terms of outlook, the manager says that, while asset prices in developed markets have been supported by a relatively benign monetary environment, the now likely increase in interest rates should reduce investors’ propensity to buy equities at demanding valuation levels. The manager says that, overtime, this process should facilitate his efforts to identify compelling investment opportunities. The manager says that, although large US companies face profitability headwinds resulting from Dollar strength, the outlook for smaller companies with domestic sales is positive in his view. The manager believes that the expected easing in US fiscal conditions following President Trump’s election will emphasise domestic spending as opposed to what he describes as the past two decades’ expensive overseas commitments which also sapped the Dollar’s strength. He says that this emphasis, along with a tax-incentivised repatriation of US corporate overseas cash balances, will add support to the Dollar particularly with the concomitant likelihood of Fed monetary tightening.
In the UK, the manager says that opportunities are still hard to find with too much capital chasing too few deals. He says that a probable increase in Sterling interest rates and a possible decline in large UK company earnings growth could reduce equity prices overall, enabling NAS to deploy its substantial cash reserves effectively on this side of the Atlantic as well. The manager says that Brexit may bring an improved opportunity set as continental European investors focus increasingly on their domestic markets and Euro weakness has a depressing impact on the earnings of large export-oriented UK companies.
North Atlantic Smaller Companies’ NAV reaches an all time high : NAS