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Board discussing fee level at Strategic Equity Capital

Board discussing fee level at Strategic Equity Capital – Over the year to 30 June 2017, Strategic Equity Capital generated an increase of 29.3% in its NAV per share. On a total return basis, the NAV return was 29.6%, which was ahead of the Small Cap ex Investment Trusts Total Return Index which increased by 28.4%. The share price total return during the year was 26.1%. The Board is proposing an unchanged final dividend of 0.78p.

The Board says that it has entered into discussions with the Investment Manager on the level of fees payable.

The report says that performance was strong across the portfolio, with seven companies delivering total share returns over 40% and a further six companies delivering returns in excess of 20%.

What follows is an extract from the manager’s report.

“Top 5 Contributors to Performance 

Company                                                         GBP’000          (basis points) 

Equiniti                                                             20,130                      455 

Tribal                                                                 14,928                      402 

E2V Technologies                                                      –                       391 

Clinigen                                                              13,166                       359 

Servelec                                                              18,467                       312
 
Equiniti was a new investment made in early 2016 at, what we believe, was a very attractive valuation. It is our view that there had been concern around the level of gearing following the IPO at the end of 2015 and that the stock had suffered owing to negative ‘read-across’ from the specific problems of other companies in the support services sector. On both of these issues we had (and continue to have) a different view. Equiniti ended the year as the largest holding. The business had been very well invested through private ownership and bore significantly higher debt levels through the crisis without needing any equity injection. This is largely due to its resilience in providing ‘critical but non-core’ services, with average customer tenure in share registration of over 20 years. It is also markedly different from other support services companies in having limited public exposure to multi-billion pound ‘cliffedge’ contracts. Despite headwinds of a cut in base rates and a slower IPO market, the company delivered solid growth in sales and profit. Total shareholder return of 60% over the year was supported by a re-rating as the market took account of the strong nature of the business model and exposure to growth areas including regulation technology (“RegTech”) and the need for customers to have cost effective solutions. Towards the end of the period, Capita sold its share registration administration division to an international acquirer at a reported 13x EBITDA. This business has similarities to Equiniti’s Investment Solutions division which accounts for approximately a third of the group and implies
material valuation upside to the whole group. 

Tribal delivered a total shareholder return of 56% over the year. We have been engaged with the company as it undertakes a strategy to overcome poor integration and a high cost base and build on a business with strong positions in attractive education and learning markets. Initial progress is encouraging. The company has delivered significant cost savings, identifying GBP9m of annualised efficiencies (on full year sales of c.GBP90m), the balance sheet has net cash and contract momentum is returning. We undertook further diligence over the year, visiting company sites and customers in Australia which reaffirmed our positive view of the company. The next steps for the business are to continue the transition towards a purer application software business, thereby improving the recurring revenue base and operating margins. 

E2V Technologies delivered a total shareholder return of 37% over the year. The shares initially performed strongly given the significant US$ sales exposure of the group, but fell following delays in contract awards in space imaging at the time of interim results in November. Soon after, 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 prior day closing share price. The takeover was a positive culmination to an investment which involved a significant amount of engagement since first investment in late 2009. 

Clinigen recovered from a depressed share price (and rating), delivering a total shareholder return of 42% over the year. Concerns over the timing of orders were addressed and the company reported strong growth in profit and cash flow in its full year results. The company held a capital markets day where the newly promoted CEO outlined the long term opportunities for the enlarged business given the significant shortage of access to medicines across much of the world. The acquisition of Link Healthcare in 2015 has provided access to a wider customer base and increased distribution to healthcare professionals in Africa, Asia and Australasia. In addition, the ongoing upgrade in the technology platform should improve operations and customer interaction. 

Servelec delivered a total shareholder return of 33% over the year. The price initially recovered well from the surprise profit warning and downgrade in June last year. The shares were volatile driven by low liquidity and sentiment towards the timing of public sector spending. At the end of 2016, the company was awarded a previously delayed contract by Centrica to remotely operate an offshore gas platform. Full year results highlighted good order book progression and we recently increased our holding at a discounted valuation to historical levels. 

Outside of the top five contributors, there was strong performance from Gooch & Housego delivering a total return of 59% over the year. It remains a very good quality business with strong growth, however it has re-rated to a very high valuation and as a result, the position has been materially reduced. A new position was initiated in Medica on its IPO in late March 2017 (see page 7 of the Annual Report for further details). Its market displays positive long term prospects and the shares delivered a total return of 67%. The position in Tyman was increased in March 2017 and the shares delivered a total return of 42% over the year.

On the downside, after a very strong prior year, IFG Group delivered a negative total shareholder return of 6%. The company’s SIPP platform business, James Hay, was impacted by the cut in base rates in August last year which materially reduced interest income. In addition, continuing investment to improve back office functions and service levels has further depressed profits as highlighted in their full year results. Progress has been demonstrated in the growth in the average size of customer and the improving relationships with larger advisers. The wealth management business Saunderson House continues to grow strongly and is widening its discretionary management offering. Both businesses appear to be trading at a significant discount to precedent transaction multiples. The position was meaningfully increased after the final results in March. 

Wilmington’s share price has been volatile and delivered a negative total return of 4% over the year. Good progress in the risk and compliance divisions has been offset by legacy issues in financial training and legal businesses. The company performed in-line with market expectations over the period, however, the shares have de-rated significantly to what we view as a material discount to fair value.”

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