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Another great year for Henderson Smaller Companies

Another great year for Henderson Smaller Companies

Another great year for Henderson Smaller Companies – Over the year to the end of May 2018, Henderson Smaller Companies says its share price has risen by 23.8%, and the net assets by 15.9%, substantially outperforming its benchmark, the Numis Smaller Companies Index (excluding investment companies), by 10.6% – the return on the index was 5.3%. The chairman points out that fund manager, Neil Hermon, and his team have now outperformed the benchmark in 14 of the 15 years in which he has managed the investment portfolio, as well as outperforming over the last one, three, five and ten years. They are also reporting a 17% increase in the proposed total dividend for the year, the 15th consecutive year of dividend growth; a total dividend for the year of 21.0p (2017: 18.0p).

Principal contributors – absolute increase and contribution to returns

NMC Health + 55.1 + 1.4
Renishaw + 46.7 + 0.8
Victrex + 53.7 + 0.8
Burford Capital + 79.8 + 0.8
Intermediate Capital + 34.0 + 0.7

NMC Health 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 looks 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. The acquisition strategy has supplemented the organic strategy by diversifying the business by geography and medical discipline. The company was elevated to the 100 Index in September 2017 and in line with stated policy they sold the position.

Renishaw designs, develops and manufactures high technology precision measuring and calibration equipment. The business is a global leader in its field with strong patent protection. The company invests heavily in research and development to maintain its market leading technological position. Over the medium term the organic growth delivered has been one of the strongest in the capital goods sector. It has expanded its operations by diversifying into healthcare and additive manufacturing markets, both of which offer long term attractive growth. In the short term the company is enjoying the recovery in industrial capital expenditure, new investment in the smartphone production chain and, as a major exporter, the competitive benefits of a weaker pound. They say that Renishaw, with a very strong balance sheet and a well invested production base, is superbly positioned for the long term.

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. Victrex has recently expanded capacity as there are significant opportunities for growth in the medical, oil and gas, aerospace and smartphone markets.

Burford Capital is a provider of investment capital and risk solutions for the litigation industry. The company has an integrated business model as it takes both on-balance-sheet risk and derives fee revenues from its fund management business. Litigation is a nascent and growing market where returns are fundamentally uncorrelated to the stock market or business cycle. Burford is the largest player in this market globally. This investment provides the fund with exposure to structural growth in demand for litigation financing which has been driven by the practical solution it provides to the unfavourable accounting treatment of litigation on corporates and the temporary nature of equity in law firms. Management run a conservative balance sheet.

Intermediate Capital is an alternative finance provider and asset manager. It is a leading provider of mezzanine finance to LBO markets. It also owns a highly successful mezzanine, property lending and credit fund management operation. Its portfolio of investments are performing well but the primary growth engine of the business is the fund management operation where it is having real success in growing assets due to the strength of its performance, the quality of the team and underlying demand for its product in an income-hungry world. The management have also boosted the company’s return on equity by returning substantial surplus capital.

Principal detractors

Safestyle – 79.4 – 0.5
AA – 45.1 – 0.5
Conviviality – 100.0 – 0.5
Wizz Air + 61.5 – 0.5
Ferrexpo + 73.9 – 0.4

Safestyle is a provider of windows, doors and conservatories. The last year has been tough for the business as market demand has softened due to a decline in consumer spending, particularly in large ticket items such as replacement double glazing. In addition the company has been targeted by a new competitor which was set up by the original founder of Safestyle. Although market conditions remain difficult, Safestyle benefits from a well invested manufacturing facility and a strong balance sheet and they think that, when market conditions recover, the company is well placed for a sharp rebound in profitability.

AA is a roadside assistance and insurance group. The company has suffered from a combination of volatile demand for roadside assistance combined with an inflexibility in its cost base and an increase in insurance premium tax which reduced the ability to raise prices. In addition, upgrading the IT platform has taken longer and proved more costly than expected. Management have been changed after the high profile departure of the executive chairman. Although the company has high debt levels they still believe its franchise is strong and think that, if the company delivers on its revised business plans, then there is substantial upside in the share price.

Conviviality was a convenience store and drinks wholesaling business. After a very successful period of growth, boosted by organic and acquisitive growth, the company issued a severe profits warning in March 2018, citing margin pressure and a spreadsheet error in its forecasting model. This warning severely dented their confidence in the business and the management team and they sold the position. Subsequently, the company discovered unrecorded cash flow liabilities and after failing to raise additional equity it went into administration.

Wizz Air is a low cost airline operator. The company had no holding in Wizz Air. Wizz performed strongly, aided by capacity expansion, low fuel prices and strong growth in Eastern European economies.

Ferrexpo is an Ukranian provider of iron-ore. The company had no holding in Ferrexpo. The iron-ore market was strong in 2017 with robust Chinese economic growth and production cutbacks aiding a recovery in prices. The company has typically had an underweight position in the mining sector due to the volatile nature of commodity prices, the high leverage these companies usually employ, their position as price takers with little influence over the value of their output and their poor corporate governance.

HSL : Another great year for Henderson Smaller Companies

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