Gresham House Strategic extends run of outperformance – Gresham House Strategic beat its benchmark by 10.5% over the year ended 31 March 2020. its NAV total return was -14.3% against -24.8% for the Small Cap ex Investment Companies Index. A narrowing of the discount from 22.6% to 15.0% meant that the return to shareholders was even better at -5.2%. The dividend for the year is 22.9p.
Portfolio highlights
Strong investment performance, in particular from:
- Augean plc, UK’s largest hazardous waste business
- IMImobile plc, material investment in mobile communications specialist, fully exited post year-end
- Successful December 2019 IPO of asset management business services provider MJ Hudson
“Augean plc
Our investment was first made in October 2017 and subsequently increased on growing conviction through 2018 to become one of the largest positions in the portfolio. Having had the second half of 2017 to formulate a recovery strategy, in 2018 the executive team, led by Jim Meredith (Executive Chairman) and Mark Fryer (FD), began to enact the plan, starting with a rightsizing of the cost base to respond to the anticipated HMRC assessment to landfill tax and related penalties and fines (quantum as yet undecided, but final assessments have provided an expected cap). Having exceeded 30% of the portfolio during the final quarter, we reduced our position modestly into secondary market demand. The management team have done an outstanding job developing and delivering upon their strategy, which resulted during 2019 in justified remuneration. External factors have driven further outperformance as strong volumes and pricing in waste flows created by emerging ‘energy-for-waste’ plants have boosted profitability and cash flow such that Augean has been able to ‘pay’ the still disputed HMRC assessments, without admitting ‘guilt’ or accepting them, thus de-risking the equity investment case for other investors. We anticipate COVID-19 effects on profitability will be modest, mainly centred on North Sea activities. As such, Augean will in 2020 again demonstrate the highly cash generative business that it is, driven from its strategic position as the largest hazardous waste company in the UK. The shares now trade, in our view, at a significant discount to intrinsic value and transaction multiples in the relevant sector.”
“IMImobile plc
The company has been a material part of the portfolio since the Investment Manager’s appointment. A clear investment thesis was developed and has pleasingly been delivered for this international mobile communications services specialist. During the period, the company made an acquisition in the US and delivered further organic top-line growth. The technology sector both in the UK and elsewhere has performed strongly and valuations across the sector have moved higher, in some cases to all-time high multiples. IMImobile shares have themselves been re-rated in recent years, not in the least part, in our view, due to the engagement and involvement we provided. Key workstreams included revised investor relations and communications approach, simplified share capital structure and Board composition changes. During the period, we further reduced the position and post-period end have exited.”
“MJ Hudson Group plc
We made our original investment in MJ Hudson in 2016. The company is led by the highly experienced and dynamic Matthew Hudson who is utilising his extensive prior business-building capabilities to develop a leading services business to the asset management industry. This is being achieved both organically and through acquisition. The attractions of what the group offers and the quality of what has been built to date were demonstrated by him and his senior management team listing the company on AIM on 12 December 2019, the day of the General Election. This was no mean feat, during a very difficult year for new issues generally. The business now faces a disrupted end market which will no doubt create opportunities and the net cash balance sheet is well positioned for further progress.”
Five new investments made, with exciting return outlooks, low valuations and clear catalysts, timing often linked to the companies’ need for capital, including:
- Leading housing digital conveyancing platform ULS Technology plc
- English whisky distillery Lakes Distillery, via secured convertible loan note at 20% per annum return
- Market-leading piling, foundation services and equipment specialist Van Elle Holdings plc
Operational and turnaround support in under-performing investments, and five smaller holdings exited
GHS : Gresham House Strategic extends run of outperformance