Rockwood Strategic’s results for the year ended 31 March 2023 encompass its very strong run of performance last year. Over the period, the trust generated an NAV total return of 21.4%, which compares to a 15.7% fall in its FTSE Small Cap (ex-ITs) benchmark. Shareholders got a return of 28.2% as the discount narrowed. There is no dividend.
The statement says that this was the most active period of investing since the strategy was conceived, with 13 new investments made during the year, and with the majority of capital remaining in the top ten holdings. Significant investment gains were realised from Crestchic (£12.4m) and there were material unrealised gains within the portfolio at the period end.
With the aim of increasing marketability and liquidity the board is recommending a 10 for 1 stock split.
Extracts from the manager’s report
Crestchic
The main feature was Crestchic Plc (formerly Northbridge Industrial Services) which started the period at 15.8% of NAV. We are delighted that our engagement efforts supported the company and ultimately rewarded all shareholders with a material increase in shareholder value which was realised into cash. Crestchic was a proven business, asset-rich with an excellent international client base. Our engagement since late 2019 included getting the company to report and focus on Return on Capital Employed metrics, the evolution of management with the appointment of Peter Harris as Executive Chairman, the appointment of two NEDS, one a direct representative of Harwood Capital, the development of an appropriate incentivisation scheme, the sale of the company’s loss-making second division, the re-investment into the business and improved Investor Relations narrative and approach. Rockwood owned a material stake in the company and “ran our winner” with the % of NAV reaching c. 31% prior to the company being successfully taken over by Aggreko (Private Equity backed). The realisation generated an IRR of 30.4%, a money multiple of 4.8x and a gain of £12.4m.
There were only three other, much smaller, exits during the year:
Lakes Distillery Convertible Loan Note – realised IRR 21.6%
The Lakes Distillery has been building its English whisky and spirits brand carefully and successfully over recent years, despite a number of external challenges. The business model requires a lot of capital, whilst growing, to support the working-capital in laid down casks. We were delighted to see some well-deserved awards for their whisky but were happy to realise our maturing Convertible Loan note into cash during the period allowing new investors to take the company through to its next phase of growth.
Seraphine – realised IRR -6%
Our target holding period for investments is three to five years. This relates to the usual time we have observed it historically takes for a turnaround in a company’s profitability and valuation rating when accompanied by the usual Board, management, operational and strategic changes to catalyse the recovery. Over excited ‘Growth’ investors backed a series of over-valued IPOs in the run-up to the regime change caused by the normalisation of interest rates. Seraphine, a mainly on-line, successful, international retailer of maternity apparel had listed at c. £150 million market capitalisation and had collapsed to c.£20m. We initiated a ‘Springboard’ 2% weighting, however subsequent key online platform changes to advertising rates affected all retailer’s customer acquisition costs hitting profitability, alongside the accelerating cost of living pressures and poor consumer confidence. We accepted a Private Equity takeover approach for the company, at approximately the value we paid for our holding (our ‘margin of safety’ protected us), as the risks to our medium-term thesis had materially increased post purchase.
Bonhill Loan – realised IRR 65.4%
Bonhill, the financial services B2B media publishing and events business, has also been a volatile investment since initiation in a rescue fund raise in the first couple of months of lockdown in 2020. There is no doubt the collapse in physical events was highly disruptive for the relationship between their brands and customers, however operationally management was found wanting and changes were necessary. The inability of the US business to generate cashflow, some marginal brands creating organisational cost and complexity, inadequate technology systems and limited integration led to one conclusion: the business was sub-scale for a listing and had no mandate for further acquisitions. Having taken a NED Board position, we helped refinance again during the year increasing our holding to 19.5%, and the Board then initiated a formal sales process of the business with UK and Asian assets and the small titles sold during the period. During this process further financing was required and Rockwood Strategic provided a “bridging” loan to Bonhill to help them through to completion of asset sales. Although modest in terms of a cash return (relative to NAV) it delivered an excellent IRR. Post year end the US assets were sold and the company initiated a full return of realised capital to shareholders. A good illustration of the flexibility of our mandate.
RKW : Rockwood Strategic reports impressive numbers