Half-yearly Report
Strategic Equity Capital plc
Unaudited Half Yearly Report & Financial Statements
for the six month period to 31 December 2014
KEY HIGHLIGHTS:
Richard Hills, Chairman of Strategic Equity Capital plc, commented that the
Company has seen:
* Very strong absolute and relative performance during the period, which
reflects the Investment Manager's high conviction, concentrated portfolio
approach. The Company delivered a 10.1% increase in net asset value ("NAV")
per share to shareholders over the six months ended 31 December 2014,
exceeding the FTSE SmallCap ex Investment Trusts Index ("FTSE Small Cap Index")
by 13.2% over the same period.
* 16.8% outperformance of comparable FTSE Small Cap Index over 3 years.
* The Company's NAV benefited from M&A activity with the acquisition of a top
10 holding, Allocate Software, at a 35% premium to its pre-bid price.
* Portfolio companies continue to display attractive valuations and strong
operational momentum.
* A market environment which continues to be favourable for the Investment
Manager's focused strategy.
For further information, please contact:
GVO Investment Management Limited 0203 691 6100
Investment: Stuart Widdowson
Investor relations: Theresa Russell
Capita Sinclair Henderson Limited 01392 412122
Paul Richards
Copies of the announcement and other corporate information can be found on the
Company's website at: www.strategicequitycapital.com
INVESTMENT OBJECTIVE
The investment objective of the Company is to achieve absolute returns (i.e.
growth in the value of investments) rather than relative returns (i.e.
attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
The Company's investment policy can be found below.
INVESTMENT MANAGER'S STRATEGY
The strategy of GVO Investment Management Limited ("GVOIM" or the "Investment
Manager") is to invest in publicly quoted companies which will increase their
value through strategic, operational or management change. The Investment
Manager follows a practice of constructive corporate engagement and aims to
work with management teams in order to enhance shareholder value.
A more detailed explanation can be found in the Investment Manager's report
below.
FINANCIAL SUMMARY
Six months
At At At % change to
31 December 30 June 31 December 31 December
2014 2014 2013 2014
Performance
Total shareholder return for the period(1) 10.11% 38.63% 29.39%
Capital return
Net asset value ("NAV") per Ordinary share 190.43p 173.66p 162.00p 9.66%
Ordinary share price (mid-market) 188.50p 156.00p 146.50p 20.83%
Discount of Ordinary share price to NAV 1.01% 10.17% 9.57%
Average discount of Ordinary share price
to NAV for the period ended 7.57% 11.72% 13.12%
Total assets (£'000)(2) 110,673 104,183 96,772 6.23%
Equity shareholders' funds (£'000) 108,669 103,429 96,487 5.07%
Ongoing charges(3) 1.28% 1.27% 1.30%
Revenue return per Ordinary share 0.69p 0.76p 0.61p
Dividend yield 1.12% 0.50% 1.12%
Proposed final dividend for year n/a 0.78p n/a n/a
Ordinary shares in issue with voting rights(2) 57,066,291 59,558,111 59,558,111 (4.18%)
Interim period's Highs/Lows High Low
Net asset value per Ordinary share 190.60p 127.60p
Ordinary share price 194.38p 104.25p
(1) Total shareholder return is the increase per share in NAV plus dividends
paid.
(2)The Company's fifth tender offer took place in July 2014. 2,382,098 shares
were bought back for cancellation at a cost of £3,716,940 (including stamp
duty). A sixth semi-annual tender offer took place in November 2014. 109,722
shares were bought back for and held in treasury at a cost of £182,582.
(3) The ongoing charges figure has been calculated using the Association of
Investment Companies' ("AIC's") recommended methodology and relates to the
ongoing costs of running the Company. Non-recurring fees are therefore excluded
from the calculation.
INVESTMENT POLICY
The Company invests primarily in equity and equity-linked securities quoted on
markets operated by the London Stock Exchange where the Investment Manager
believes the securities are undervalued and could benefit from strategic,
operational and management initiatives. The Company also has the flexibility to
invest up to 20% of the Company's gross assets at the time of investment in
securities quoted on other recognised exchanges.
The Company may invest up to 20% of its gross assets at the time of investment
in unquoted securities, provided that, for the purpose of calculating this
limit, any undrawn commitment which may still be called shall be deemed to be
an unquoted security.
The maximum investment in any single investee company will be no more than 15%
of the Company's investments at the time of investment.
The Company will not invest more than 10%, in aggregate, of the value of its
total assets at the time the investment is made in other listed closed-end
investment funds provided that this restriction does not apply to investments
in any such funds which themselves have published investment policies to invest
no more than 15% of their total assets in other listed closed-end investment
funds.
Other than as set out above, there are no specific restrictions on
concentration and diversification. The Board does expect the portfolio to be
relatively concentrated, with the majority of the value of investments
typically concentrated in the securities of 10 to 15 issuers across a range of
industries. There is also no specific restriction on the market capitalisation
of issues into which the Company will invest, although it is expected that the
majority of the investments by value will be invested in companies too small
for inclusion in the FTSE 250 Index.
The Company's Articles of Association permit the Board to take on borrowings of
up to 25% of the net asset value at the time the borrowings are incurred for
investment purposes.
CHAIRMAN'S REPORT
Introduction
I am delighted to report that the Company made excellent progress in the six
month period to the end of December 2014, delivering very strong growth in both
share price and net assets. The Company's share price also moved from trading
at a discount to net asset value to a premium over the period. This has been
brought about by a combination of strong long-term performance and increased
marketing activities by the Investment Manager.
From a performance perspective, it was pleasing to see the portfolio starting
to benefit from M&A activity. The takeover of Allocate Software vindicated our
long-term investment approach and highlighted some of the strategic value
contained within the portfolio's holdings.
Performance
As at 31 December 2014, the Company had net assets of £108.7 million (190.43
pence per share). This represented an increase of 4.3% (9.7% per share) over
the period. Including dividends, the Company delivered a NAV total return to
shareholders of 10.1% per share. The Company's NAV outperformed the FTSE Small
Cap Index by 13.3%. This strong absolute and relative performance was delivered
despite an average cash balance of c.6.6%.
The Company has delivered a NAV total return per share of 107.6% over the past
three years, exceeding the 90.8% return from the FTSE Small Cap Index by 16.8%.
The Company's five year NAV total return per share growth of 194.4% has
exceeded the return from the Index by more than 100%. Notably, growth in the
Company's NAV has been delivered without the use of gearing and with relatively
low volatility.
Discount Management
The discount to NAV at which the Company's shares trade narrowed significantly
from an average in the previous financial year ended 30 June 2014 of 11.7% to
an average of 7.6% in the six months to the end of December 2014. The share
price ended the period trading at a small premium to NAV. The Board believes
that the narrowing in the discount has been driven by a mix of strong ongoing
performance, the Company's increased profile among institutional and retail
investors, the broadening shareholder base and also the regular tender offers.
Since the beginning of 2013 the Investment Manager's efforts to increase the
profile of the Company have led to a major change in the shareholder base, with
an increasing proportion of shares held by retail investors and wealth managers
instead of discount focused institutional shareholders. This trend has
continued during the period under review. New purchasers of shares included
wealth managers, long term institutional shareholders and additional offices of
existing wealth manager shareholders.
Dividend
The Directors continue to expect that returns for shareholders will derive
primarily from the capital appreciation of the shares rather than from
dividends. In line with previous years, the Board does not intend to propose an
interim dividend.
Tender
In May 2012, the Company introduced semi-annual tender offers, buying back
shares for cancellation in May and November each year. Subject to unforeseen
circumstances, the Directors intend to offer such tender offers in the event
that the discount to NAV at which the Company's shares trade exceeds on average
10% over the relevant six month period to June or December as the case may be.
Each tender offer is for up to 4% of the Company's issued share capital at a
price equivalent to a 10% discount to NAV (including current period revenue and
deducting the estimated tender costs) per share.
At a meeting in September 2014, the Board decided that it would no longer
cancel tendered shares but buy them back into treasury given the possibility
that the shares would soon trade at a premium and so could be reissued
thereafter at the Board's discretion.
Accordingly, the Company undertook its sixth semi-annual tender offer in
November 2014, buying back 109,722 shares into treasury at a price of 166.4
pence per share, as announced on 18 November 2014.
Shareholders should note that with the shares now trading around NAV it is
currently unlikely that the Board will recommend a tender offer in May 2015.
Development of the Company
At the Annual General Meeting held on 14 November 2014, shareholders passed a
resolution reaffirming their support for the Board to issue new shares or sell
shares out of treasury were there sufficient demand.
The Company has subsequently applied to the UK Listing Authority for a block
listing of 5,607,878 further shares, being the number of shares which the
Company has authority to issue non-premptively, following shareholder approval
being granted at the Annual General Meeting held in 2014. This, in effect,
gives the Board the ability to increase the size of the Company, if there is
sufficient demand, by issuing new shares at a premium to NAV from time to time.
Since the start of the period under review, all the shares held in the treasury
account have been sold and as at the date of this report, 725,000 new shares
have been issued by the Company. As a result, the Company's issued share
capital consists of 57,901,013 ordinary shares. The issue of ordinary shares is
being made in order to meet market demand. The proceeds of each issue will be
used in further pursuing the investment objectives of the Company. The Company
has the ability to issue a further 4,882,878 ordinary shares under its block
listing facility.
The Board
On 10 February 2015, Richard Locke joined the Board. Richard brings with him a
wealth of experience in the financial sector having been a stockbroker for many
years and is now a managing director at a corporate finance advisory company.
As previously announced to the market, John Hodson, who served as Chairman of
the Company from incorporation until September 2014, retired from the Board on
10 February 2015. On behalf of the Board, I would like to take this opportunity
to thank John for his long-term leadership and valuable contribution to the
successful running of the Company.
Investment Manager
In December 2014, RIT Capital Partners plc ("RIT") announced that it had
entered into an agreement to acquire the Investment Manager from Hansa
Aktiengesellschaft ("Hansa"). RIT also entered into an agreement to acquire
Hansa's shareholding in the Company on completion of the transaction. Both
transactions have now completed. The Investment Manager will continue to
operate as a separate legal entity with the same autonomous management team,
structure and process. The Board looks forward to continuing to work closely
with the Investment Manager and its new owner RIT.
Gearing and Cash Management
The Company has maintained its policy of operating without a banking facility.
This policy is periodically reviewed by both the Board and the Investment
Manager.
The Board, together with the Investment Manager, has a conservative approach to
gearing due to the concentrated nature of the portfolio. No gearing has been in
place at any point during the period. From time to time cash positions are
maintained for when suitable investment opportunities arise.
Outlook
The Board shares the Investment Manager's belief that the prospects for the
Company remain encouraging. The existing portfolio is in good shape, with
individual companies enjoying strong balance sheets and materially better
growth prospects than the broader smaller companies sector. The challenging
markets have enabled the Investment Manager to build a good pipeline of
potential new investments. Despite the many uncertainties going into 2015, the
Board believes that the Investment Manager's selective investment approach will
continue to serve the Company well.
Richard Hills
17 February 2015
INVESTMENT MANAGER'S REPORT
Investment Strategy
Our strategy is to invest in publicly quoted companies which will increase
their value through strategic, operational or management change. We follow a
practice of constructive corporate engagement and aim to work with management
teams in order to enhance shareholder value. We aim to build a consensus with
other stakeholders and prefer to work alongside like-minded co-investors as
leaders, followers or supporters. We try to avoid confrontation with investee
companies as we believe that there is strong evidence that overtly hostile
activism generally generates poor returns for investors.
We are long-term investors and typically aim to hold companies for the duration
of rolling three-year investment plans that include an entry and exit strategy
and a clearly identified route to value creation. The duration of these plans
can be shortened by transactional activity or lengthened by adverse economic
conditions. Before investing we undertake an extensive due diligence process,
assessing market conditions, management and stakeholders. Our investments are
underpinned by valuations, which we derive using private equity-based
techniques. These include a focus on cash flows, the potential value of the
company to trade or financial buyers and potentially beneficial changes in
capital structure over the investment period.
Our typical investee company, at the time of initial investment, is too small
to be considered for inclusion in the FTSE 250 Index. We believe that smaller
companies provide the greatest opportunity for our investment style as they are
relatively under-researched, often have more limited resources and frequently
can be more attractively valued.
We believe that this approach, if properly executed, will generate favourable
risk adjusted returns for shareholders over the long term.
Market Background
The last six months of 2014 witnessed considerable volatility in stock markets.
Through early September, the UK market became increasingly concerned about the
potential impact of Scotland voting for independence. In October, global
markets stuttered. A downgrade in growth forecasts for the Eurozone, despite
upgrades in growth for the US and UK, triggered a sudden sell-off. Notably,
liquidity was poor and some share price movements appeared to be driven far
more by fear than fundamentals.
A notable change was in foreign exchange markets, where the continued strong
performance of the US economy and expectations of earlier rate rises led to a
marked strengthening of the US$. With many emerging markets holding US$ debt,
some market participants became concerned about a re-run of the emerging
markets crisis of 1998. Compared with the bullish start to 2014, investors
continued their aversion to risk. In the UK market, this was typified by
continued outflows from UK Smaller Companies OEICs. As at the end of November
2014, these funds in aggregate had experienced seven months of consecutive
outflows, the longest period of consecutive outflows for at least twelve years.
The other major factor impacting markets was the relentless slide in the price
of oil, which started at the beginning of the period. Over the half year, the
price of Brent Crude almost halved from $112 per barrel to finish the year at
$57. The price movement took many market participants by surprise and appears
to be driven by OPEC politics and positive supply dynamics rather than demand
concerns. The impact on the share prices of oil explorers and producers was
material, with the FTSE 350 Oil & Gas Producers Index delivering a negative
return of 16.5%.
There was a notable divergence in the performance of the main UK equity
indices. The FTSE Small Cap Index delivered a 3.2% gain, the only
major index to deliver a positive return. The FTSE 100 Index fell by 1.1%,
although stripping out the resources companies, the index would have delivered
a positive return. Small Companies fared less well, with the FTSE Small Cap
Index falling by 3.1% and AIM falling by 10.0%. We believe that the poor
performance of the broader smaller companies sectors was driven by a
combination of 1) poor performances from the smaller and more speculative
resources companies 2) stock specific disappointments - profit warnings appear
to have risen and forward earnings forecasts have continued to be cut in
aggregate, and 3) a general reduction in risk appetite, as evidenced by the
negative fund flows out of UK Smaller Companies OEICs.
The buoyant IPO market which we commented on in the Annual Report for the year
ended 30 June 2014 almost vanished during the period under review. Although
some IPOs were successful, they tended to be of good quality and reasonably
priced. In contrast, the return of M&A was more pronounced. We recall one week
in particular where there was a new bid every day for a small or mid cap
company, with bidders being both trade and private equity. We were not
surprised by this given the low historic levels of M&A over the preceding few
years. Notably, bid premiums were high, an indication of a considerable
divergence in the ratings of certain quoted companies and their potential value
to trade or private equity bidders.
Performance Review
Despite the poor investment environment for smaller companies, the portfolio's
performance over the period was pleasingly strong, driven by stock specific
factors. Notably, only one small portfolio holding, accounting for less than
1.5% of the NAV, downgraded or missed forecasts. This was due to US$ currency
exposure, which was a drag on performance until July 2014. Pleasingly, all of
the other portfolio holdings with significant US$ sales and profits either
maintained, or in one case exceeded and upgraded forecasts.
Top 5 Contributors to Performance
Valuation at Period
period end attribution
Company £'000 (basis points)
Allocate Software - 240
4imprint Group 9,385 220
Tyman 12,564 177
EMIS Group 9,570 153
Servelec Group 11,637 132
Allocate Software was the star performer, delivering more than 32% over the
period. It released very strong final results at the end of July 2014, showing
good growth and cashflow. It also showed continuation of the trend for an
increasing proportion of revenues being repeat or recurring, indicating better
sales and profit visibility and, therefore, higher quality earnings. We felt
for some time that the improving business model had been overlooked by the
broader investment community and had commented before on the undervaluation of
the company. However, others had spotted this positive change and Allocate
received a bid from HgCapital in October 2014 at a 35% premium to the
prevailing share price, itself an almost record high.
The next most significant contributors to performance over the whole year were
4imprint, Tyman, EMIS and Servelec. They delivered market beating returns of
25.6%, 16.5%, 20.3% and 13.1% respectively, materially outperforming the 3%
fall in the FTSE Small Cap Index.
4imprint maintained its strong record of organic growth. Its interim results
and Q3 trading statement showed consistent currency growth of more than 20%, as
it continues to take share in its large and highly fragmented market. With a
market share of less than 3% and the clear market leader, we continue to
believe that the long-term prospects for the business remain excellent. The
company has also made decisive steps to address the long-term potential leakage
of shareholder value to its legacy pension schemes. The result of these
initiatives will, we believe, remove what has been a poison pill and improve
long-term cash conversion. With virtually all of the revenues and profits being
delivered from North America, a stronger US$ should provide an additional
tailwind to results.
Tyman's share price was a little volatile over the period, but ultimately
delivered a good return. The interim results and Q3 trading statement were both
positive. At an update with the company in December 2014, we were reminded
about the prospects for operational improvement initiatives to augment the
upside from continued medium-term recovery in the key end markets. The
management team believes that these initiatives will enable Tyman to deliver
what were peak margins at the top of the last cycle, at volumes consistent with
long-term average volumes (some 70% of the levels of historic peaks and some
40% higher than current market volumes). We believe that only a limited amount
of this margin and earnings upside is reflected in the current rating of the
company. We estimate that at least two-thirds of profits are derived from North
America and as a result there should be a tailwind for results this year.
EMIS continued to deliver predictably good results, with organic growth
exceeding expectations. In September 2014, it announced a landmark deal, the
first of its kind, to deliver an integrated Electronic Patient Record system
for all of the health authorities (acute, community, mental, GP) in Gibraltar,
where there are approximately 50,000 patients. In challenging equity markets,
both institutional and retail investors appear to have warmed to the investment
case and the shares re-rated over the period. We believe some of this may also
have been driven by the investment community noticing M&A activity in the
healthcare software space - namely Allocate Software and Advanced Computer
Software. EMIS has continued to utilise its strong cashflows and balance sheet
to make small bolt on acquisitions over the period.
Servelec Group continues to perform well, both in terms of its share price and
business performance. Since IPO, its healthcare business has won more than 40%
more licence renewals in the "London Refresh" of community and mental health
patient record systems than was forecast at its November 2013 IPO. This
indicates both the stickiness and high reputation of the product. Its
technologies business unit appears to have also exceeded expectations. Its
controls business, which provides specialist services to oil, gas, nuclear and
power markets, has seen the award of a significant automation implementation
contract with Centrica delayed. Servelec has done the design and specification
and there is a pressing need to upgrade Centrica's operating assets. As a
result, we believe that this contract will ultimately be awarded. The change in
resource prices witnessed since June 2014 could be positive for brownfield
investment to reduce operating costs in UK oil and gas production, which would
be of benefit to Servelec. At the end of the period, the company announced the
acquisition of Corelogic, a leading provider of electronic records for social
care, funded out of its cash balances. We believe this could prove to be an
excellent acquisition and add material shareholder value over time.
Outside of the top five contributors, other holdings enjoyed strong rises in
their share prices. Clinigen, a new investment made in July 2014, delivered a
total return of 44% following the purchase. The shares rallied from an oversold
position, and were bolstered by strong final results and a further acquisition.
We believe that the company has a compelling business model and is capable of
many years of strong growth.
Dignity delivered a total return of more than 38% over the period. Trading was
robust following an acceleration of its annual price increases, combined with a
normalisation of the mortality rate in the second half of the year. It also
announced a surprise refinancing, which simultaneously lowered the cost of its
debt and extended the duration. It also modestly increased the balance sheet
leverage, facilitating another of its periodic special dividends. The shares
re-rated significantly over the period and are trading close to our target exit
rating.
CVS Group shares also delivered a total return of more than 38% over the
period, driven by better than expected trading and a significant re-rating of
the shares. The shares have increased by c.350% since our initial investment in
late 2010, and re-rated some way beyond our expectations.
Vintage I, the diversified fund of private equity funds advised by 3i Debt
Management Limited, delivered a total return of more than 26% over the period,
buoyed by a supportive exit environment for the underlying holdings. Wilmington
delivered a total return of more than 13%, reversing some of its disappointing
performance in Q2 2014. The company announced the appointment of a new CEO, who
is due to deliver a strategic review to investors in early 2015.
E2V delivered a total return of 6.6% over the period. The recently appointed
CEO presented his 5-year plan for the business in mid-November 2014. The stated
objective is to double operating profits through a blend of improved organic
growth, modest self-funded acquisitions, and margin improvement. The ambition
to achieve this without any share issuance implies substantial earnings growth
over this period. Although the shares have re-rated a little, we believe that
little of this long term potential is priced in.
Bottom 5 Contributors to Performance
Valuation at
period Period
end attribution
Company £'000 (basis points)
Northbridge Industrial Services 1,695 (50)
Journey Group 203 (36)
RPC Group 3,069 (36)
Lavendon Group 1,547 (30)
Goals Soccer 7,535 (19)
With the exception of Goals Soccer, the bottom contributors to performance were
among the smaller holdings in the portfolio. Only four holdings delivered a
lower return than the FTSE Small Cap Index.
Northbridge delivered a disappointing return, with the shares falling 24%,
predominately during the last three months of the period. We had taken profits
over the summer prior to this fall in the price. The company has some, albeit
modest exposure to the oil and gas sector through a specialist equipment rental
business. The shares de-rated materially over concerns about the trading
prospects for these businesses. We estimate that less than 20% of revenues are
derived from the oil and gas sectors, of which a large proportion is either
based in the Middle East (where oil re-related capex is forecast by
commentators to remain robust) or used in gas exploration and production, where
commodity prices have been more stable than oil. We believe that the de-rating of
the shares has been pernicious.
Journey Group delivered a negative return of 15% over the period. The company
generates the vast majority of its profits in North America. Trading was
insufficiently strong to compensate for the relatively weak US$ in the first
six months of 2014 and the company downgraded profits in September 2014. The
market cap is less than £20m and shares are highly illiquid. As a result, any
movement in the share price tends to become exaggerated.
RPC released in-line trading statements and interim results over the period. In
December 2014, it announced the significant acquisition of its Nordic peer,
Promens, alongside a significant rights issue. The shares performed poorly on
sentiment between the end of June 2014 and the sell-off in mid-October 2014,
falling 20% peak to trough, before rallying and delivering a -8.3% return over
the period.
Lavendon released mixed interim results and an autumn trading update. The
performance of the European businesses continues to vary by region and the UK
has disappointed with a slower recovery than some had hoped for. The Middle
Eastern business, the highest margin business unit, continued to compensate for
the rest of the group. The shares de-rated over the period, falling by 16%.
Goals Soccer released a solid trading statement in July 2014 and interim
results in September 2014 which were in line with expectations. Directors
bought stock six times over the period. We believe that substantial upside
exists from the return to organic growth in the UK, the launch of the app and
the expansion of the US business. Little of this potential is in the share
price.
The average cash balance in the Company's portfolio was 6.6% over the period,
reflecting both the Board and the Investment Manager's conservative approach to
gearing and desire to retain the ability to participate in block transactions
at short notice without being a forced seller of other holdings.
Dealing Activity
The level of portfolio activity was lower compared with the previous year, with
disposals of £15.3m (excluding distributions from unlisted investments)
representing around 14.9% of the weighted average NAV. In addition, £0.2m of
net distributions were received from unlisted investments. £9.2m of purchases
were made, representing 9.0% of the NAV.
The takeover of Allocate Software realised the remaining holding, raising
£8.7m. This has been a successful investment for the Company, with the
investment of £3.6m delivering 2.6x cost and 26% IRR over our five-year holding
period.
The positions in CVS and Journey were reduced materially over the period. The
CVS share price climbed above what we perceive to be fair value. Disposals
raised £1.6m.
Journey has been a legacy investment for some time. It suffers from
exceptionally poor liquidity and a low free float. Actively marketing the stake
would have probably led to an overhang on the share price, or alternatively
selling the stock at a material discount to the share price. Our patience was
rewarded in December, when an offer was made for the majority of our holding at
around the then current share price. Whilst value undoubtedly remains, this has
been a non-core investment for some time, mainly as it would fail a number of
our investment criteria.
Whilst we are not active traders, the volatility in some longer term holdings
over the period presented some excellent opportunities to add value. E2V,
Northbridge and Tyman are good examples. As an example, the Company sold £2.3m
of shares on a gross basis, but only £1.1m on a net basis in these names. The
net sales were as a result of modest portfolio rebalancing. Some of the
re-investment back into Northbridge was via participating in a placing at a
significant discount to where shares had previously been sold.
Three new investments were made during the period. £2m was invested in
Clinigen, a specialist pharmaceuticals services and products business. Since
this purchase, the shares have performed better than we had anticipated and are
above our current buying level. The other two new holdings are being built and
accounted for less than 0.5% of the NAV at the half year end.
Further investments of £1.3m and £1.2m were made in XP Power and Goals Soccer.
Following the takeover of Allocate Software, a further £2m in total was also
invested in EMIS and Servelec. Both EMIS and Servelec continue to trade at
materially lower ratings than the equivalent exit multiple for Allocate
Software. However, we believe that EMIS and Servelec are higher quality
business models with better long term growth potential.
Portfolio Review
The portfolio remained highly focused, with a total of 19 direct holdings and
the top 10 holdings accounting for 78% of the NAV at the end of the financial
period. The portfolio remains predominantly invested in quoted equities,
however, the percentage of the portfolio invested in unlisted securities
changed from 1.8% to 2.0% at the end of the period due to the valuation uplift
from Vintage I more than outweighing the distributions. 10.9% of the NAV was
invested in cash at the period end.
Portfolio as at 31 December 2014 - Top 10 Largest Investments
% of % of
invested invested
Date of portfolio at portfolio at % of
Sector first Cost Valuation 31 December 30 June net
Company classification investment £'000 £'000 2014 2014 assets
Tyman Manufacturing Apr 2007 3,843 12,564 13.0 12.1 11.6
Servelec Software and
Group Computer
Services Dec 2013 7,589 11,637 11.9 10.6 10.7
E2V
Technologies Electronics Oct 2009 3,038 11,556 11.9 12.2 10.6
EMIS Group Software and
Computer
Services Mar 2014 6,880 9,570 9.9 7.9 8.7
4imprint Support
Group Services Feb 2006 2,941 9,385 9.7 8.6 8.6
Wilmington
Group Media Oct 2010 7,315 9,051 9.3 8.5 8.3
Goals Soccer Consumer
Services Mar 2012 5,181 7,535 7.8 7.1 6.9
Gooch &
Housego Electronics Dec 2011 3,619 5,794 6.0 5.8 5.3
XP Power Electronics Dec 2013 3,721 4,229 4.4 3.3 3.9
RPC Manufacturing Feb 2007 1,664 3,789 3.9 3.9 3.5
45,791 85,110 87.8 80.0 78.1
Portfolio as at 31 December 2014 - Sector split
Sector Percentage
Electronics & Electricals 19.9%
Software & Computer Services 19.8%
Manufacturing 16.3%
Net cash 10.9%
Support Service 10.3%
Consumer Services 10.2%
Media 8.3%
Healthcare 2.3%
Unquoted investments 2.0%
Portfolio as at 31 December 2014 - Size split (by market capitalisation)
Size Percentage
£100m - £300m 45.9%
Greater than £500m 26.2%
£300m - £500m 13.0%
Net cash 10.9%
Less than £100m 2.0%
Unquoted Investments 2.0%
The underlying operational performance of the portfolio remains good. We
continue to believe that few portfolio companies are operating at peak margins,
even those in cyclical sectors. We continue to avoid situations where companies
are generating peak sales, peak margins and whose shares are trading at peak
multiples, and are constantly seeking to exit holdings where this could be the
case.
Portfolio Characteristics
FTSE Small Cap ex
Strategic FTSE Small Cap ex Investments Trusts
Consensus portfolio Equity Capital Investment Trusts ex financials and resources
Price/Earnings ratio (FY1) 15.4x 13.8x 13.4x
Dividend yield 2.3% 2.8% 2.6%
Price/Book ratio 5.7x 1.5x n/a
Price/Sales ratio 2.4x 0.7x n/a
Price/Cashflow ratio 13.6x 12.8x n/a
GVOIM Cashflow yield 9.8% n/a n/a
Forecast earnings growth (FY1) 14.4% 5.2% 0.8%
Forecast net debt to EBITDA 0.3x 1.6x 1.2x
Source: Factset Portfolio Analysis System, Investec, Peel Hunt. Index
statistics include loss makers.
As was the case a year ago, the overall index valuation and growth metrics are
skewed by the resources and financial services sectors. As a result, we believe
that comparison against the FTSE Small Cap Index excluding these sectors is
worthy of inclusion.
In contrast to previous periods, the overall aggregate growth across smaller
companies is poor. Interestingly, the median growth statistics of the indices
appear to show higher growth. We believe this demonstrates a very significant
divergence in growth prospects of smaller quoted companies. Given the aggregate
valuations of these indices, it suggests that there are a number of companies
on market ratings which have little or no growth.
In comparison, the portfolio growth is forecast to be double digit, alongside
good cashflow. Although the GVOIM free cashflow yield has dipped marginally
below 10%, we still believe this is good value given the growth prospects of
the underlying holdings. On traditional metrics, the p/e rating of the
portfolio appears undemanding given the combination of growth, yield and
cashflow. The aggregate underling portfolio company balance sheets remain
stronger than the overall market.
Unlisted Investments
Over the period, the Company received a total of £0.2m from Vintage I. The
outstanding commitment relating to Vintage I is £1.2m and its adviser has
communicated that it does not expect to make any further net draw downs.
Outlook
Accurately predicting market movements or trends for the year ahead is always
fraught with difficulty. This is ever more the case when equity markets are
mid-cycle, as we believe they are currently.
Global economies appear unbalanced and fraught with "known unknowns". Investors
are pondering many questions. Will Quantitative Easing work in Europe? Is the
US economic growth sustainable? Will the oil price remain depressed for the
short, medium or long term? Will the result of the UK general election be clear
and good or bad for the UK economy? How much impact will the "real" UK public
sector spending cuts have after the election? How big a threat is the Chinese
shadow banking system? Will the appreciation in the US$ lead to a repeat of the
1998 emerging markets sovereign debt crisis?
The ultimate impact of the great Quantitative Easing experiment is the key
topic of discussion at the time of writing. We believe that it has created an
asset bubble in fixed income and some fixed asset prices, particularly prime
property and high value "collectibles". In this environment, we believe that
equities remain relatively attractively rated.
In equity markets, it has led arguably to indiscriminate re-rating of markets
and valuation anomalies over the past few years. Last year, we commented that
the valuation gap between higher quality and lower quality companies with
similar growth prospects appeared unsustainably low, presenting an opportunity.
Some of this valuation anomaly has corrected, but in our view not wholly.
We believe the emerging valuation anomaly is likely to be a relative
overvaluation of high yield/low growth or reasonable yield/high risk stocks
compared with the overall market. This is understandable given the paucity of
yield from other asset classes.
However, dividend yield is only one source of return from equities. We often
come across perceived "high yield" companies which are paying out all or even
more than their free cashflows in dividends. Certain utilities companies are a
good example of the latter phenomenon - effectively paying dividends out of
borrowings. Therefore the growth and sustainability of all dividends is not
sustainable. If there is little underlying growth, long term total returns are
likely to disappoint.
Within our immediate investment space, the stark statistic is that following
negative earnings growth in 2014, the aggregate constituents of the FTSE Small
Cap Index are forecast to have declining earnings again in 2015. However,
within the constituents, there are growing companies, as evidenced by the
median forward earnings growth of the index, ex oil and gas, ex financials and
ex loss makers, being 12.7% at the beginning of the year.
As a result of the above factors, we believe that 2015 will be another year
requiring selective investing, which should be favourable to our investment
style. Seeking quality, growing companies, trading at below fair value, and
generating strong cashflow over and above that used to pay dividends, should
generate a good balanced return.
At the beginning of 2015, the portfolio in aggregate was forecasting forward
earnings growth of 12-14%, depending on whether you consider the median or the
weighted average, as well as a dividend yield of at least 2.3%. The GVOIM cash
yield of more than 9% indicates that these companies should be generating free
cashflow over and above the dividend yield of 3-4% of their market
capitalisations. Adding these factors together suggests the potential for mid-
to high-teens returns, excluding the impact of rating changes or M&A.
These latter two are difficult to predict. However, we note that the portfolio
rating of 15.4x appears attractive relative to the total return (growth plus
dividend plus additional free cashflow). Despite the 18% NAV per share return
over the past year, it also remains below the level of December 2013. We
continue to plan for no rating change.
If we are correct in our assumption of being mid-cycle, the recent pick up in
M&A could be sustained or even increase. We do not plan for our holdings being
bid for. However, many look attractive on our simulated leverage buyout models
and are trading below precedent M&A multiples in their sectors. Therefore we
would not be surprised to receive bid approaches for one or two holdings during
2015.
The more discriminating markets and divergent company performances have helped
us to build a strong and diversified pipeline of new investments. Given the
paucity of secondary fundraisings, the majority of these will involve market
purchases of the shares.
We continue to try and seek out investments where growth is more structural
than cyclical. Where cyclical companies are already owned or being considered
for investment, we are keen to ensure they are neither profit/margin
maximising, nor trading at peak multiples. This should allow some cushioning of
earnings if there is a cyclical shock, as well as protecting value. On the flip
side, if there are more years left for the cycle to run, these types of
companies should generate superior returns as margins and ratings expand. Gooch
& Housego is an example of one such company. The recently appointed CEO
believes there is scope to build and extend on his predecessor's work in
improving operational efficiency and R&D efficacy, as well as sales
performance. Although the shares are not lowly rated, we believe little of this
incremental improvement opportunity is priced in.
We will continue to favour higher quality companies as we believe that they
have the potential to offer more resilient returns across the cycle. High
quality companies with superior business models and strong market shares tend
to be more able to maintain or raise prices than companies with weak franchises
or market shares. Regardless of if one believes in inflation or deflation,
price leaders should deliver stronger returns than price takers.
We expect bouts of volatility as witnessed in October 2014, which have the
potential to provide attractive opportunities for new investments, as well as
selectively topping up existing holdings. As a result we intend to continue to
maintain a strong balance sheet, and be assiduous in taking profits where we
believe even high quality companies are being rated higher than their fair
value.
In conclusion, we believe that 2015 is likely to see a continuation of the
trends of 2014. In particular, we think that equities offering sustainable
growth allied with strong free cashflow will become even more sought after in a
low growth and uncertain economic and geopolitical environment. Underlying
portfolio company sales and profits remain skewed towards North America and the
UK, which we perceive continue to offer better underlying demand drivers than
Europe. Whilst earnings growth for the average smaller company remains low, we
believe that our selective approach should help us find the pockets of
reasonably priced, cash generative growth companies and help deliver another
year of NAV progression.
Top 10 Investee Company Review
4imprint Group is the fourth largest distributor of promotional products in the
world with an international network of companies in the UK, USA, Hong Kong and
Europe. We have been involved with the company since a change of management in
2003. Following the disposal of Brand Addition, virtually all of the profits of
the group are generated by the fast growing US business. The company has a
significant net cash balance. Funds managed by the Investment Manager currently
hold approximately 6% of the company's equity.
E2V Technologies is a global market leader in the design and manufacture of
specialist electronic components and low volume, high value, high reliability
semi-conductors, predominately for the medical, aerospace, defence and
industrial markets. An ill-timed acquisition in September 2008 funded by debt
left the balance sheet of the business over-stretched as the economic downturn
began. A new Finance Director, well known to GVOIM, was appointed in May 2009.
The management team acted, raising new equity to pay down debt as well as
restructure the UK and French cost base, a process which is now largely
complete. The Company made its initial investment during December 2009 via a
placing and a deeply discounted rights issue to refinance the balance sheet.
During 2013, a new chairman and CEO were appointed. The new CEO updated
investors in November 2014 on his strategy for improving long-term shareholder
returns. Funds managed by the Investment Manager currently hold approximately
5% of the company's equity.
EMIS Group is a specialist healthcare software and services provider. It is the
UK market leader in the provision of electronic patient records for GPs, with a
53% market share. It also supplies electronic patient records to other
healthcare organisations including community pharmacies, community and mental
health trusts and accident & emergency departments. It has grown organically
every year for 24 years and just under 80% of its revenues are recurring. It is
very cash generative and has used this cash to augment its product portfolio
through selective acquisitions. The shares had been under pressure due to some
scepticism regarding the acquisition of Ascribe in autumn 2013, as well as
uncertainty surrounding the renewal of the GP Systems of Choice framework
contract which was announced at the end of March 2014. Funds managed by the
Investment Manager currently hold approximately 3% of the company's equity.
Goals Soccer is a developer and operator of 5-a-side soccer centres in the UK,
trading from 42 centres. In early 2012, the company announced that it would
significantly reduce the speed of rolling out new sites for 12-18 months. Given
that the roll out of sites requires significant capital, the impact of this
change was to increase the free cash generation of the business and drive a
large degearing of its balance sheet. The entry valuation was a significant
discount to precedent M&A - specifically the acquisition of its only major
competitor, Powerleague, by Patron Capital in 2009. The management team and
board is working together to optimise operational performance and return the
business to growth in the UK and North America. Funds managed by the Investment
Manager currently hold approximately 6% of the company's equity.
Gooch & Housego is a global market leader in the design and manufacture of
specialist optical components and subsystems. Funds managed by the Investment
Manager previously invested in the company during 2010 and the Manager knows
the business and management team well. The company's shares derated
significantly at the end of 2011 and early 2012, driven by concerns over
slowing activity in their industrial division. The Investment Manager took
advantage of this weakness in the share price to rebuild a stake at a
significantly lower level than its exit price in late 2010. The new product
development pipeline and ramping up of volumes on existing contracts has the
potential to deliver significant growth over the medium term. Its fiber-optics
products have strong long-term growth prospects as they substitute conventional
electronics in aerospace and defence applications. The appointment of a new CEO
has the potential to accelerate medium-term shareholder returns. Funds managed
by the Investment Manager currently hold approximately 3% of the company's
equity.
RPC Group is Europe's leading manufacturer of rigid plastic packaging.
Following lobbying from the Investment Manager and another shareholder acting
in concert, the group initiated a strategic and operational review and made
substantial changes to its board in 2008. The management team has performed
well against RPC's new objectives, leading to a significant reduction in group
debt and ongoing focus on improving return on invested capital. Post the
restructuring, RPC has returned to consolidating its markets, acquiring a
number of companies in the UK and Europe as well as one in the Far East. Funds
managed by the Investment Manager currently hold approximately 1% of the
company's equity.
Servelec is a UK technology company with three key divisions. The healthcare
software division is a market leader in the design and operation of electronic
patient records for NHS mental and community trusts. The controls division
specifies, designs, assembles, installs and maintains safety and remote control
systems for the oil & gas and process industries. The technologies division
provides software, hardware and systems for industrial telemetry and SCADA
applications. It was listed in November 2013, having previously been owned by a
Singaporean listed group. The company has a robust balance sheet. Cash
conversion will be strong for the foreseeable future due to the unwinding of a
legacy trade debtor. In December 2014, it announced the acquisition of
Corelogic. Funds managed by the Investment Manager currently hold approximately
5% of the company's equity.
Tyman is a leading international supplier of building products to the door and
window industry, and was the world's leading manufacturer of marine breakaway
couplings. The company has significant operations in nine separate countries
across Europe, the Americas, Asia and Australasia. The building products
division enjoys clear market leadership in a number of niches, with a highly
diversified customer base, serving both the new build and RMI (repair and
maintenance) markets. The building products division was adversely impacted by
the significant fall in residential construction activity experienced since
2007, which, combined with a geared balance sheet, led to a material fall in
the share price through 2008. We began building our stake in the company in
late 2009 following the appointment of a new chairman. We believe that there is
substantial upside from a medium-term recovery in the end markets of the
building products division in North America. The recent acquisition of North
American peer, Truth, has delivered significant cost and sales synergies to
augment this end market recovery. Further upside remains from automating and
streamlining more of its US manufacturing operations. Funds managed by the
Investment Manager currently hold approximately 4% of the company's equity.
Wilmington provides business information and training services to professional
business customers in the financial services, legal and medical sectors. More
than 76% of revenues in the main publishing and information division are
delivered digitally, typically on a subscription basis, and with high levels of
client retention. The company is highly cash generative. Growth has been held
back over the past few years due to a significant fall, and no recovery, in its
legal training market and the decline in some legacy print publications. This
has masked strong growth in the rest of the business. The declining segments
have now either been exited or stabilised. The company's earnings are set to
grow organically at double digit rates, as well as generating significant free
cash flow, neither of which we feel are fully reflected in the current rating.
With a stronger balance sheet, there is potential upside from targeted M&A. The
management team has a good track record of creating value from M&A. A new CEO
was announced in June 2014. Funds managed by the Investment Manager currently
hold approximately 5% of the company's equity.
XP Power is a global market leader in the manufacture of high volume power
supply solutions to healthcare, industrial and technology markets. The company
has leading positions in fragmented European, Asian and North American markets
where it has been taking share from larger industrial conglomerates. Under
existing management, the business model has transformed from a third-party
distributor to integrated manufacturer, developing strong customer
accreditations, which act as a barrier to entry and have significantly improved
the margins of the business. The business is highly cash generative and
provides a very high return on capital employed. It is forecast to be in a net
cash position at the start of this year. Funds managed by the Investment
Manager hold approximately 1% of the company's equity.
Stuart Widdowson/Jeff Harris
GVO Investment Management Limited
17 February 2015
The unconstrained, long-term philosophy and concentrated portfolios resulting
from the Investment Manager's investment style can lead to periods of
significant short-term variances of performance relative to comparative
indices. The Investment Manager believes that evaluating performance over
rolling periods of no less than three years, as well as assessing risk taken to
generate these returns, is most appropriate given the investment style and
horizon. Properly executed, the Investment Manager believes that this
investment style can generate attractive long-term risk adjusted returns.
All statements of opinion and/or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent the Investment Manager's own assessment
and interpretation of information available to it at the date of this report.
As a result of various risks and uncertainties, actual events or results may
differ materially from such statements, views, projections or forecasts. No
representation is made or assurance given that such statements, views,
projections or forecasts are correct or that the objectives of the Company will
be achieved.
RISK, GOING CONCERN AND RESPONSIBILITY STATEMENT
RISK
The important events that have occurred during the period under review are set
out in the Chairman's report and Investment Manager's report, which also
include the key factors influencing the financial statements.
The Directors do not consider that the principal risks and uncertainties have
changed since the publication of the annual report for the year ended 30 June
2014. The principal risks are set out on pages 18 to 20 of the annual report,
which is available at www.strategicequitycapital.com.
In summary these risks are:
• general risk;
• market risk;
• regulatory risks;
• financial risks; and
• financial instruments.
GOING CONCERN
The Company has adequate financial resources to meet its investment commitments
and as a consequence, the Directors believe that the Company is well placed to
manage its business risks. After making appropriate enquiries and due
consideration of the Company's cash balances, the liquidity of the Company's
investment portfolio and the cost base of the Company, the Directors have a
reasonable expectation that the Company has adequate available financial
resources to continue in operational existence for the foreseeable future and
accordingly have concluded that it is appropriate to continue to adopt the
going concern basis in preparing the Half-Yearly Report, consistent with
previous years.
RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge:
• the condensed set of financial statements contained within the Half-Yearly
Report has been prepared in accordance with International Accounting Standard
34, 'Interim Financial Reporting' issued by the International Accounting
Standards Board as adopted by the EU, and gives a true and fair view of the
assets, liabilities, financial position and profit of the Company as required
by Disclosure and Transparency Rule ("DTR") 4.2.4R;
• the interim management report includes a fair review of the information
required by:
(a) DTR 4.2.7 of the Disclosure and Transparency Rules, being an indication of
important events that have occurred during the first six months of the
financial year and their impact on the condensed set of financial statements;
and a description of the principal risks and uncertainties for the remaining
six months of the year; and
(b) DTR 4.2.8 of the Disclosure and Transparency Rules, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the Company during that period; and any changes in the related
party transactions described in the last annual report that could do so.
This Half Yearly Report was approved by the Board of Directors on 17 February
2015 and the above responsibility statement was signed on its behalf by Richard
Hills, Chairman.
STATEMENT OF COMPREHENSIVE INCOME
for the six month period to 31 December 2014
Six month period to Year ended Six month period to
31 December 2014 30 June 2014 31 December 2013
unaudited audited unaudited
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Investments
Gains on investments at fair
value through profit or loss - 10,712 10,712 - 29,361 29,361 - 22,150 22,150
- 10,712 10,712 - 29,361 29,361 - 22,150 22,150
Income
Dividends 2 1,127 223 1,350 1,712 - 1,712 950 - 950
Interest 2 12 - 12 39 - 39 19 - 19
1,139 223 1,362 1,751 - 1,751 969 - 969
Expenses
Investment Manager's
fee 8 (483) - (483) (859) - (859) (398) - (398)
Investment Manager's
performance fee - (1,679) (1,679) - (310) (310) - - -
Other expenses 3 (260) (66) (326) (432) (108) (540) (199) (61) (260)
Total expenses (743) (1,745) (2,488) (1,291) (418) (1,709) (597) (61) (658)
Net return before finance
costs and taxation 396 9,190 9,586 460 28,943 29,403 372 22,089 22,461
Finance costs - - - - - - - - -
Net return before taxation 396 9,190 9,586 460 28,943 29,403 372 22,089 22,461
Taxation - - - - - - - - -
Net return after taxation
for the period/year 396 9,190 9,586 460 28,943 29,403 372 22,089 22,461
pence pence pence pence pence pence pence pence pence
Returns per Ordinary share
- Basic 5 0.69 16.08 16.77 0.76 47.85 48.61 0.61 35.98 36.59
The total column of this statement is the statement of comprehensive income of
the Company. All items in the above statement derive from continuing
operations. The condensed interim financial statements do not comprise
statutory accounts within the meaning of Section 434 of the Companies Act 2006.
The financial statements for the six month period to 31 December 2014 and
31 December 2013 have not been either audited or reviewed by the Company's
Auditor. Information for the year ended 30 June 2014 has been extracted from
the latest published Annual Report and financial statements, which have been
filed with the Registrar of Companies. The report of the Auditor on those
financial statements was unqualified, did not contain an emphasis of matter
paragraph and did not contain any statement under Section 498 of the Companies
Act 2006.
These financial statements have been prepared under International Financial
Reporting Standards, and in accordance with the accounting policies applied in
the annual report which is available at www.strategicequitycapital.com.
The notes form an integral part of these Half-Yearly financial statements.
STATEMENT OF CHANGES IN EQUITY
for the six month period to 31 December 2014
Share Capital
Share premium Special Capital redemption Revenue
capital account reserve reserve reserve reserve Total
Note £'000 £'000 £'000 £'000 £'000 £'000 £'000
For the six month period
to 31 December 2014
1 July 2014 5,955 5,246 42,650 46,581 2,026 971 103,429
Gain on sale of investments - - - 5,177 - - 5,177
Appreciation of investments - - - 5,535 - - 5,535
Net return and total comprehensive
income for the period - - - 223 - 396 619
Dividend paid 4 - - - - - (446) (446)
Performance Fee - - - (1,679) - - (1,679)
Tender offer expenses - - - (66) - - (66)
Shares bought back for cancellation (238) - (3,900) - 238 - (3,900)
31 December 2014 5,717 5,246 38,750 55,771 2,264 921 108,669
For the year to 30 June 2014 6,203 5,246 46,089 17,638 1,778 1,442 78,396
1 July 2013
Net return and total comprehensive
income for the year - - - 28,943 - 460 29,403
Dividend paid 4 - - - - - (931) (931)
Shares bought back for cancellation (248) - (3,439) - 248 - (3,439)
30 June 2014 5,955 5,246 42,650 46,581 2,026 971 103,429
For the six month period ended
31 December 2013
1 July 2013 6,203 5,246 46,089 17,638 1,778 1,442 78,396
Net return and total comprehensive
income for the period - - - 22,089 - 372 22,461
Dividend paid 4 - - - - - (931) (931)
Shares bought back for cancellation (248) - (3,439) - 248 - (3,439)
31 December 2013 5,955 5,246 42,650 39,727 2,026 883 96,487
These financial statements have been prepared under International Financial
Reporting Standards, and in accordance with the accounting policies.
The notes form an integral part of these Half-Yearly financial statements.
BALANCE SHEET
as at 31 December 2014
As at As at As at
31 December 30 June 31 December
2014 2014 2013
unaudited audited Unaudited
Note £'000 £'000 £'000
Non-current assets
Investments held at fair value
through profit or loss 6 96,830 92,423 87,205
Current assets
Trade and other receivables 132 64 80
Cash and cash equivalents 13,711 11,696 9,487
13,843 11,760 9,567
Total assets 110,673 104,183 96,772
Current liabilities
Trade and other payables 2,004 754 285
Net assets 108,669 103,429 96,487
Capital and reserves
Share capital 7 5,717 5,955 5,955
Share premium account 5,246 5,246 5,246
Special reserve 38,750 42,650 42,650
Capital reserve 55,771 46,581 39,727
Capital redemption reserve 2,264 2,026 2,026
Revenue reserve 921 971 883
Total Shareholders' equity 108,669 103,429 96,487
NAV per share pence pence pence
Basic 190.43 173.66 162.00
Shares in issue number number number
Ordinary shares 7 57,066,291 59,558,111 59,558,111
These financial statements have been prepared under International Financial
Reporting Standards and in accordance with the accounting policies.
The notes form an integral part of these Half-Yearly financial statements.
STATEMENT OF CASH FLOWS
for the six month period to
31 December 2014
Six month Six month
period to Year ended period to
31 December 30 June 31 December
2014 2014 2013
unaudited audited unaudited
Note £'000 £'000 £'000
Operating activities
Net return before finance costs
and taxation 9,586 29,403 22,461
Adjustment for gains on investments (10,712) (29,361) (22,150)
Share buy back expenses 66 108 61
Operating cash flows before movements
in working capital (1,060) 150 372
Decrease/(increase) in receivables (68) 201 185
Increase/(decrease) in payables 1,354 (746) (1,110)
Purchases of portfolio investments (12,813) (24,123) (11,638)
Sales of portfolio investments 19,014 32,580 17,997
Net cash flow from operating activities 6,427 8,062 5,806
Financing activities
Equity dividend paid 4 (446) (931) (931)
Shares bought back for
cancellation in the period (3,716) (3,439) (3,439)
Shares bought back and held in
treasury (184) - -
Share buy back expenses (66) (108) (61)
Net cash flow from financing
activities (4,412) (4,478) (4,431)
Increase in cash and cash
equivalents for period 2,015 3,584 1,375
Cash and cash equivalents
at start of period 11,696 8,112 8,112
Cash and cash equivalents at
31 December 2014 13,711 11,696 9,487
These financial statements have been prepared under International Financial
Reporting Standards and in accordance with the accounting policies.
The notes form an integral part of these Half-Yearly financial statements.
Notes to the financial statements for the six month period to 31 December 2014
1.1 Corporate information
Strategic Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom, registered in England and Wales under the
Companies Act 2006 whose shares have a premium listing on the London Stock
Exchange. The Company is registered as a public limited company and is an
investment company as defined by Section 833 of the Companies Act 2006.
The Company carries on business as an investment trust within the meaning of
Sections 1158/1159 of the Corporation Tax Act 2010.
1.2 Basis of preparation/statement of compliance
The condensed interim financial statements of the Company have been prepared on
a going concern basis and in accordance with International Accounting Standard
("IAS") 34, 'Interim financial reporting' issued by the International
Accounting Standards Board ("IASB") (as adopted by the EU). They do not include
all the information required for a full report and financial statements and
should be read in conjunction with the report and financial statements of the
Company for the year ended 30 June 2014, which have been prepared in accordance
with International Financial Reporting Standards ("IFRS") as adopted by the EU.
Where presentational guidance set out in the Statement of Recommended Practice
("SORP") for investment trusts companies and venture capital trusts issued by
the Association of Investment Companies ("AIC") (as revised in 2009) is
consistent with the requirements of IFRS the Directors have sought to prepare
financial statements on a basis compliant with the recommendations of the SORP.
The condensed interim financial statements do not comprise statutory accounts
within the meaning of Section 434 of the Companies Act 2006. The financial
statements for the six month period to 31 December 2014 and 31 December 2013
have not been either audited or reviewed by the Company's Auditor. Information
for the year ended 30 June 2014 has been extracted from the latest published
Annual Report and financial statements, which have been filed with the
Registrar of Companies. The report of the Auditor on those financial statements
was unqualified, did not contain an emphasis of matter paragraph and did not
contain any statement under Section 498 of the Companies Act 2006.
Convention
The financial statements are presented in Sterling, being the currency of the
primary environment in which the Company operates, rounded to the nearest
thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single
segment of business, being investment business.
1.3 Accounting policies
The accounting policies, presentation and method of computation used in these
condensed financial statements are consistent with those used in the
preparation of the financial statements for the year ended 30 June 2014.
1.4 New standards and interpretations not applied
Implementation of changes and accounting standards in the financial period, as
outlined in the financial statements for the year ended 30 June 2014, had no
significant effect on the accounting or reporting of the Company.
2. Income
Six month Year Six month
period to ended period to
31 December 2014 30 June 2014 31 December 2013
£'000 £'000 £'000
Income from investments:
UK dividend income 1,285 1,617 911
Overseas dividend income 65 95 39
Liquidity fund income 12 39 19
1,362 1,751 969
Other income:
Underwriting commission - - -
1,362 1,751 969
Total income comprises:
Dividends 1,350 1,712 950
Interest 12 39 19
Underwriting commission - - -
1,362 1,751 969
Income from investments:
Listed UK 1,285 1,617 911
Listed overseas 77 134 58
1,362 1,751 969
3. Other expenses
Six month period to Six month period to
31 December 2014 Year ended 30 June 2014 31 December 2013
(unaudited) (audited) (unaudited)
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
£'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000 £'000
Secretarial
services 40 - 40 80 - 80 40 - 40
Auditors'
remuneration
for:
audit
services 15 - 15 17 - 17 14 - 14
Directors'
remuneration 64 - 64 115 - 115 54 - 54
Other
expenses 141 66†207 210 108†318 91 61†152
260 66 326 432 108 540 199 61 260
†Expenses incurred in relation to the tender offer process.
4. Dividend
The Company paid a final dividend of 0.78p in respect of the year ended 30 June
2014 (30 June 2013: 1.50p) per Ordinary share on 57,176,013 (30 June 2013:
62,039,682) shares, amounting to £445,973 (30 June 2013: £930,595). The
dividend was paid on 18 November 2014 to shareholders on the register at
17 October 2014.
5. Return per Ordinary share
Six month period to Year ended Six month period to
31 December 2014 30 June 2014 31 December 2013
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
pence pence pence pence pence pence pence pence pence
Return per Ordinary share 0.69 16.08 16.77 0.76 47.85 48.61 0.61 35.98 36.59
Returns per Ordinary share are calculated based on 57,150,371 (30 June 2014:
60,482,751 and 31 December 2013: 61,392,316) being the weighted average number
of Ordinary shares, excluding shares held in treasury, in issue throughout the
period.
6. Investments
31 December 2014
£'000
Investment portfolio summary:
Listed investments at fair value through profit or loss 94,691
Unlisted investments at fair value through profit or loss 2,139
96,830
31 December 2014
Listed Unlisted Total
£'000 £'000 £'000
Analysis of investment portfolio movement
Opening book cost 54,553 213 54,766
Opening investment holding gains 35,969 1,688 37,657
Opening valuation 90,522 1,901 92,423
Movements in the period:
Purchases at cost 12,709 - 12,709
Sales - proceeds (18,800) (214) (19,014)
- realised gains on sales 4,985 192 5,177
Decrease in unrealised appreciation 5,276 259 5,535
Closing valuation 94,692 2,138 96,830
Closing book cost 53,447 191 53,638
Closing investment holding gains 41,245 1,947 43,192
94,692 2,138 96,830
Investments in unquoted investment funds are generally held at the valuations
provided by the managers of those funds. The valuation for Vintage I is as at
30 November 2014.
A list of the top ten portfolio holdings by their aggregate market values is
given in the Investment Manager's report above.
31 December 2014
Total
Analysis of capital gains:
Gains on sale of investments 5,177
Foreign exchange gains -
Movement in investment holding gains 5,535
10,712
The Company is required to classify fair value measurements using a fair value
hierarchy that reflects the subjectivity of the inputs used in measuring the
fair value of each asset. The fair value hierarchy has the following levels:
• Quoted prices (unadjusted) in active markets for identical assets or
liabilities ("level 1").
• Inputs other than quoted prices included within level 1 that are observable
for the asset or liability, either directly (that is, as prices) or indirectly
(that is, derived from prices) ("level 2").
• Inputs for the asset or liability that are not based on observable market
data (that is, unobservable inputs) ("level 3").
The level in the fair value hierarchy within which the fair value measurement
is categorised is determined on the basis of the lowest level input that is
significant to the fair value of the investment.
The following table analyses within the fair value hierarchy the Company's
financial assets and liabilities (by class) measured at fair value at
31 December 2014.
Financial instruments at fair value through profit and loss
Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Equity investments and limited partnership interests 94,692 - 2,138 96,830
Liquidity funds - 13,513 - 13,513
Total 94,692 13,513 2,138 110,343
Investments whose values are based on quoted market prices in active markets
are classified within level 1 include active listed equities. The Company does
not adjust the quoted price for these instruments.
Financial instruments that trade in markets that are not considered to be
active but are valued based on quoted market prices, dealer quotations or
alternative pricing sources supported by observable inputs are classified
within level 2. As level 2 investments include positions that are not traded in
active markets and/or are subject to transfer restrictions, valuations may be
adjusted to reflect illiquidity and/or non-transferability, which are generally
based on available market information.
Level 3 instruments include private equity. As observable prices are not
available for these securities, the Company has used valuation techniques to
derive the fair value. In respect of unquoted instruments, or where the market
for a financial instrument is not active, fair value is established by using
recognised valuation methodologies, in accordance with International Private
Equity and Venture Capital ("IPEVC") Valuation Guidelines.
There were no transfers between levels for the period ended 31 December 2014.
The following table presents the movement in level 3 instruments for the period
ended 31 December 2014 by class of financial instrument.
Equity
investments
£'000
Opening balance 1,901
Disposals during the period (22)
Total gains for the period included
in the Statement of comprehensive income 259
Closing balance 2,138
7. Share capital
31 December
2014
Number £'000
Allotted, called up and fully
paid Ordinary shares of 10p each 57,176,013 5,717
Ordinary shares of 10p each held in treasury (109,722) (110)
Ordinary shares in circulation at 31 December 2014 57,066,291 5,607
During the period to 31 December 2014, 2,382,098 shares were repurchased by the
Company for cancellation and 109,722 shares were repurchased by the Company and
held in treasury.
Subsequent to the period under review, all 109,722 treasury shares have been
sold in the market at prices ranging from 194.5p per share to 196p per share
(before expenses) and a further 725,000 new shares have been issued to the
market at prices ranging from 195p per share to 197p per share (before
expenses).
8. Investment Manager's fee
A basic management fee is payable to the Investment Manager at the lower of (i)
the annual rate of 1% of the adjusted NAV of the Company or (ii) 1% per annum
of the market capitalisation of the Company. The basic management fee accrues
weekly and is payable quarterly in arrears.
The Investment Manager is also entitled to a performance fee, details of which
are set out below. No performance fee has been payable in the period.
9. Investment Manager's performance fee
The Investment Manager is entitled to a performance fee on the following terms:
â— the Company's performance is measured over rolling three year periods ending
on 30 June in each year, with the first Performance Period having commenced on
1 July 2008 and ended on 30 June 2011 and the current Performance Period having
commenced on 1 July 2011 and ending on 30 June 2014;
â— the Company's performance is measured by comparing the NAV total return per
share over a Performance Period against the total return performance of the
FTSE Small Cap Index, being the index against which the Board has historically
compared the Company's investment performance;
â— if the NAV total return per share (calculated before any accrual for any
performance fee to be paid in respect of the relevant Performance Period) at
the end of the relevant Performance Period exceeds both:
(i) the NAV per share at the beginning of the relevant Performance Period as
adjusted by the aggregate amount of (a) the total return on the FTSE Small Cap
Index (expressed as a percentage) and (b) 2.0% per annum over the relevant
Performance Period ("Benchmark NAV"); and
(ii) the High Watermark (which is the highest NAV per share by reference to
which a performance fee was previously paid).
Currently the Investment Manager is entitled to 15% of any excess over the
higher of the Benchmark NAV per share and the High Watermark.
Payment of a performance fee that has been earned will be deferred to the
extent that the amount payable exceeds 1.75% per annum of the Company's NAV at
the end of the relevant performance period (amounts deferred will be payable
when, and to the extent that, following any later performance period(s) with
respect to which a performance fee is payable, it is possible to pay the
deferred amounts without causing that cap to be exceeded or the relevant NAV
total return per share to fall below the relevant Benchmark NAV per share and
the relevant High Watermark).
10. Taxation
The tax charge for the half year is £Nil (30 June 2014: £Nil; 31 December 2013:
£Nil) based on an estimated effective tax rate of 0% for the year ended 30 June
2014. The estimated effective tax rate is 0% as investment gains are exempt
from tax owing to the Company's status as an Investment Company and there is
expected to be an excess of management expenses over taxable income.
11. Capital commitments and contingent liabilities
The Company has a commitment to invest €1,560,000 in Vintage I (30 June 2014:
€1,560,000; 31 December 2013: €1,560,000).
12. Related party transactions
The Investment Manager is regarded as a related party of the Company. The
Investment Manager may draw upon advice from the Industry Advisory Panel
("IAP") of which Sir Clive Thompson, a Director of the Company, is a member.
The IAP was established to provide advice to the Investment Manager in relation
to the strategy, operations and management of potential investee companies.
The amounts payable to the Investment Manager, in respect of management fees,
during the period to 31 December 2014 was £483,000 (30 June 2014: £232,000;
31 December 2013: £157,000), of which £257,000 (30 June 2014: £232,000; 31
December 2013: £214,000) was outstanding at 31 December 2014. The amount due to
the Investment Manager for performance fees at 31 December 2014 was £1,679,000
(30 June 2014: £310,000; 31 December 2013: £Nil).
DIRECTORS AND ADVISORS
Directors
Richard Hills (Chairman)
Sir Clive Thompson (Deputy Chairman)
John Cornish (retired 14 November 2014)
Ian Dighé
Josephine Dixon
John Hodson (retired 10 February 2015)
Richard Locke (appointed 10 February 2015)
Auditor
Ernst & Young LLP
1 More London Place
London SE1 2AF
Broker
Canaccord Genuity Limited
88 Wood Street
London EC2V 7QR
Custodian
The Northern Trust Company
50 Bank Street
Canary Wharf
London E14 5NT
Depositary
Northern Trust Global Services Limited
50 Bank Street
Canary Wharf
London E14 5NT
Investment Manager
GVO Investment Management Limited
25 North Row
London W1K 6DJ
Tel: 020 3691 6100
Registrar and transfer office
Computershare Investor Services plc
The Pavilions
Bridgwater Road
Bristol BS99 6ZY
Tel: 0870 707 1285
Website: www.computershare.com
Secretary and registered office
Capita Sinclair Henderson Limited
Beaufort House
51 New North Road
Exeter EX4 4EP
Tel: 01392 412122
Solicitor
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
Shareholder information
Financial calendar
Company's year-end 30 June
Annual results announced September
Annual General Meeting November
Company's half-year 31 December
Half yearly results
announced February
Share price
The Company's Ordinary shares are listed on the main market of the London Stock
Exchange. The mid-market price is quoted daily in the Financial Times under
'Investment Companies'.
Share dealing
Shares can be traded through your usual stockbroker.
Share register enquires
The register for the Ordinary shares is maintained by Computershare Investor
Services plc ("Registrar"). In the event of queries regarding your holding,
please contact the Registrar on 0870 707 1285. Changes of name and/or address
must be notified in writing to the Registrar whose address is shown below.
NAV
The Company's NAV is announced daily to the London Stock Exchange.
Website
Further information on the Company can be accessed via the Company's website
www.strategicequitycapital.com
An investment company as defined under Sections 833 of the Companies Act 2006
REGISTERED IN ENGLAND No 5448627
A member of the Association of Investment Companies
The Half Yearly Financial Report will be posted to shareholders shortly. The
Report will also be available for download from the following website:
www.strategicequitycapital.com or on request from the Company Secretary.
NATIONAL STORAGE MECHANISM
A copy of the Half Yearly Financial Report will be submitted shortly to the
National Storage Mechanism ("NSM") and will be available for inspection at the
NSM, which is situated at: http://www.morningstar.co.uk/uk/nsm
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of this announcement.
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