Interim Management Statement
STRATEGIC EQUITY CAPITAL PLC
This interim management statement, issued in accordance with the UK Listing
Authority's disclosure and transparency rules, relates to the period from 1
January to 31 March 2010.
Investment highlights
* Net assets per share increased by 4.6%, outperforming the smaller
companies index by 2.8%.
* Top holdings continued to perform well; reporting strong annual results.
* Exuberant markets allowed for exits of mature investments at attractive
valuations.
* Invested in undervalued companies as secondary fundraising opportunities
dried up.
Financial highlights
* Net assets of 69.2p per share.
* Discount remained broadly unchanged at 25.9%.
* Company fully invested, temporarily used gearing facility for the first
time.
* 3i consideration for SRF2 investment successfully placed in market.
Investment Managers' Review
* The period saw a further improvement in net assets per share of 4.6%,
resulting in a cumulative increase of 70.7% over the twelve months ended 31
March 2010. The performance of the trust is now in line with the smaller
companies market over three years.
* Performance was driven by the continued strong performance of top portfolio
holdings. Statpro, Spirent, and 4imprint rallied in excess of 20% around
solid annual results, positive outlook statements and continued upgrades to
consensus earnings forecasts. Performance attribution was broad based, with
KCOM, Lupus, Mecom and Lavendon adding to the names above in contributing
materially to performance. It was encouraging to see some of the more
recent portfolio investments, such as Lavendon, Mecom and Lupus, having an
immediate impact, without the usual J-Curve effect. This highlighted the
efficacy of active engaged investment at this point in the economic cycle.
* Negative attributions came from E2V, which fell on the back of industrial
disruption in France, and Intec Telecom, which issued a profits warning on
the last day of the quarter. E2V has subsequently resolved these issues,
which were accounted for in our investment thesis, and rallied materially.
Intec is a mature and highly successful investment which had been largely
exited at the time of the warning.
* Our principal engagement activity in the period centred around assisting
the board of 4imprint on succession planning issues and clarifying long
term strategy aims with some of our newer investee companies. We
successfully lobbied for increased research coverage of a number of
portfolio companies which fell off the radar screen of investment banks
during the market turbulence of the last two years. Finally we have
identified a limited number of portfolio companies which might benefit from
changes to their corporate structure, and have encouraged their management
to explore these options further.
Portfolio Review
* The portfolio remains highly focused with 21 holdings, a slight reduction
following the sales of two toe-hold investments. The top 10 holdings
accounted for 77.2% of net assets, broadly in line with our 80% target. At
the end of the period the portfolio was less than 1% geared, in line with
our new policy of using a small proportion of our facility to fund working
capital movements. The portfolio moved back into a net cash position
shortly after the period end.
* Sales over the period centred on the exit of toe-hold positions and
reductions in our mature and successful investments in the technology
sector. Four small holdings were completely exited over the period:
Communisis, Inspired Gaming, Melrose and Renold. In each of these cases
while valuations appeared attractive we were unconvinced that there
remained a verifiable catalyst for shareholder value creation in the near
term. The majority of value realised over the period was from the remaining
holdings of technology stocks Spirent, Statpro and Intec. These stocks have
all roughly doubled in value since investment, and delivered IRRs in excess
of 25%. While these companies may remain attractive for growth investors,
the ongoing driver of their value is unlikely to be strategic or
operational or management change.
* From a valuation perspective the portfolio remains very attractive. Our key
financial metric the SVG Cash Flow Yield (calculated as operating cash flow
less maintenance capital expenditures to enterprise value), is currently
running at just over 15%, the highest it has been since the company began.
On more conventional measures the median consensus forecast PE of 10.7X and
price to sales of 0.4X also imply good value. The gearing of the underlying
portfolio has been deliberately increased to about 1.5X debt to EBITDA as
we have reduced our exposure to Intec and Spirent, which have net cash
balance sheets, and proceeds have been invested in more highly geared
companies.
Outlook
* The current corporate environment is probably the best seen for active
engaged investors since the early 1990s. Activist investing usually
produces the best results during the early-to-mid stages of an economic
recovery, when plcs are benefitting from the tailwind of economic recovery,
yet boards battered by poor historic results can benefit greatly from
financial or strategic support from shareholders.
* While many of the political and macroeconomic uncertainties engendered by
the credit crunch remain unresolved, the news flow from public companies
has unquestionably turned positive. Bottom and top line earnings forecasts
have been upgraded consistently for over 6 months now, and the strength of
corporate balance sheets has been restored. The analytical community has
rejected any possibility of a double dip in corporate earnings, and this
view appears to be shared by investors.
* Renewed confidence has led to startling recoveries in stock markets. At the
time of writing the FTSE All-Share Index has returned to within 10% of its
all time high, and the smaller companies market, while still down on 2007
levels, is up 88% from its 2009 low. Many mid-cap stocks and cyclical
companies are trading at or near all time high PE ratios, in anticipation
of a multi-year recovery in valuations and earnings. Meanwhile others have
seen little change in their ratings, and have benefitted mostly from
improved earnings.
* This two tier investment environment presents a compelling investment
environment for the trust, as we are able to recycle capital from mature
holdings that have become relatively expensive into newer ideas which we
believe can produce returns significantly in excess of our stated targets.
Summary
(as at 31 March 2010)
Net assets £53.2m
NAV per share 69.23p
Net cash % -0.4%
Top 10 Investments
Company name (as at 31 March 2010) % of
invested
portfolio
Strategic Recovery Fund II 13.91
RPC Group 9.26
Kcom Group 8.43
Statpro Group 8.30
Lavendon Group 8.17
Thorntons 6.46
Spirent Comms 5.96
4imprint Group 5.70
E2V Technologies 5.62
Mecom Group 5.06
Sector analysis % of portfolio
Unlisted 16.4
Manufacturing 13.3
Telecoms 9.0
Technology 29.7
Retail 6.5
Media 9.8
Support services 15.4
Financial general -
Leisure 0.3
Net cash (0.4)
Size analysis % of portfolio
(market cap)
<£100 million 55.4
£100 - £300 million 30.5
£300 - £500 million 8.5
>£500 million 6.0
Net cash (0.4)
The Directors are not aware of any significant events or transactions which
have occurred between 31 March 2010 and the date of publication of this
statement which have had a material impact on the financial position of the
Company.
For further information please contact:
Adam Steiner
SVG Advisers Limited
Telephone: +44 (0)20 7010 8927 or email adam.steiner@svgcapital.com
Company website: www.strategicequitycapital.com