Interim Results
Strategic Equity Capital plc
Unaudited interim results for the period ended 31 December 2006
Key highlights:
· At 31 December 2006, the Company had net assets of £77.8 million an increase
of 4.6% in net assets since June 2006, predominantly driven by a strong
fourth quarter which saw a 9.5% increase in value.
· There is now evidence of a high level of strategic, management and
operational change occurring within the underlying portfolio companies.
· The Company has achieved its objective of becoming fully invested.
John Hodson, Chairman, commented:
"It is pleasing to be able to report another half of net asset growth and in
particular the strong final quarter of 2006. Over the last six months there
has been a marked increase in the interest displayed by private equity
investors and other investment companies in applying private equity techniques
to public markets. The acceptance of this investment style by the broader
investment community bears witness to both the size of the opportunity and the
potential returns it can generate."
For further information, please contact:
Capita Sinclair Henderson Limited 01392 412 122
Tracey Brady/ Michael Buckley
SVG Investment Managers Limited 020 7010 8900
Adam Steiner / Rebecca Hartley
Copies of the press release and other corporate information can be found on the
company website at: http://www.strategicequitycapital.com
Chairman's Report
This is Strategic Equity Capital's second interim results and I am pleased to
report that some significant milestones have been reached since our year-end in
June.
2006 was a significant year in which a major objective was to fully invest the
capital raised since listing in July 2005. The Manager has now achieved this
target, and the Company is over 90% invested. At 31 December 2006, Strategic
Equity Capital had net assets of £77.8 million, increasing its net asset value
by 4.6% since June 2006, driven by a strong fourth quarter which saw a 9.5%
increase in value. Now that the portfolio is close to fully invested, the
Manager is focused on working with the management of the portfolio companies in
order to create value for our investors over the medium term.
There is now evidence of a high level of strategic, management and operational
change occurring within the underlying portfolio companies, which has been
driven or supported by the Manager. Since inception, a meaningful number of
realisations have been completed and the 35% IRR achieved on these have
reinforced my confidence in the Manager's investment process.
Whilst it is pleasing to be able to report another half of net asset growth,
and in particular the strong final quarter of 2006, performance since inception
is currently below the Manager's long term expectations. Overall, performance
over 2006 was constrained by the Company's significant cash holdings and
specific issues with a limited number of stocks in the portfolio. It is clear
that the objective for the remainder of this year must be to build on the
recent improvement in portfolio returns.
Investment manager
The Company's portfolio is managed by SVG's Public Equity Team. Its investment
processes and techniques are modelled on that of successful private equity
investors, focusing on companies that can benefit from strategic, operational
and management initiatives.
The Manager has continued to invest in its business to support its investment
management process, in particular through the addition to the team of two
analysts with private equity backgrounds. SVG's Public Equity Team has also
strengthened its research capability through the addition of Alan MacKay and
Stewart Binnie to its Strategic Advisory Board.
Alan McKay joined 3i in October 1987 and has since been a senior partner in
their leveraged buyout business and global lead partner for 3i in healthcare.
In 2006, Alan nurtured 3i's activity on the interface between private and
public capital markets. He is currently Chairman of 3TS Capital Partners and
is a Director of AIM listed Character Group plc.
Stewart Binnie has been involved in UK publishing and retail businesses since
1976. He was a partner of, and consultant to, Schroder Ventures (now known as
Permira) until 1996, specialising in the generation, execution and monitoring
of investment opportunities in media, retail and related markets. He is
currently the Chairman of Mosaic Fashion hf.
Board
During the period Stewart Binnie resigned as a member of the Board. This was
necessary in order to maintain its independent status once it had been
concluded that the Company would benefit from his involvement as an adviser to
the Manager. I would like to thank him for the contribution he has made during
his time on the Board.
Discount management
The Board maintains a policy of active discount management. At the current
time no action is required, however as stated in the Company's prospectus, if
the market price of the shares has been (and continues) to be at a discount of
more than 10% to the net asset value per share for a continuous period of six
months, and if sufficient cash resources are available (excluding borrowed
monies) the Directors would expect the Company to seek to reduce the discount
to a level of 10% or less through the purchase of its own shares.
Outlook
Over the last six months there has been a marked increase in the interest
displayed by private equity investors and other investment companies in
applying private equity techniques to public markets. The acceptance of this
investment style by the broader investment community bears witness to both the
size of the opportunity and the potential returns it can generate. SVG's
Public Equity Team is one of the leaders in applying these techniques to the UK
market. The returns displayed by the majority of the Company's investments
provide solid grounds to believe that the Company will meet its long term
expectations.
John Hodson
7 February 2007
Investment Manager's Report
Overview
Portfolio review
At 31 December 2006 Strategic Equity Capital had net assets of £77.8 million
and was 93% invested and committed with a portfolio of 19 companies. As the
Company became fully invested the portfolio displayed reasonable growth over
the period, increasing its net asset value by 4.6%, driven by a strong fourth
quarter which saw a 9.5% increase in value. There is now widespread strategic,
management, operational and corporate activity occurring throughout the
portfolio, which we believe will drive returns over the medium term.
Performance
Key positive contributors to performance over the period were Redstone, Mecom
Group, Pinewood Shepperton and Melrose.
Redstone performed strongly following its acquisition of Symphony Telecom
Holdings and has subsequently announced a positive trading statement, two
contract wins and a further acquisition.
Mecom Group benefited from the completion of its acquisition of Orkla Media,
and the resumption of trading of its shares on the London Stock Exchange.
Pinewood Shepperton's share price rallied significantly following the formation
of a joint venture with Morley Fund Management to develop its property assets.
Finally, Melrose commenced the sale process of its aerospace division, leading
to a significant re-rating in its shares.
Key negative contributors were Filtronic, SMG and Watermark Group.
Filtronic has displayed share price volatility following the sale of its
wireless infrastructure business. We believe that the market undervalues its
remaining businesses and that once capital is returned from this sale, the
company will perform strongly.
There has been significant corporate activity surrounding SMG, including a
change of Chief Executive, however deterioration in its television revenues has
offset the benefits of management change. The company is currently in
discussions with UTV regarding a merger. We believe that further corporate
activity is likely and we remain closely involved in the process.
Watermark Group has seen its share price fall significantly following the
termination of takeover talks and a subsequent profits warning. Following this
there has been a change of management and we believe that there is considerable
upside in the shares should the performance of the business be restored. In
order to oversee this process, since the period-end, Graham Bird, a fund
manager of SVG's Public Equity Team, has been appointed to Watermark's board as
a non-executive Director.
New investments
The Company made five new investments, which represented 26.3% of the invested
portfolio at the period-end.
Redstone is a communications services provider. The management believe that
they can build shareholder value by playing an active role in the consolidation
of the telecoms sector. The Company is Redstone's largest shareholder having
been a cornerstone investor in a £20 million equity placing, providing finance
for the acquisition of Symphony Telecom Holdings.
Intec Telecom Systems supplies telecommunications billing software solutions.
We anticipate that the company will benefit from a cost cutting programme as
well as a return to top line growth in its core markets. We are engaged with
the management to support this objective.
Renold is primarily a manufacturer of industrial chains. We believe that
recent changes to the board will accelerate the company's move of production to
low cost areas and the disposal of non core businesses will lead to significant
value creation.
Spirent specialises in telecommunications testing systems. We have supported
the election of several new board members who we believe will implement the
necessary changes to create an improvement in the company's strategy and
profitability.
Thorntons is a manufacturer and retailer of luxury chocolates. We are backing
a proven and highly qualified Chairman, alongside a new management team to
execute a performance improvement strategy based on cost reduction, better
asset utilisation and top line growth.
Realisations
There was one disposal over the period, Elementis, the speciality chemicals
group. In order to assist a restructuring process led by a new management
team, Ken Minton, a member of the Strategic Advisory Board joined Elementis as
a non-executive Director in June 2005. The Company first invested in Elementis
in August 2005 as a supporter of the restructuring programme. Following
operational improvements and the disposal of a division, the company reached
our target valuation and the holding was sold at a 1.33x multiple, and an IRR
of 44.7%.
Portfolio analysis
The investment portfolio is predominantly focused on small and medium sized
companies with market capitalisations ranging from approximately £12 million to
£500 million.
Sector weightings in the portfolio are driven by stock specific investment
opportunities. As at 31 December 2006, media and industrials continue to carry
the largest weighting in the portfolio, representing 24% and 21% respectively.
Following our investment in Redstone, telecoms accounted for 12% of the total
portfolio.
Top 10 holdings
A summary of the top 10 investments, which represent approximately 72% of net
assets, is given below:
Cost Valuation % of net % of invested
Name Sector assets portfolio
£ £
Redstone Telecom 6,948,750 9,595,893 12.33 13.43
Melrose Industrials 5,633,976 7,014,063 9.01 9.82
Mecom Group Media 4,646,485 6,868,269 8.83 9.62
Pinewood Shepperton Media 4,826,062 6,439,620 8.27 9.02
Hampson Industries Industrials 4,339,758 5,480,906 7.04 7.67
Filtronic Technology 4,713,250 4,728,913 6.08 6.62
Support
Cardpoint services 4,285,511 4,674,000 6.01 6.54
Evolution Financial 5,155,080 4,522,958 5.81 6.33
SMG Media 4,500,665 3,366,197 4.33 4.71
Thorntons Retail 3,136,799 2,969,093 3.82 4.16
48,186,336 55,659,912 71.53 77.92
Outlook
2006 set an all time record for M&A activity with global public to private
activity also achieving a record high of £76.0 billion of transactions
announced after a robust second half to the year. This high level of activity
was unsurprising given the record year for private equity fundraising, with an
estimated £152.0 billion plus committed to new funds. We expect that the
combination of robust corporate balance sheets and continued private equity
activity will lead to another strong year for M&A activity in 2007. This
environment of high transactional liquidity should benefit the Company by
increasing the number of investment and exit opportunities in the market. The
Company may also benefit from the increased size of private equity investment
which is leading private equity investors towards ever larger deals and thereby
increasing the number of small companies which now fall below their "radar
screen".
The UK public market remains attractive relative to bonds and continues to
display a strong cash flow yield and high return on equity. We believe that
the greatest risk to the UK market is a fall in operating margins, which are
currently at a 20 year high. We evaluate this risk on a company specific basis
as part of our due diligence process.
SVG Investment Managers Limited
7 February 2007
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 SVG Investment Managers Limited's own
assessment and interpretation of information available to it as 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.
The Directors announce the unaudited statement of results for the half year 1
July 2006 to 31 December 2006 as follows:
Income statement
(unaudited) for the period ended 31 December 2006
31 December 2006 31 December 2005
(unaudited) (unaudited)
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Investments
Gains on investments - 3,084 3,084 - 1,950 1,950
Net investment results - 3,084 3,084 - 1,950 1,950
Income
Dividends 503 - 503 96 - 96
Interest 301 - 301 1,076 - 1,076
Total income 804 - 804 1,172 - 1,172
Expenses
Investment Manager's fee 429 - 429 233 - 233
Investment Manager's performance fee - 192 192 - 477 477
Other expenses 151 - 151 141 - 141
Total expenses 580 192 772 374 477 851
Net return before taxation 224 2,892 3,116 798 1,473 2,271
Taxation - - - (191) 130 (61)
Net return after taxation for the period 224 2,892 3,116 607 1,603 2,210
Earnings per Ordinary share pence pence pence pence pence pence
Basic and diluted 0.31 3.98 4.29 0.85 2.25 3.10
The total column of this statement is the income statement of the Company. All
items in the above statement derive from continuing operations. These accounts
are unaudited and are not the Company's statutory accounts.
These accounts have been prepared under International Financial Reporting
Standards.
Statement of changes in net equity
(unaudited) for the period ended 31 December 2006
Share
Share premium Special Capital Revenue
capital account reserve reserve reserve Total
£'000 £'000 £'000 £'000 £'000 £'000
For the period 1 July 2006 to 31 December 2006
1 July 2006 7,262 2,042 62,282 2,839 1,198 75,623
Profit/(loss) for the period - - - 2,892 (719) 2,173
Write back of share issue expenses - 28 - - - 28
31 December 2006 7,262 2,070 62,282 5,731 479 77,824
For the period 20 July 2005 to 30 June 2006
20 July 2005 7,040 62,282 - - (12) 69,310
Transfer to special reserve - (62,282) 62,282 - - -
Profit for the period - - - 2,839 1,210 4,049
Issue of share capital 222 2,042 - - - 2,264
30 June 2006 7,262 2,042 62,282 2,839 1,198 75,623
These accounts have been prepared under International Financial Reporting
Standards.
Balance sheet
(unaudited) as at 31 December 2006
31 December 31 December 30 June
2006 2005 2006
(unaudited) (unaudited) (audited)
£'000 £'000 £'000
Non-current assets
Fair value through profit and loss investments
- Portfolio 71,431 29,394 55,022
Current assets
Trade and other receivables 108 303 989
Cash and cash equivalents 7,067 44,854 20,458
7,175 45,157 21,447
Total assets 78,606 74,551 76,469
Current liabilities
Other payables 590 290 846
590 290 846
Total assets less current liabilities 78,016 74,261 75,623
Non-current liabilities
Investment Manager's performance fee 192 477 -
192 477 75,623
Net assets 77,824 73,784 75,623
Represented by:
Share capital 7,262 7,262 7,262
Share premium account 2,070 2,042 2,042
Special reserve 62,282 62,282 62,282
Capital reserve 5,731 1,603 2,839
Revenue reserve 479 595 1,198
Total shareholders' equity 77,824 73,784 75,623
Net asset value per share pence pence pence
Basic 107.16 101.59 104.13
Shares in issue number number number
Ordinary shares 72,626,000 72,626,000 72,626,000
These accounts have been prepared under International Financial Reporting
Standards.
Statement of cash flows
(unaudited) for the period ended 31 December 2006
1 July 2006 to 20 July 2005 to
31 December 31 December
2006 2005
(unaudited) (unaudited)
£'000 £'000
Operating activities
Net return before tax 3,116 2,271
Adjustment for gains on investments (3,084) (1,950)
Operating cash flows before movements in working capital 32 321
Decrease/(increase) in receivables 143 (303)
Increase in payables 224 666
Net cash inflow from operating activities 399 684
Investing activities
Purchases of portfolio investments (21,028) (31,455)
Sales of portfolio investments 8,155 4,011
Net cash outflow from investing activities (12,873) (27,444)
Equity dividends paid (944) -
Financing activities
Write back of share issue expenses 27 -
Proceeds of ordinary share issue - 71,564
Net cash (outflow) /inflow from financing activities (13,391) 71,564
Decrease/ increase in cash and cash equivalents for period (13,391) 44,804
Cash and cash equivalents at start of period 20,458 50
Cash and cash equivalents at 31 December 2006 7,067 44,854
These accounts have been prepared under International Financial Reporting
Standards ('IFRS').
The Company was incorporated on 10 May 2005 and commenced activities on 20 July
2005.
1 General information
The financial information contained in this announcement does not constitute
statutory financial statements as defined in Section 240 of the Companies Act
1985. The financial information is unaudited and has been prepared on the
basis of the accounting policies set out in the statutory financial statements
for the period ended 30 June 2006, which contained an unqualified auditors'
report and have been lodged with the Registrar of Companies and did not contain
a statement required under Section 237(2) or (3) of the Companies act 1985.
2 Basis of preparation
The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ('IFRS') issued by the
International Accounting Standards Board (as adopted by the EU),
interpretations issued by the International Financial Reporting Interpretations
Committee, and applicable requirements of United Kingdom company law, and
reflect the following policies which have been adopted and applied
consistently. Where presentational guidance set out in the Statement of
Recommended Practice ('SORP') for investment trusts issued by the Association
of Investment Companies ('AIC') in January 2003 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.
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