Results analysis from Kepler Trust Intelligence

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Bellevue Healthcare Trust PLC

06 March 2023

 

Bellevue Healthcare (BBH)

06/03/2023

Results analysis from Kepler Trust Intelligence

In the year to 30/11/2022, Bellevue Healthcare (BBH) delivered NAV total returns of -4.1% and share price total returns of -11.9%. That compared to a 14.1% total return increase in the trust's benchmark, the MSCI World Healthcare Index (GBP).

It was a year of two halves for the trust. Rate hikes and the invasion of Ukraine in H1 led to a sell-off in the more growth-oriented, small caps that BBH holds. Recessionary fears tampered in H2 and BBH outperformed the benchmark in NAV terms by 5.3% in the second half of the year.

BBH paid dividends of 6.47p per share during the period, compared to 6.03p in FY21. The board aims to pay a dividend equal to 3.5% of year-end NAV. This means the target dividend for the current period is 5.99p per share, reflecting last year's performance.

Chairman Randeep Grewal noted that the trust's small cap exposure has made it more sensitive to interest rate hikes and other macroeconomic factors, even if company fundamentals haven't changed substantially.

"We hope that the New Year will bring improved performance that in turn will attract buyers and contribute to a narrowing of the discount and ultimately share price appreciation," he added.

Kepler View

Bellevue Healthcare (BBH) has built an impressive track record since its launch in 2016. The trust runs a concentrated portfolio of growth-oriented healthcare companies, with no sectoral or geographical limits imposed on the managers.

Last year was not easy for growth investors in the healthcare sector. Smaller, earlier stage businesses were seen as being more susceptible to the risks incurred by rising interest rates and a wider economic downturn. At the same time, with bonds and equities falling concurrently, investors tended to de-risk and allocate more of their equity exposure to large caps than smaller companies. An easing of recessionary fears and a downshift in the pace of rate hikes was likely a factor in BBH's better performance in the second half of the year and through into 2023.

Managers Paul Major and Brett Darke remain cognisant of the risks that higher rates pose but believe they are largely protected from them. In BBH's December factsheet they noted that, even if higher rates were factored into current valuations, it would not change their view of the companies in the portfolio.

As can likely be inferred from that, the two managers believe that share price fluctuations over the last 18 months have largely been driven by macroeconomic predictions, as opposed to company fundamentals. This meant Paul and Brett felt confident enough to add to the portfolio, as well as to existing positions, in 2022. They also added to their own holdings in the trust during the period, with Paul arguing that the first quarter of 2022 is ultimately going to be seen as a historic buy opportunity.

We think BBH looks interesting at this juncture as a result. Companies in the portfolio are being driven by secular trends that look unlikely to dissipate in the near or long-term future. The trust has an estimated forward yield of 3.6% and is trading on a rare discount of -6.7% as at 24/02/2022. While there are no guarantees in a fickle market, this discount may tighten if performance remains strong and sentiment toward smaller, growth-oriented companies of the sort favoured by the managerso improves.

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