Montanaro UK Smaller Companies Investment Trust PLC · LSE:MTU
Montanaro UK Smaller Companies Investment Trust — UK Smaller Companies Investment Trust (MUSCIT) — Q2 2020 Earnings Presentation
44 slides from Montanaro UK Smaller Companies Investment Trust's earnings presentation, Jun 30, 2020
Slide 1: UK Smaller Companies Investment Trust (MUSCIT) Presentation to Clients
UK Smaller Companies Investment Trust (“MUSCIT”) Presentation to Clients Review of Q2 2020 & Outlook Montanaro Asset Management Ltd 53 Threadneedle Street, London EC2R 8AR www.montanaro.co.uk enquiries@montanaro.co.uk Tel: +44 (0)20 7448 8600 Follow us on Twitter: @MontanaroAM Blog: http://www.monta
Slide 2: Disclaimer
30 June 2020 Disclaimer Important Notice This document is issued by Montanaro Asset Management Limited (“MAM”) for distribution only to persons of the kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, or of a kind to whom this document m
Slide 3: Update on Montanaro
30 June 2020 Update on Montanaro • AuM increased to £2.8 billion: won another Global SmallCap mandate • Covid-19: all working remotely (everyone well) - business as usual • 3 appointments since May 2020 – largest team ever (32 - soon 33): – Healthcare Analyst and Fund Administrator (May 2020) – Comp
Slide 4: A Team of 32 (soon 33) – we hire in Bear Markets
30 June 2020 A Team of 32 (soon 33) – we hire in Bear Markets Bear Bear Market Market 35 • 63% here for over 5 years and 34% for over 10 years 32 • 10 different nationalities 30 30 • 11 Analysts - average experience 16 years (average 29 29 28 28 28 age of team 41 years) 27 26 • 52 site visits & 198
Slide 5: We are different
30 June 2020 We are different 1. It is our business 2. One big family - no big egos 3. Conservative (no loss-makers, no unquoteds, no derivatives, no stock lending) 4. We invest in our own funds 5. Long-term investors 6. We avoid brokers 7. Small & MidCap are all that we do Source: Internal. 4
Slide 6: What is a “Montanaro” company?
30 June 2020 What is a “Montanaro” company? 1. Simple business we can understand 2. Profitable 3. Niche business in a growth market 4. Market leader 5. Business with high operating margins and high return on capital 6. Good management we trust “Quality Growth” investment approach Source: Internal. 5
Slide 7: Over the long run SmallCap “Quality Growth” has performed best
30 June 2020 Over the long run SmallCap “Quality Growth” has performed best Global Excess Returns by Size & Quality (1989 - Nov 2019, excess return vs T-Bills) 1,300 1,200 Small - HIGH QUALITY 1,100 Small - LOW QUALITY +8.8% p.a. 1,000 Large - HIGH QUALITY 900 Large - LOW QUALITY 800 700 +7.0% p.a.
Slide 8: A tough start to 2020 - NAV down 17%
30 June 2020 A tough start to 2020 - NAV down 17% MUSCIT - Calendar Year Returns (TR, GBP) 60% 48% 50% 44% 37% 40% 34% 27% 28% 29% 27% 30% 25% 23% 20% 16% 10% 0% -10% -2% -7% -4% -6% -20% -18% -17% -30% -40% -37% -50% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20
Slide 9: BUT: outperformance of 8% since January 1st
30 June 2020 BUT: outperformance of 8% since January 1st Annual Returns to June 2020 UK Small Cap Montanaro NAV Composite (ex Relative ICs) (£)*** 3 Months 11.8% 16.6% -4.8% 6 Months -16.8% -25.0% 8.2% 1 Year -0.8% -15.0% 14.2% 3 Years 0.6% -5.9% 6.5% 5 Years 2.5% -1.0% 3.5% 10 Years 8.1% 5.5% 2.7%
Slide 10: Our Top 20 holdings
30 June 2020 Our Top 20 holdings Company Country % Company Country % 4Imprint Group UK 4.0% Polypipe Group UK 2.8% XP Power UK 3.7% FDM Group UK 2.7% Marshalls UK 3.6% AJ Bell UK 2.7% Hilton Food Group UK 3.5% NCC Group UK 2.7% Integrafin UK 3.5% YouGov UK 2.6% Big Yellow Group UK 3.5% Porvair UK 2.
Slide 11: Major Buys / Sells in Q2 2020
30 June 2020 Major Buys / Sells in Q2 2020 PURCHASES > £1m Value (£m) SALES > £1m Value (£m) Kainos 2.3 Shaftesbury -2.4 Big Yellow 1.5 Hilton Food -2.3 New Avon Rubber 1.4 Integrafin -1.6 Dechra Pharmaceuticals 1.3 Vistry -1.4 Sold Liontrust Asset Management 1.0 Cineworld -1.4 Sold Source: Internal
Slide 12: Avon Rubber (Respiratory masks)
30 June 2020 Avon Rubber (Respiratory masks) • World leader in respiratory masks for law enforcement, military and fire fighters. 8-year co- development programme with US DoD. • Also has 75% global market share in dairy (milking equipment) but in the process of selling that business. • EBIT Margin o
Slide 13: Sectors – overweight Industrials, IT & Health Care; no Oil & Gas
30 June 2020 Sectors – overweight Industrials, IT & Health Care; no Oil & Gas 40% 37% Of which: 35% Support Services: 12% Electronic & Electrical Equipment: 11% 30% Construction & Materials: 6% Other Industrials: 8% 25% 23% 22% 19% 19% 20% 17% 15% 9% 9% 9% 10% 7% 7% 5% 5% 5% 2% 3% 0% 0% Oil & Gas Ba
Slide 14: Sub-sectors
30 June 2020 Sub-sectors FTSE All- Trust v. FTSE All- Trust v. Trust NSCI ex-ICs Trust NSCI ex-ICs Share NSCI Share NSCI Oil & Gas 0.0% 4.8% 8.4% -4.8% Health Care 9.2% 3.3% 11.4% 5.9% Oil & Gas Producers 0.0% 3.5% 8.3% -3.5% Health Care Equipment & Services 3.3% 1.0% 1.0% 2.4% Oil Equipment, Servic
Slide 15: Half of sales are to the domestic UK market
30 June 2020 Half of sales are to the domestic UK market Emerging Markets = 7% Western Europe, South & Central 15% America, 1% Asia: other, 0% Africa, 0% Australasia, 1% Japan, 1% North America, 24% China, 2% Middle East, 1% United Kingdom, 51% Southeast & South Asia, 2% Eastern Europe, 2% Source: I
Slide 16: Size – a SmallCap portfolio with no exposure to the FTSE 100
30 June 2020 Size – a SmallCap portfolio with no exposure to the FTSE 100 FTSE SmallCap (ex-IC): 13% (6 holdings) 40% FTSE 250: 54% (21 holdings) FTSE 100: 0% (0 holdings) 38% AIM: 33% (20 holdings) 35% 33% 33% 30% 28% 25% 22% MUSCIT 20% 20% NSCI Benchmark 15% 12% 10% 8% 5% 3% 3% 1% 0% 0% 0 - 100m 1
Slide 17: A high quality portfolio – almost 40% of companies have net cash
30 June 2020 A high quality portfolio – almost 40% of companies have net cash Portfolio Characteristics Risk Portfolio Benchmark Portfolio Benchmark # Stocks 47 330 Beta* 0.84 1.00 Weighted Market Cap £919m £760m Standard Deviation* 18.7% 20.7% EBIT Margin (21F) 19% 17% Tracking Error* 7.9% n/a RoE
Slide 18: Growth & Valuation (based on consensus estimates) - who knows?
30 June 2020 Growth & Valuation (based on consensus estimates) - who knows? Growth (2020F) Growth (2021F) Numis SmallCap Numis SmallCap Portfolio Portfolio (ex-IC) Index (ex-IC) Index Sales Growth 0.5% -12.0% Sales Growth 10.1% 8.8% EBIT Growth -11.9% -13.2% EBIT Growth 15.7% 25.1% EPS Growth -19.7%
Slide 19: Our companies typically deliver higher EPS growth than the index
30 June 2020 Our companies typically deliver higher EPS growth than the index 16% Consensus EPS Growth - 2014 Consensus EPS Growth - 2015 15% Consensus EPS Growth - 2016 18% 14% 16% 12% 14% 9% 12% 12% 6% 10% 10% 3% 8% 8% 0% 6% 6% -3% 4% MUSCIT MUSCIT -6% 4% 2% NSCI ex-ICs Index NSCI ex-ICs Index -9%
Slide 20: Relative performance attribution – Q2 2020 (no big movers)
30 June 2020 Relative performance attribution – Q2 2020 (no big movers) POSITIVE Top 10 NEGATIVE Bottom 10 XP Power 0.4% Advanced Medical Solutions -0.5% Liontrust Asset Management 0.4% Cranswick -0.5% 4imprint 0.3% Big Yellow Group -0.5% GlobalData 0.2% Polypipe Group -0.5% Treatt 0.2% Restore -0.4
Slide 21: Relative performance attribution – 12 months (AIM was mixed)
30 June 2020 Relative performance attribution – 12 months (AIM was mixed) POSITIVE Top 10 NEGATIVE Bottom 10 Entertainment One 1.6% Cineworld -1.5% XP Power 1.6% RPS -0.7% Hilton Food 1.4% First Derivatives -0.7% Cranswick 1.2% Avon Rubber -0.5% Ideagen 1.1% Midwich -0.4% TOTAL 7.0% TOTAL -3.8% Trad
Slide 22: Absolute returns (by Financial Year - March to March)
30 June 2020 Absolute returns (by Financial Year - March to March) Charles Other PM 1 Charles Other PMs 2 Charles 58% (from 24 June 2016) 53% 50% 47% 40% 39% 28% 24% 25% 25% 20% 21% 12% 11% 11% 12% 8% 4% 1% 0% -4% -3% -6% -5% -8% -11% -17% -25% -37% -40% -50% 95/96 96/97 97/98 98/99 99/00 00/01 01/0
Slide 23: Relative returns (by Financial Year)
30 June 2020 Relative returns (by Financial Year) Charles Other PM 1 Charles Other PMs 2 Charles (from 24 June 2016) 28% 19% 20% 17% 16% 13% 14% 11% 10% 10% 8% 7% 7% 5% 5% 4% 0% 1% 0% 0% -1% 0% -3% -5% -5% -5% -5% -10% "Dash for Trash" -12% -15% -20% 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 0
Slide 24: Over 5 years MUSCIT has delivered positive returns 93% of the time
30 June 2020 Over 5 years MUSCIT has delivered positive returns 93% of the time MUSCIT - 5-year NAV Rolling Return (annualised, Net Total Returns) 30% 25% 20% 15% 10% 5% 3.8% 0% -5% -10% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Internal, Bloomberg. 23
Slide 25: Good returns over the past 25 years (TR after fees: +9% p.a.)
30 June 2020 Good returns over the past 25 years (TR after fees: +9% p.a.) Absolute Capital Returns p.a. since Trust inception (Mar 1995 - Jun 2020, all returns in GBP) 9% 8.6% 8% 7.6% 7.0% 7% 6.5% 6% 5.8% 5.8% 5% 4.5% 4.0% 4% 3.2% 3.3% 3% 2% 1.5% 1.1% 1% 0% JAPAN Nikkei 225 FTSE All UK SmallCap Gil
Slide 26: The discount is attractive at 16%
30 June 2020 The discount is attractive at 16% MUSCIT - Discount 0% -2% -4% -6% -8% -10% -12% -14% -16% -16% -18% -20% -22% -24% -26% 10 11 12 13 14 15 16 17 18 19 20 Source: Internal, Bloomberg. 25
Slide 27: Unchanged dividend policy: 1% of NAV paid out each quarter
30 June 2020 Unchanged dividend policy: 1% of NAV paid out each quarter MUSCIT - Dividend Per Share (GBp) 6.00 Past dividends are adjusted for the 5-for-1 share split in July 2018 26 July 2018: New 5.46 27 July 2018: Revised Dividend Policy Dividend Policy 5.00 (Target 4% of NAV p.a.) announced 4.00
Slide 28: MUSCIT offers the highest yield within its peer group
30 June 2020 MUSCIT offers the highest yield within its peer group 12m Historic Yield 6.0% 5.0% 4.8% 5.0% 4.0% 3.5% 3.0% 3.0% 2.5% 2.4% 2.5% 1.8% 1.8% 2.0% 1.1% 1.0% 0.0% FTSE AIM BlackRock Standard Li fe Numi s JPMorgan BlackRock Henderson Aberforth Invesco Montanaro Throgmorton UK Smaller Smaller
Slide 29: Outlook: UK SmallCap is up 26% from its low – plenty to claw back
30 June 2020 Outlook: UK SmallCap is up 26% from its low – plenty to claw back Numis Smaller Companies ex-ICs Index (from Jan 1999, rebased) 9,000 8,000 -36% 7,000 -11% +17% in 6,000 Q2 2020 Brexit 5,000 COVID-19 -17% 4,000 TMT Meltdown 3,000 Euro Crisis -47% -45% 2,000 Great Financial Crash 1,000 9
Slide 30: UK SmallCap is down 25% YTD, led by Energy and the Consumer
30 June 2020 UK SmallCap is down 25% YTD, led by Energy and the Consumer NSCI Sectors - Performance YTD (to 30 June 2020, TR in GBP) 10% 6% 0% -1% -10% -8% -11% -10% -13% -20% -30% -25% -29% -33% -32% -40% -42% -50% Energy Consumer Consumer Industrials NSCI Index Financials Telecom Utilities IT Heal
Slide 31: SmallCap outperformed LargeCap by 6% in Q2 (after a tough Q1)
30 June 2020 SmallCap outperformed LargeCap by 6% in Q2 (after a tough Q1) UK Sma ll v. La rgeCa p (NSCI ex-IC v. FTSE Al l-Share, TR i n GBP) 15% 9.2% 10% 6.4% 4.7% 5% 2.6% 1.8% 2.3% 0.7% 0.1% 0% -0.6% -0.9% -0.6% -0.7% -1.6% -1.3% -5% -3.1% -2.9% -10% -9.3% -10.5% -15% 1Q16 2Q16 3Q16 4Q16 1Q17 2Q1
Slide 32: … as investors start looking at an earnings recovery in 2021
30 June 2020 … as investors start looking at an earnings recovery in 2021 Numis Small Cap ex-IT index - % EPS Growth 30% 24% 20% 9% 10% 6% 4% 5% 0% -1% -2% -1% -3% -3% -10% -8% -20% -16% -24% -30% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020e 2021e Source: Internal, Bloomberg. 31
Slide 33: UK SmallCap looks cheap based on P/E (24% below median)
30 June 2020 UK SmallCap looks cheap based on P/E (24% below median) UK SmallCap - NSCI ex-ITs - 12-month trailing P/E 20 18 16 Median = 13.5x 14 24% 12 below median 10 8 6 4 78 80 82 83 85 86 88 90 91 93 94 96 97 99 01 02 04 05 07 09 10 12 13 15 16 18 20 Source: Internal, Bloomberg, Numis. 32
Slide 34: The 8-year Shiller P/E for UK SmallCap is 12% below median
30 June 2020 The 8-year Shiller P/E for UK SmallCap is 12% below median 28 NSCI - Shiller's Cycle-adjusted P/E (over 8 years trailing) 27 May 2007 26 24.8x Mar 1989: Feb 2000: 25 23.6x 23.5x 24 SELL 23 22 21 20 19 Median = 17.5x 12% 18 below 17 median 16 Jun 20: 15.5x 15 14 13 12 11 10 BUY 9 Mar 200
Slide 35: … which suggests a 12% annual return over the next 5 years
30 June 2020 … which suggests a 12% annual return over the next 5 years NSCI Index return p.a. over next 5 Years (TR) TR over next 5 Years (p.a.) based on Shiller 8-year P/E range (from June 1987) 25% We are here 19% 20% 18% 15% 15% 12% 9% 10% 7% 5% 4% 5% 1% 0% -5% -4% <10x 10-12x 12-14x 14-16x 16-1
Slide 36: It has been tough for UK SmallCap since the 2016 referendum
30 June 2020 It has been tough for UK SmallCap since the 2016 referendum UK SMALL CAP v. LARGE CAP 30% (NSCI ex-ICs vs FTSE All-Share, Price Returns) SmallCap OUTPERFORMS 24% 25% 19% 20% 15% 15% 13% 12% 10% 10% 8% 7% 8% 7% 7% 5% 2% 3% 0% 0% -5% -2% -5% -4% -5% SmallCap UNDERPERFORMS -7% -10% -10% -1
Slide 37: But market timing is hard - and missing the recovery can be costly
30 June 2020 But market timing is hard - and missing the recovery can be costly Numis UK Smaller Companies Index - Price Returns (in GBP, Jan 1987 - Jun 2020) 650 The 5 best months for UK SmallCap since 1987: NSCI Index 550 1/ Apr 2009: +18.4% Exc 3 Best Mths 2/ Feb 1991: +14.8% 3/ Nov 1999: +11.1%
Slide 38: UK SmallCap typically outperforms LargeCap by 7% p.a. in Bull Markets
30 June 2020 UK SmallCap typically outperforms LargeCap by 7% p.a. in Bull Markets BULL Markets in UK SmallCap SmallCap LargeCap ** Small v. LargeCap Trough Date Peak Date # Months % Change % CAGR % Change % CAGR % Change CAGR 1 Jul-56 Sep-64 100 +250% +16% n/a n/a n/a n/a 2 Nov-66 Jan-69 26 +96% +3
Slide 39: Our number crunching shows UK SmallCap offers plenty of upside
30 June 2020 Our number crunching shows UK SmallCap offers plenty of upside Estimated Annualised Total Returns over the next 7 years *: (per annum) Dividends EPS Growth P/E Change Total Return HIGHEST Numis SmallCap (ex.IT) 2.9% 6.8% 0.8% +10.9% Expected Returns MSCI Europe SmallCap 2.7% 7.7% -0.8%
Slide 40: Gearing
30 June 2020 Gearing MUSCIT Gearing (Annual) 14% 2012 Ave 2013 Ave 2014 Ave 2015 Ave 2016 Ave 2017 Ave 2018 Ave 2019 Ave 2020 Ave = 4.8% = 2.3% = 7.6% = 6.6% = 10.1% = 3.6% = 3.7% = 5.6% = 3.9% 12% 10% 8% 6% 4% 2% 1.3% 0% 11 12 13 14 15 16 17 18 19 Source: Montanaro. 39
Slide 41: MUSCIT has performed well since launch
30 June 2020 MUSCIT has performed well since launch Cumulative Returns since MUSCIT launch (31 Mar 1995 - 30 June 2020) 900 800 MUSCIT 700 7.6% p.a. Benchmark 600 500 400 300 3.0% p.a. 200 100 0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Source: Internal, Bloomberg
Slide 42: Conclusions
30 June 2020 Conclusions • The post-COVID recovery for UK SmallCap began in Q2: – +17% outperforming LargeCap by 6% * • The recovery will be bumpy – watch out for weak, low quality companies: – balance sheet strength increasingly important as government assistance fades • Portfolio quality has been
Slide 43: Quarterly Dividend History
30 June 2020 Quarterly Dividend History Ex-Dividend Record Pay Quarter ended Dividend Paid (p) Date Date Date 30-Sep-18 1.43 01-Nov-18 02-Nov-19 23-Nov-18 31-Dec-18 1.17 31-Jan-19 01-Feb-19 22-Feb-19 31-Mar-19 1.29 25-Apr-19 26-Apr-19 24-May-19 30-Jun-19 1.32 25-Jul-19 26-Jul-19 23-Aug-19 30-Sep-19
Slide 44: Contacts
30 June 2020 Contacts Charles Montanaro Cedric Durant des Aulnois Tom Norman-Butler Chairman, Fund Manager CEO, Fund Manager Head of Business Devel. UK & Ireland cmontanaro@montanaro.co.uk cedric@montanaro.co.uk tnormanbutler@montanaro.co.uk Chris Crier Adam Lomas Christian Albuisson UK IFAs (North)
UK Smaller Companies Investment Trust (MUSCIT) — Q2 2020 Earnings Presentation on 6ix