Strategic Equity Capital plc · LSE:SEC
Strategic Equity Capital — Q1 2014 Earnings Presentation
41 slides from Strategic Equity Capital's earnings presentation, April 2014
Slide 1: Strategic Equity Capital plc Q1 update 2014
STRATEGIC EQUITY CAPITAL PLC Q1 update 2014
Slide 2: Notice to recipients
Notice to recipients This document is given to the recipient on condition that the recipient accepts that it is not a client of GVO Investment Management Limited (“GVOIM”) and that hence, none of the client protections applicable to GVOIM’s clients are in fact in force or available, and GVOIM is not
Slide 3: Contents
Contents Q1 update 2014 • Summary & highlights 4 • Performance 6 Detailed portfolio analysis 14 Portfolio outlook 19 UK Outlook 22 Appendix 33 2
Slide 4: Q1 Update 2014
Q1 UPDATE 2014
Slide 5: Q1 2014 Executive summary
Q1 2014 Executive summary • Net assets per share increased by 9.0%1, driven by modest re-rating of some portfolio holdings and earnings growth • FTSE Smaller Companies Index rose 2.1% in Q1 2014, driven by re-rating. IMA UK Smaller Companies sector delivered 4.2%1 • As anticipated, significant diver
Slide 6: Q1 2014 Highlights
Q1 2014 Highlights Investment highlights1: • Net assets per share increased by 9.0%, compared with the 2.1% rise in the FTSE Smaller Companies (ex investment trusts) index • Average 14.7% net cash balance over the quarter, with 11.7% net cash at the end of March • Portfolio holdings continue to perf
Slide 7: Long term track record
Long term track record Cumulative rebased total returns1 190 CAGR* SEC NAV 31.2% 170 150 FTSE 250 ex IT 22.5% 130 IMA UK Smaller Companies 21.9% FTSE Small Cap ex IT 21.0% 110 90 70 50 30 Dec-09 Jun-09 Dec-11 Dec-10 Jun-11 Dec-13 Jun-10 Dec-12 Jun-13 Jun-12 Strong cumulative performance since proces
Slide 8: Medium and long term outperformance
Medium and long term outperformance SEC NAV performance against comparator index & IMA Sector1 50 Annualised 45 43.7 40 Total return % 34.8 35 32.3 29.7 30 26.9 25.8 25 22.6 19.2 20 15.8 15 9.0 10 4.2 5 2.1 0 3 months 1 year 3 years 5 years SEC NAV Total Return FTSE Small Cap x IT Total Return¹ IMA
Slide 9: SEC's NAV has tended to outperform falling markets
SEC’s NAV has tended to outperform falling markets SEC NAV Morningstar upside/downside capture ratio Morningstar - Upside and Downside Capture Ratio Upside/downside capture ratio shows you whether a 120 given fund has outperformed--gained more or lost less 103.5 than--a broad market benchmark during
Slide 10: SEC is a low beta, low volatility fund
SEC is a low beta, low volatility fund Key performance and risk statistics 5 year absolute NAV performance vs volatility March 20141,2 for AIC UK Smaller Company trusts2 3 year 5 year NAV return % Beta vs FTSE Small Cap 0.72 0.61 380 Annualised Alpha vs FTSE Small Cap 8.2 15.9 SEC Correlation vs FTS
Slide 11: Q1 performance attribution
Q1 performance attribution Total return three months Contribution to Company GVOIM Comment to 31st March 2014 (%) return (bps) Top 5 contributors Strong final results. Better than expected synergies from Truth Tyman 31.3% 305 acquisition Return to like-for-like growth. Roll out plan for USA followin
Slide 12: Turnover was relatively high, driven by disposals
Turnover was relatively high, driven by disposals Investments & pipeline Annualised purchases and sales • New investment £6.1m in EMIS plc 60% • £1m participation in secondary fundraising for Goals Soccer 50% • Opportunistic other small top ups in 40% Allocate, Wilmington 30% • Pipeline more active
Slide 13: New investment - EMIS
New investment - EMIS • Healthcare software and services provider, – predominately Electronic Patient Record Software for GPs & community trusts & pharmacies. • 24 years of unbroken organic growth since first product launched in 1990 • 77% recurring revenues, affording high earnings visibility • Cle
Slide 14: Valuation case study - EMIS
Valuation case study - EMIS EMIS – valuation metrics at SEC average entry price • 10% organic eps growth, with • Trading at a considerable high earnings visibility due to discount to precedent M&A in the recurring revenues healthcare software sector • 24 year unbroken track record of organic growth
Slide 15: Highly concentrated and unconstrained portfolio
Highly concentrated and unconstrained portfolio Sector exposure by value Value by market cap band 9 8 1 2 8 1 1 Technology 21.6% 7 1 <£50m 1.9% 7 2 Industrials 18.3% 2 £50m - £100m 8.3% 6 6 3 Electronics 18.2% 3 £100m - £200m 39.1% 4 Support services 12.2% 4 £200m - £300m 0.2% 5 2 5 Consumer Service
Slide 16: Portfolio valuation
Portfolio valuation FTSE UK Small Cap ex FTSE UK Small Cap Weighted average Weighted median investment trusts ex ex investment trusts resources & financials Number of securities 18 18 139 97 Market capitalisation (£m) 294 198 291 293 Consensus EV/EBITDA FY1 9.6x 10.0x 8.2x 7.8x Consensus price earni
Slide 17: Top 10 holdings
Top 10 holdings GVOIM GVOIM Net debt/ Return Progress Market Company Vintage Sector Funds % of FCF EBITDA 12 month catalyst potential** vs thesis leader** company yield NTM Tyman 2009 Industrials <3% Medium In line 9.3% 0.9x Market recovery; synergies from Truth Yes - niche E2V Technologies 2009 Ele
Slide 18: Investment focus remains unchanged
Investment focus remains unchanged Investing Avoiding • Niche market leaders with IP • Vulnerable to inflation • Overseas and/or recurring earnings • UK discretionary public spending • Strong cash generators • UK Consumer discretionary • Can pass on price increases • Highly rated, difficult to predi
Slide 19: We aim to find companies not maximising returns
We aim to find companies not maximising returns Top 10 portfolio holdings Company HOLT* CFROI Historic peak Year of GVOIM's view on GVOIM's views on the drivers to improve CFROI CFROI Historic peak scope to improve CFROI CFROI Tyman 17.8 n/a n/a Yes Higher asset turn - note capacity utilisation is w
Slide 20: Outlook – sources of new investments in 2014
Outlook – sources of new investments in 2014 Secondary fundraisings Market purchases Primary fundraisings Growth at Recovery Broken / Growth capital Self help reasonable IPO finance stalled growth price • Strong, getting • Unlikely at this • Operational • Good asset • Growth at • Be highly stronger
Slide 21: Case study – Civica. Mispriced cashflow & quality
Case study – Civica. Mispriced cashflow & quality • Provider of software and managed Civica share price vs FTSE Small Cap Index services to Local Government – Low organic growth, but stable 290 First purchase – High recurring revenues by SEC Bid from 3i – Buy & build strategy had added 270 Civica va
Slide 22: Conclusion
Conclusion • Net assets per share increased by 9.0% during Q1 2014, compared to the FTSE Smaller Companies (ex Investment Trusts) index up 2.1%, despite average cash balance of 14.7% • Significant medium and long term outperformance of the FTSE Smaller Companies (ex Investment Trusts) index • Attrac
Slide 23: UK Outlook
UK OUTLOOK
Slide 24: Outlook summary
Outlook summary • Positives – Forward earnings growth forecasts for UK Small Cap continue to be “pushed to the right”– predicated on “recovery in 2015” – UK government appears to be committed to engineering “economic recovery” by May 2015 through lax monetary policy. UK monetary policy plans for low
Slide 25: UK Smaller Companies - outlook
UK Smaller Companies - outlook • We believe that much of the UK Smaller Companies performance over the past 18 months has been driven by: – Increasing comfort with UK economic recovery – Increased institutional and retail fund flows – A belief that earnings growth will accelerate “next year” • We ar
Slide 26: Earnings growth, cashflow and M&A to drive returns
Earnings growth, cashflow and M&A to drive returns • Low double digit aggregate • M&A levels continue to improve earnings growth for portfolio through 2014 • Portfolio growth exceeds • Portfolio companies market, despite portfolio’s much overcapitalised lower financial gearing Growth Corporate Activ
Slide 27: 12-month forward EPS growth projections
12-month forward EPS growth projections 12m forward eps growth by FTSE index ex investment trusts 30% June 2007 – date2 20% 10% 0% -10% -20% -30% FTSE 100 Mid 250 Small Cap FTSE 100 and FTSE Small Cap forward earnings growth has deteriorated since the start of 2014 As at 31st March 2014 Source: Peel
Slide 28: FTSE Small Cap CY2014 downgrades in Q1
FTSE Small Cap CY2014 downgrades in Q1 eps growth FTSE Small Cap eps growth by sector 42.1 73.3 CY2014 30 25 20.5 19.6 19.2 20 16.915.9 15 13.6 11.9 11.4 Dec-13 10.1 10 7.4 Mar-14 5.9 4.4 4.6 5 2.5 1.7 0 -0.1 -5 FTSE Small Cap P/E rating by sector p/e CY2014 CY2014 PE/(G+Y) 40 36.4 now c.2x 31.4 30
Slide 29: SEC portfolio rating remains relatively attractive
SEC portfolio rating remains relatively attractive Valuation and growth metrics of key indices ex oil, miners and financials and ex loss makers and non-dividend payers1 Index 12m forward 12m forward 12m forward Growth & PEG ratio PE/(growth + Net p/e eps growth dividend yield yield yield) debt/EBITD
Slide 30: UK domestic stocks appear priced for peak returns
UK domestic stocks appear priced for peak returns UK Domestics UK exporters 18 mth 1 yr 6 mth 1 mth 18 mth 1 yr 6 mth 1 mth Price Change % 58.66 39.35 13.19 -4.88 Price Change % 9.32 6.94 0.95 -3.37 As at 31st March 2014 Source: HOLT Lens Aggregates; sample excludes Financials 29
Slide 31: UK profit warnings – on the rise in 2014?
UK profit warnings – on the rise in 2014? UK profit warnings per quarter # Q1 1991 – Q4 2013 160 140 120 100 80 60 40 20 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
Slide 32: UK Smaller Companies funds are growing again
UK Smaller Companies funds are growing again Monthly net flows of UK smaller companies funds £m Dec-02 to Feb-14 Cumulative net flows of UK smaller companies funds 300 £m Dec-02 to Feb-14 500 250 200 0 150 -500 100 50 -1,000 0 -1,500 -50 -100 -2,000 -150 -200 -2,500 Dec-03 Dec-07 Dec-02 Dec-04 Dec-0
Slide 33: The SEC's investment universe is growing again
The SEC’s investment universe is growing again Constituents of the FTSE Small Cap ex Investment Trusts Index 450 438 400 350 316 300 277 263 269 250 241 250 228 201 200 163 164 154 150 135 131 136 139 129 128 100 50 0 2001 2000 2002 2004 2003 2005 2006 2007 2008 2009 2010 2011 2012 Dec-13 Jun-13 Mar
Slide 34: Appendix
APPENDIX
Slide 35: Performance
Performance Annual performance1 % 2014 YTD 2013 2012 2011 2010 2009 Share Price Total Return 8.2% 61.4% 25.6% 9.4% 35.1% 252.1% NAV Total Return 9.0% 46.0% 21.3% 3.9% 37.1% 63.8% FTSE Small Cap ex Investment Trusts 2.1% 43.9% 36.3% -15.2% 16.9% 57.7% Total Return Only UK Smaller Companies investment
Slide 36: Upside/downside ratio - background
Upside/downside ratio - background Morningstar - Upside and Downside Capture Ratio Upside/downside capture ratio show you whether a given fund has outperformed--gained more or lost less than--a broad market benchmark during periods of market strength and weakness, and if so, by how much. Upside capt
Slide 37: Future NAV growth driven by focused approach
Future NAV growth driven by focused approach Stock selection / portfolio management Engagement topics • Find growth in low growth environment • Dividend policy – Growth markets – Overseas earnings & geographic expansion • Investor relations activities – Move up value chain – Appropriate corporate ad
Slide 38: Asset quality
There are strict criteria for inclusion in our funds Speculative Fair valued GARP* Under valued Recovery Turnaround Distress growth A A Investment focus Asset quality Asset quality B Avoid Avoid B C Avoid C GVOIM’s research process aims to identify high quality coveted assets with attractive cash fl
Slide 39: How we identify coveted assets
How we identify coveted assets We look for characteristics which GVOIM believes potential acquirers value highly Qualitative Quantitative • Niche market leaders • High and/or improving ROCE • Orderly end markets, with some growth • Strong cash conversion • Sustainable business model/franchise/unique
Slide 40: Our Black List screens out companies with fundamental business risks
Our Black List screens out companies with fundamental business risks Operational • Excessive reliance on a single product, customer, supplier or distributor • The primary driver of profitability cannot be influenced by management (e.g. resources) • Inherently low margins • Structurally declining mar
Slide 41: Case study – RPC. Self help transitions to growth
Case study – RPC. Self help transitions to growth • Initial investment by GVOIM in 2004 RPC share price vs indices • SEC became an investor in 2007 700 following significant additional due RPC diligence 600 – Multiple management & site meetings Periods of significant corporate engagement – Referenci
Strategic Equity Capital — Q1 2014 Earnings Presentation on 6ix