Strategic Equity Capital plc · LSE:SEC
Strategic Equity Capital — Q2 2013 Earnings Presentation
38 slides from Strategic Equity Capital's earnings presentation, July 2013
Slide 1: Strategic Equity Capital plc Q2 Update 2013
Strategic Equity Capital plc Q2 Update 2013 July 2013
Slide 2: Notice to recipients
Notice to recipients 2 This document is given to the recipient on condition that the recipient accepts that it is not a client of SVG Investment Managers Limited (“SVGIM”) and that hence, none of the client protections applicable to SVGIM’s clients are in fact in force or available, and SVGIM is not
Slide 3: Contents
Contents 3 Page number Q2 update 2013 4 – Summary & highlights 6 – Performance 7 – Portfolio analysis 10 Detailed portfolio analysis 20 UK Outlook 24
Slide 4: Q2 update 2013
Investment Managers
Slide 5: Introduction: Q2 2013 Executive summary
Introduction Q2 2013 Executive summary 5 • Net assets per share increased by 2.0%, driven by portfolio earnings growth and dividends. Rating unchanged • FTSE Small Cap rose 3.8% in Q2 2013, driven by re-rating; IMA UK Smaller Companies sector delivered 1.0% • Full or partial exits of mature and stub
Slide 6: Performance Highlights
Performance Highlights 6 Investment highlights1: • Net assets per share increased by 2.0%, compared with the 3.8% rise in the FTSE Smaller Companies (ex investment trusts) index • Market very momentum driven since Autumn 2012 -> significant re-rating of FTSE Smaller Companies • Medium term NAV perfo
Slide 7: Unconstrained, long term investment approach
Unconstrained, long term investment approach Strong cumulative performance since process improvements in June 2009 7 Cumulative rebased performance1 Annualised 130 26.8% 120 110 100 18.8% Pence per share 18.1% 90 80 70 60 50 40 SEC NAV TR FTSE Small Cap ex IT TR IMA UK Smaller Companies Long term in
Slide 8: Investment strategy has delivered medium and long term outperformance
Performance Investment strategy has delivered medium and long term outperformance 8 SEC NAV performance against sector and comparator index1 Annualised 45% 40% 38.6% 35% 30% 27.0% 25.4% 25% 23.7% 20% 17.4% 17.7% 15.3% 15% 12.9% 11.4% 10.4% 9.0% 8.3% 10% 5% 3.8% 2.0% 1.0% 0% 3 months 6 months 1 year
Slide 9: SEC's risk adjusted performance appears attractive
Performance SEC’s risk adjusted performance appears attractive in absolute and relative terms 9 1 year 3 year 5 year Alpha SEC NAV 18.3 16.0 5.9 Average AIC Smaller Company trust 3.2 4.2 0.9 Beta SEC NAV 0.3 0.5 0.5 Average AIC Smaller Company trust 0.9 1.0 0.9 Sharpe ratio SEC NAV 2.7 1.7 0.5 Avera
Slide 10: Market & portfolio analysis
Market & portfolio analysis FTSE Small Cap return of c.25% since September 2012 seems to have been driven by re-rating 10 September 2012 June 2013 Change Trend P/e ratio FY1 SEC 12.3x 12.4x +0.1x / +1% FTSE Small Cap 9.3x 11.7x +2.4x / +26% Earnings growth FY1 SEC 9.7% 10.6% +0.9% pts FTSE Small Cap
Slide 11: Q2 performance attribution
Performance Q2 performance attribution 11 Total return three months Contribution to Company to 28th June 2013 (%) return (b.p) SVGIM Comment Positive attribution 4imprint 13.5% 107 Continued strong US growth. Significant re-rating Gooch & Housego 21.0% 87 Strong interim results Tyman 5.6% 67 Acquisi
Slide 12: Portfolio activity during Q2 2013
Portfolio activity during Q2 2013 Turnover c.25% on annualised basis 12 Investments & pipeline • Top ups – Andor on weakness – Wilmington: compelling balance of cash returns and growth • Participated in rights issue to fund Tyman’s acquisition of North American peer Truth. US sales now 75% of total
Slide 13: Portfolio engagement
Portfolio engagement Engagement initiatives with portfolio companies 13 Initiative Benefits • Significant engagement with new Chairman • Ensure “hits the ground running” to drive at E2V change. Help determine scope for determining self-help • Engagement re: new Chairman appointment • Ensure high qua
Slide 14: Portfolio summary & monitoring
Portfolio summary & monitoring* Typically market leaders with an attractive SVG FCF yield and multiple value drivers 14 SVGIM Funds Return Progress SVGIM Net debt/ Company Vintage Sector % of company potential** vs thesis FCF yield EBITDA NTM 12 month catalyst Market leader** Tyman 2009 Industrials
Slide 15: Portfolio analysis
Portfolio analysis Portfolio remains highly concentrated and unconstrained 15 9 Sector exposure by value 7 1 Value by market cap band* 1 6 8 1 Support services 20.1% 5 2 1 <£50m 8.7% 7 2 Electronics 18.9% 2 £50m - £100m 9.1% 6 3 3 £100m - £200m Industrials 18.1% 27.2% 4 Consumer Services 10.3% 4 £20
Slide 16: Key valuation metrics - estimates at June 2013
Portfolio analysis Key valuation metrics - estimates at June 2013 16 FTSE UK Small Cap ex Weighted average Weighted median investment trusts Number of securities 17 17 128 Market capitalisation (£m) 225 257 226 Consensus EV/EBITDA FY1 7.0x 6.9x 6.5x Consensus price earnings Hist 19.3x 17.5x 12.8x Co
Slide 17: North America now 31% of underlying portfolio sales
Portfolio analysis North America now accounts for 31% of underlying portfolio sales 17 Portfolio company sales by end geography 100% 4% 4% 4% 3% 4% RoW Significant increase in exposure to North America 5% 90% • Tyman acquisition of Truth Hardware in Q2 16% 80% 22% Asia takes Tyman’s exposure to Nort
Slide 18: Consistent investment focus
Portfolio analysis Consistent investment focus 18 Investing Avoiding • Niche market leaders with IP • Vulnerable to inflation • Overseas and/or recurring • UK Public spending earnings • UK Consumer Discretionary • Strong cash generators • Highly rated, difficult to • Can pass on price increases pred
Slide 19: Conclusion
Conclusion 19 • Net assets per share increased by 2.0% during Q21, compared to the FTSE Smaller Companies (ex Investment Trusts) index up 3.8% • Significant long term outperformance of the FTSE Smaller Companies (ex Investment Trusts) index • 12.6% underlying cash flow yield remains attractive compa
Slide 20: Appendix
Investment Managers
Slide 21: Discrete performance
Performance Discrete performance 21 Annual performance1 % YTD 2012 2011 2010 2009 2008 Share Price TR 13.6% 25.6% 9.4% 35.1% 252.1% -79.3% NAV TR 12.9% 21.3% 3.9% 37.1% 63.8% -55.9% FTSE Small Cap ex Investment Trusts TR 15.3% 36.3% -15.2% 16.9% 57.7% -48.3% Uncorrelated NAV performance. Discount pr
Slide 22: Portfolio valuation remains attractive in absolute terms
Portfolio analysis Portfolio valuation remains attractive in absolute terms 22 Weighted average consensus portfolio valuation 18 16 Weighted average statistics settling down post Mecom exit in Q1/Q2 14 We believe that significant value remains in the portfolio: 12 • We regard 10% SVG Cash Yield as “
Slide 23: Future NAV growth driven by focused approach
Future NAV growth driven by focused approach Stock selection together with portfolio company engagement 23 Stock selection / portfolio management Engagement topics • Find growth in low growth environment • Dividend policy – Growth markets • Investor relations activities – Overseas earnings & geograp
Slide 24: UK outlook
Investment Managers
Slide 25: SVGIM outlook summary
Outlook SVGIM outlook summary 25 Positives • Forward earnings growth forecasts remain at high single digit for small and mid cap1 • UK equities continue to look undervalued relative to other geographic regions on traditional metrics • M&A activity to continue to build given strong drivers and high i
Slide 26: Trends for the four drivers of NAV growth
Outlook – trends for the four drivers of NAV growth Re-rating and M&A to take the lead from earnings growth and cashflow & yield 26 • Mid to high single digit • M&A levels to improve aggregate earnings Growth Corporate significantly in 2013, growth activity following better 2012 • Modest re-rating t
Slide 27: Prospects for recovery in the USA appear good
Outlook Prospects for continued (possibly prolonged?) recovery in the USA appear good 27 US GDP growth % US unemployment rate % 5 10.0 4 3.6 9.5 3.5 9.0 3 2.6 3.0 2.9 8.5 2.3 2 Current: 1.6 8.0 Current: 7.6 1 7.5 7.3 Federal Reserve 0 7.0 7.2 central tendency Federal Reserve target threshold 6.8 -1
Slide 28: UK and Japan only major areas with growth upgrades for 2013
Outlook UK and Japan only major economic areas experiencing growth upgrades for 2013 28 Real GDP growth forecasts UK Real GDP output 10 102 Apr-13 Jul-13 Industrial production 8.0 7.8 100 8 Services 98 5.7 5.6 Real GDP 6 96 4 94 3.0 2.5 1.9 1.7 2.0 2 1.6 92 0.7 0.9 0.6 0.3 90 0 88 -2 -1.5 -1.8 -1.6
Slide 29: 12-month forward EPS growth projections remain strong
Outlook - growth 12-month forward EPS growth projections remain strong for small and mid caps 29 12M-Forward EPS growth by FTSE index % June 2007 to date 30 20 10 0 -10 -20 -30 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 FTSE 100 Mid 250 Small Cap Indic
Slide 30: An international market de-rated by local factors
Outlook An international market de-rated by local factors 30 % MSCI return composition for UK market1 25 20 15 10 5 0 -5 -10 1970s 1980s 1990s 2000s 2010s All Periods Market 2013² SEC³ Dividend Re-Rating Growth Total Return A ‘decade plus’ of market de-rating; forecasts in-line with long term averag
Slide 31: UK market looks attractive relative to other global regions
Outlook UK market looks highly attractive relative to other global regions 31 PE ratings 2013E Dividend yield 2013E 0 2 4 6 8 10 12 14 16 % 0.0 1.0 2.0 3.0 4.0 Japan CEEMEA USA UK DM Eur Ex UK AC World Asia Pac ex Jap Eur Ex UK LatAm LatAm EM Asia Pac ex Jap AC World UK DM EM USA CEEMEA Japan With c
Slide 32: UK market attractive relative to history
Outlook UK market looks highly attractive relative to history on earnings and cash flow metrics 32 UK market cyclically adjusted PE Market ex Financials - EV/EBITDA 1979-2013E 1989 - 2013E 35 14 12 30 10 25 8 6 20 4 15 2 10 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Slide 33: UK market attractive relative to other asset classes
Outlook UK market looks highly attractive relative to other asset classes 33 UK 12-month forward earnings yield and BBB bond yield crosses over with UK equity 10 year gilt yield 1986 to date1 dividend yield 1999 to date2 % % 20 10 18 9 16 8 14 7 12 6 10 5 8 4 6 3 4 2 2 1 0 0 1999 2000 2001 2002 2003
Slide 34: Sharp rise in M&A activity in H1 2013
Outlook Sharp rise in M&A activity in H1 2013; return of the global mega deals 34 Value of UK stocks acquired by market capitalisation 1995 – 2013 YTD1 £bn 180 160 140 120 100 80 60 40 20 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Cash Shares Str
Slide 35: UK profit warnings
Outlook - growth UK profit warnings 35 UK profit warnings per quarter # 160 Q1 1991 – Q2 2013 140 120 100 80 60 40 20 0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Profit warnings in
Slide 36: Buyers remain wary of equities
Outlook Buyers remain wary of equities 36 FTSE 100 trading activity2 2013 YTD total returns1 10 8 % 6 12 4 10 2 8 0 6 4 FTSE Small Cap trading activity2 2 200 0 150 -2 100 50 -4 UK Equities UK Credit UK Cash UK Gilts 0 Despite strong performance from UK equities, traded volumes still subdued; great
Slide 37: Opportunity?
Outlook Opportunity? 37 Number of FTSE 100 Stocks yielding more than UK bond yields 1964 to date 90 80 70 60 # of stocks 50 40 30 20 10 0 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Despite sharp rise in bond yields rel
Slide 38: If history is a guide to the future
Outlook …and if history is a guide to the future… 38 Equity valuations against average 10 year forward real total return 1970 - 2002 20 1974 1979 15 1976 1978 1981 1983 1982 1980 1990 1988 1977 1989 1987 % per annum 10 1975 1985 1986 1984 1991 1973 1995 5 1996 1994 2002 1992 1997 1993 1970 2001 2000
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