BlackRock Smaller Companies (BRSC) aims to grow capital over the long term by investing in a portfolio of UK listed smaller companies. The trust has an exceptional long-term track record relative to the benchmark, outperforming in each of the past ten calendar years, as we discuss further in the Performance section. The manager, Roland Arnold, pays particular attention to growth companies which have the potential to become market leaders in their fields. As such, he favours companies towards the smaller end of the market cap spectrum. The portfolio is one of the most diversified in the UK Smaller Companies sector, with close to 130 stocks. The holdings come from a wide range of industries with diversified sources of revenue, and many of them have an international element to their revenues. Over the past five years the trust has delivered NAV total returns of 42.7%, compared to 7.1% from the benchmark, and 28.1% and 23.8% respectively from the IA and AIC peer groups. Although the trust has been unable to generate positive returns in 2020, it has held up well in comparison to the rest of the sector. This has been aided by the high quality, growth focus of the underlying companies, as well as the well diversified approach to risk employed by Roland. Although capital growth is the main focus, the trust also has a strong history of dividend growth. Currently yielding 2.5%, BRSC has grown its dividend at a rate of 21.1% over the past five years. Currently (as at 07/05/20) the trust is trading at a discount of 1%.
Companies: Blackrock Smaller Companies Trust
Smaller companies are usually a problematic area to invest in during significant downturns or recessions; and the sharp fall in 2020 hasn’t been an exception. In this article we assess the performance of smaller companies trusts throughout the pandemic, while identifying the factors that have differentiated the winners from the losers. This includes the impact that cash, market cap exposure, sector allocation, revenue exposure and growth or value biases have had, with some surprising results. We also ask whether now is an attractive time to invest in smaller companies, highlighting the trusts which stand out to us…
Companies: THRG GHE MINI RMMC ASIT ASL MTE TRG BRSC DSM
BlackRock Smaller Companies (BRSC) aims to grow capital over the long term through a portfolio of UK listed smaller companies. The trust has a strong long-term track record of outperformance, not only against its benchmark but also its open- and closed-ended peers in the UK Smaller Companies sector. After more than 16 years at the helm of the portfolio, Mike Prentis made the decision to step down in June 2019, leaving co-manager Roland Arnold to take over the reins. Despite this, little has changed in the firm’s bottom-up investment process, and its core focus of finding growth companies with potential to become much larger. Since Roland has taken over, BRSC’s impressive track record has only continued, with the trust delivering strong returns in 2019. The portfolio is one of the most diversified in the sector, with close to 130 stocks. The companies come from a wide range of sectors with diversified sources of revenue, and many of the holdings having an international element to these revenues. Currently (as at 12/12/19) the trust is trading at a premium of 0.8%.
BlackRock Smaller Companies aims to achieve long-term capital growth through investment mainly in listed UK smaller companies. For the past 17 years the trust has been led by Mike Prentis, however it recently announced that he will be stepping down at the June AGM and co-manager Roland Arnold will be taking over the reins. With this said, very little will change about the manner in which the portfolio is run, and the focus will continue to be on finding growth companies with potential to become much larger through a combination of top-down and bottom-up analysis. The portfolio has become increasingly concentrated over the past year, as the managers have been selling a number of holdings where their conviction has weakened. Currently the portfolio is made up of c.120 stocks, and it is well diversified by sector and underlying revenues. The team continue to have a solid exposure to companies with an international presence, with over half of the portfolio’s revenues coming from abroad. At a sectoral level, the largest active overweights come from media (+7.4%), financial services (+7.3%) and industrial engineering (+5.2%). The company offers little exposure to travel & leisure companies, food producers and general retailers, many of which are UK focused. The company is also underweight software and computer services businesses as the team believe that ongoing political uncertainty could continue to impact business investment decisions, such as IT spend. The company has a strong long-term track record of outperformance of not only its benchmark - the Numis Smaller Companies Plus AIM excluding Investment Companies - but also of its open and closed ended peers in the UK Smaller Companies sectors. Over the past five years the company’s net asset value per share has delivered returns of close to 80%, 30% ahead of the IA sector peer group and 25% ahead of the AIC peer group (all calculations on a total return basis). Perhaps more impressively, the company’s NAV has outperformed the benchmark by 48% over the same period. More recently, performance has been affected by political uncertainty surrounding the UK, which has impacted smaller companies share prices.
Blackrock Smaller Companies (BRSC) offers investors exposure to a diverse portfolio of high quality smaller companies listed in the UK. A sizeable proportion of the companies in the portfolio benefit from exposure to global growth. Managed by Roland Arnold (since April 2018) and Mike Prentis, BRSC has consistently been an exceptional performer, having outperformed the Numis Smaller Companies + AIM ex. Investments Trusts Index by 6.9% per annum over the last 15 years. The dividend paid by the Trust has increased every year, for the last 15 years. Arnold and Prentis have worked closely together as members of the BlackRock UK Small and Mid-Cap team since 2005 and the move to a co-manager structure, from being managed exclusively by Prentis, has not had a major impact on the investment philosophy and approach. We continue to recommend that investors buy BRSC.
Today, we introduce our investment trust ratings. According to the quantitative screens we have selected in an attempt to highlight the best performers in the closed-ended universe, the trusts discussed here have been the best in their classes over the last five years. We have selected trusts using two different sets of criteria, aiming to identify the top performers for capital growth and for achieving a high and growing income. There are many rating systems for open-ended funds, but no quantitative-based system for investment trusts that is available to the average investor. While we cannot identify trusts which will perform well in the future – past outperformance is no guide to future out-performance – we hope these ratings will highlight the outstanding performers in the closed-ended universe and those managers who have best used the advantages of investment trusts to generate alpha. We are trying to reward consistent and long-term outperformance, and so we have decided to look over a five-year period. All data is as of the end of December 2018, sourced from Morningstar and JPMorgan Cazenove. We have looked at NAV total return performance and discount value has not been considered: the aim is to identify those trusts which have performed the best rather than highlight bargains.
Companies: IPU FAS ATR JEO FEV FGT THRG SEC PAC BRSC IAT HNE MIGO TRY JMG DIVI SLS BGS SDP JETI SOI BCI MRC TIGT EDIN JAGI BEE SDV BRIG AAIF HFEL SCF SIGT BRFI IVPG CTY HINT JCH NAIT
While the UK economy faces headwinds in 2017, the fund manager of BlackRock Smaller Companies Trust (BRSC), Mike Prentis, believes that good companies with strong management teams are more than capable of coping with the uncertainty facing the UK. The degree of pessimism towards UK smaller company trusts remains high, as evidenced by the current discount on BRSC. Typically, this has been followed by a period of outperformance and Prentis believes that this time is no different. Therefore, this is a good time to re-assess BRSC; which has over £520m of gross assets, a long track record of consistent outperformance and a very impressive rate of dividend growth over the last few years. We recommend that investors
We remain constructive on UK smaller companies, in the long-term, despite the risk of higher volatility due to both higher interest rates and the uncertainty regarding a Brexit from Europe. The manager of BlackRock Smaller Companies Trust (BRSC), Mike Prentis, believes most of the companies in the portfolio are well positioned to weather such a storm. While he does not rule out short-term turbulence he believes that the focus on smaller companies with high ROCE, strong free cash flow and organic revenue growth should help the fund continue to deliver strong absolute and relative returns in the medium to long –term. We continue to recommend that investors buy BRSC for strong long-term returns.
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Trading in the royalty partner portfolio over Q1/21 shows a material rebound from May, which has been sustained to date, as the portfolio as a whole returns to more normalised trading. Consequently, Duke's cash receipts, while down 20% YoY currently, are set to step up in H2/21 as forbearance measures largely expire and deferred royalties realised. This bodes well for a rebound in earnings and a return to cash paid dividends. A share price down over 55% since Feb 20, standing at p/book of 0.56x H1/20A's NAV p/s thus appears overdone. We await further clarity on the portfolio before reissuing forecasts, thus leave our recommendation U/R.
Companies: Duke Royalty
L&G reported an operating profit from continuing divisions (excluding Mature Savings and General Insurance businesses) of £1,128m, -2.2% yoy. The COVID-19-related cost was £129m. LGR posted a growing operating profit to £721m. Net profit amounted to £290m vs. £874m a year before, being affected by the reduced discount rate used to calculate LGI reserves. The Solvency II ratio stood at 173%. The Board recommended an interim dividend of 4.93p/share, stable relative to H1 19.
What’s new: Purplebricks Group results for the year to 30 April 2020, show the Australian and US units as discontinued; but include the Canadian unit sold for C$60.5m (i.e. £35m) in July. Investors will focus on the UK unit which revealed:
11% fall in UK revenue to £80.5m (FY19: £90.1m), as the number of instructions fell 23% (impacted by early Covid uncertainty and lockdown), but the average revenue per instruction “ARPI” rose 12% to £1,394;
UK gross profit margin improved to 64.1% (FY19: 63.0%);
UK marketing costs to revenue improved to 25.6% (FY19: 29.6%);
Spend on Digital capacity pushed UK operating costs 32% to £26.2m (FY19: £19.9m), as new management team pursued initiatives which are being “delivered at pace with significant opportunity for further innovation.”
UK adjusted EBITDA fell 53% to £4.8m (FY19: £10.2m).
Companies: Purplebricks Group Plc
For this Monthly, we are delighted that Rooney Nimmo and 24Haymarket have allowed us to reproduce a recent report they jointly published, entitled An analysis of UK exits (2015-2019), which provides a granular analysis by sector of the activity in our dynamic private companies world. We hope you find the insights of interest.
Companies: AVO AGY ARBB ARIX CLIG ICGT NSF PCA PIN PXC PHP RECI SCE TRX SHED VTA
H1 20 operating profit declined by 12% to £1,225m and the COVID-19 claims impact was £165m. Cash remittances from business units to the group was only £150m. The insurer said that it will focus on the UK, Ireland and Canada, which means an exit from other European and Asian markets. The Board has declared a second interim dividend in respect of the 2019 financial year of 6p/share and will inform shareholders about the 2019 final dividend in Q4 20.
Companies: Aviva Plc
Since the restrictions were lifted in mid-May, Belvoir has seen a surge in activity due to pent-up demand, resulting in June being a record breaking month for the group’s Newton Fallowell estate agency network in terms of instructions and sales and the financial Services division in terms of written income. Management have stated that with the positive impact of the stamp duty reductions still to take effect they are confident that the Group is well positioned to capitalise on the current market upturn and to take advantage of the opportunities arising from more challenging conditions. We have upgraded our PBT forecasts for FY 2020 to the level we forecast pre-COVID. We have also upgraded our target price from 169p to 233p and highlight that H1 2020 has demonstrated the resilience of the group, management’s ability to navigate difficult market conditions and the power of the franchise-led strategy.
Companies: Belvoir Group Plc
Today's update highlights that despite the Covid-19 outbreak and UK/IRE lockdown, which has affected trading, Duke has continued to collect cash royalties from most of its royalty partners. Short-term alternative payment terms have been agreed with those partners hardest hit, to support them to periods where royalties can be fully recouped. Therefore the 61% fall in p/b from 1.3 (at 20 Feb) to 0.5 today, appears overdone.
The group’s earnings surprise was driven by goodwill impairments. On the negative side, management upgraded, albeit slightly, its full-year loan impairments guidance and warns about revenue and CET1 pressure. It also reckoned that the tensions between the US and China will impact the group.
Companies: HSBC Holdings Plc
The Law Debenture Corporation (LWDB) has reported another strong set of results for its independent professional services (IPS) business in H120, with EPS growth remaining in the target mid- to high single-digit range despite a more challenging economic backdrop. With the trust’s largely UK investment portfolio having been hit by the widespread stock market sell-off in February and March, IPS has provided a larger than average contribution to revenue returns. This means fund managers James Henderson and Laura Foll can continue to search for attractive total return opportunities in a broad range of sectors, while maintaining LWDB’s focus on both capital appreciation and above-inflation dividend growth.
Companies: Law Debenture Corporation
We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
Companies: Redde Northgate Plc
As expected, the quarter saw a sharp increase in loan impairments. However, one can wonder if the increase was not capped by the group’s willingness to keep its results afloat. Management’s downbeat guidance in terms of revenue recovery potential and cost reduction does not bode well as regards the group’s future credit loss absorption capacity.
Companies: Lloyds Banking Group Plc
Vacancy strongly increased in Q2 20. LTV surpassed the 50% mark on 30 June 2020 due to strong value destruction in H1 20. Hammerson announced a £550m cash capital increase coupled with a disposal of £270m. Its ex-post pro forma net debt should be £2.2bn, i.e. LTV of 42% on a proportionate basis. Too high?
Companies: Hammerson Plc
Despite challenging market conditions, Picton’s Q121 DPS was well-covered by EPRA earnings and robust portfolio capital values. Combined with low gearing, NAV per share was just 1.3% lower versus Q420 and including DPS paid, the NAV total return was -0.6%. With encouraging rent collection data continuing and the lockdown easing, we have reinstated our estimates and look for the quarterly DPS run-rate to increase in H221.
Companies: Picton Property Income Ltd.
The scaling of Duke's royalty portfolio was progressing as expected up to March 2020, with record cash receipts that month. Due to Covid-19 and the UK's economic shutdown, macro conditions have worsened and become highly uncertain. This is likely to see some royalty partners' future cash royalties decline, which in turn, will negatively impact FV's in the FY20E results. Duke's high margin and cash generative nature ensures it is well placed to trade through these challenges. Given the degree of uncertainty in outlook, we remove forecasts and put our recommendation Under Review and await further clarity on the portfolio.
Raven’s positive trading update was reassuringly robust, despite ongoing uncertainty regarding the long-term impact of Covid-19 on the Russian market. We believe that kind of performance deserves attention, although we plan to reinstate detailed forecasts post (a) the General Meeting scheduled for 31 July, which will decide upon proposals designed to create a simplified capital structure (outlined below) and (b) the interim results due in August.
Companies: Raven Property Group Ltd.