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HgT’s muted -0.3% NAV total return (TR) in H125 (according to its preliminary trading update) was negatively affected by public market volatility that reduced HgT’s private portfolio valuations by 4pp. That said, it represents a NAV rebound in Q225 following the -2.0% TR in Q125. Last 12-month (LTM
HGCapital Trust PLC
HgT’s portfolio of IT software and services companies providing mission-critical, low-spend services to SMEs has maintained its strong sales and earnings momentum on the back of the secular digitalisation trend. Revenue and EBITDA growth in FY24 were 19% and 23% across HgT’s top 20 holdings (at an
HgT reported a robust 10.1% preliminary NAV total return (TR) in FY24 (of which 4.4% in Q424), which the company highlighted was primarily driven by the strong trading performance of the underlying portfolio (in line with HgT’s long-term track record). The last-twelve-month revenue and EBITDA growt
HgT reported sustained healthy earnings momentum across its major holdings (driven primarily by upselling and cross-selling opportunities), contributing 5pp to its NAV performance in Q324. Its top 20 holdings (which make up 76% of its portfolio value) posted last 12-month sales growth of 20% (of which 12% was organic) and 24% EBITDA growth to end-September 2024, achieved at a 34% average EBITDA margin. The positive earnings impact on NAV was offset by adverse currency movements (sterling strengthening) of 3pp, the main contributor to the 0.9% NAV total return (TR) decline in Q324. The negative fx changes partly reversed post quarter-end. Continued positive momentum across HgT’s portfolio, coupled with stable valuation multiples since the start of the year, brought HgT’s year-to-date NAV TR to 5.5%. This was accompanied by an average 16% uplift to previous carrying value for full and partial realisations completed to date. HgT’s five- and 10-year NAV TR remains strong at 17.6% and 18.4% pa, respectively.
Urban Logistics REIT - Note: 1H25 Interim Results –Just timingEMV Capital - Note: Strategy evolution acceleratesOctopus Renewables Infrastructure - Reflections from an informative CMDHgCapital Trust - FX weighs on NAV; Robust underlying performanceApax Global Alpha - Q3 update, +11.5% total distribution yield before factoring in PE upside
HGT ORIT EMVC PCILF
HgT posted a 12-month net asset value (NAV) total return of 12.2% to end June 2024 (based on preliminary unaudited H124 valuations), maintaining its impressive long-term track record, at 18.6% and 18.3% pa over the last five and 10 years, respectively. Despite the still modest exit activity in the global private equity market, HgT received £347m (or 15% of opening NAV) in proceeds from exits and refinancings in H124. The four full and partial exits signed in 2024 were agreed at an average 13% uplift to their previous carrying values, reinforcing HgT’s portfolio valuations. Accounting for all deals announced to date, HgT’s pro forma available liquid resources were £508m, a robust 70% commitment coverage ratio.
HgT has published its preliminary unaudited H124 trading update, reporting a 5.6% NAV total return (TR) in H124 (of which 3.0% was in Q124). HgT’s NAV TR remains primarily driven by the solid last 12-month top-line and EBITDA momentum, which stood at 20% and 25% to end-June 2024 across its top 20 companies (making up 78% of its portfolio value), compared to 24% and 29% at end-March 2024, respectively. Despite the still modest exit activity across the global private equity market, HgT collected £347m (or 15% of opening NAV) in proceeds from exits and refinancings in H124. Its discount to NAV closed recently, translating into a year to date share price TR of more than 20%.
Real Estate Credit Investments - NAV +0.6% MoM Balanced Commercial Property Trust - Potential sale among options under consideration BioPharma Credit - Effective discount policy comes at a cost HgCapital Trust - £21m look-through investment in Focus Group
HGCapital Trust PLC Real Estate Credit Investments Limited
HgCapital Trust (HgT) posted an 11.1% NAV total return in FY23 (based on final audited numbers), which allowed it to sustain strong five- and 10-year returns of 20.4% and 18.4% pa, respectively. This has been mostly driven by robust earnings momentum across its portfolio. HgT defied the tough private equity exit environment, generating £345.9m of total realisation proceeds excluding carried interest in FY23. Moreover, it has a healthy commitment coverage ratio of 73% (based on current pro forma figures). The market has rewarded HgT through a narrowing discount to NAV, which now stands at c 6% (vs c 22% at end-2022).
HgT’s preliminary unaudited FY23 trading update reported a 10.7% net asset value total return (NAV TR) in FY23 (of which c 1% in Q423). This was supported by continued strong trading across its portfolio, with the top 20 holdings (representing 77% of the portfolio’s value) posting average revenue and EBITDA growth of 25% and 28% respectively. HgT therefore sustained its multi-year track record of delivering c 20–30% pa revenue and EBITDA growth. Despite muted global M&A activity and private equity exits, HgT had a good level of liquidity events in FY23 with £343m of proceeds from exits and refinancings. The discount narrowing from 23% to 13% during FY23 (now c 14%) translated into a share price TR of 26.2%.
EJF Investments - Note: Improved outlook for sector outperformer 3i Infrastructure - Key takeaways from the Capital Markets Event Gore Street Energy Storage Fund - FY Q2 trading update demonstrates benefits of geographic diversity HgCapital Trust - £8.1m investment in German software company
HGT 3IN EJFI GSF
HgCapital Trust (HGT) delivered a 4.6% NAV TR in H123, with its performance continuing to be mostly driven by robust trading across its portfolio (with the associated increase in portfolio value in H123 of £203.8m, or 8.3% of end-2022 portfolio value) and a minor positive impact from multiples (£34.1m or 1.4%). Hg was cautious in terms of new platform investments in H123, but saw record high M&A activity across its portfolio, highlighting increasingly attractive pricing and a strong flow of opportunities for smaller bolt-on investments. HGT’s 60% coverage of outstanding investment commitments by its liquid resources makes the trust well positioned for a potential uptick in PE deal activity.
Private equity trust with narrow focus, but interims show portfolio’s underlying resilience...
HgCapital Trust (HGT) continues to operate against the backdrop of a tougher macroeconomic environment, muted M&A markets and higher interest rates. Nevertheless, it delivered a 12-month NAV TR to end-March 2023 of 10.3%, which supports its longer-term outperformance of listed PE peers and major public indices. While Hg (its investment manager) expects some pressure on sales to new customers across HGT’s portfolio, it sees several other organic growth drivers, including cross- and up-sell. Last 12 month (LTM) revenue and EBITDA growth to end-March 2023 remained high across its top 20 holdings at 30% and 27%, respectively.
HgCapital Trust (HGT) posted a 5.4% NAV total return (TR) in FY22, mostly assisted by continued good earnings momentum (revenue and EBITDA across the top 20 holdings increased in 2022 by 30% and 25%, respectively) and the average 28% uplift to end-2021 carrying value achieved on exits. This was only partly offset by lower multiples and higher net debt across HGT’s portfolio (with net debt to last 12-month EBITDA for the top 20 holdings at 8.0x at end-2022). HGT’s recent balance sheet measures strengthen its near- to medium-term liquidity.
HgCapital Trust (HGT) posted a 2.3% increase in NAV per share total return (TR) in Q322, as positive earnings growth across the portfolio over the last 12 months (LTM) again outweighed multiple contraction. Despite the latter, the average EV/LTM EBITDA across HGT’s top 20 holdings stands at 28.8x vs 27.4x at end-2021 (see our previous note for a discussion on HGT’s valuations). The weaker global economy and tightening credit conditions weigh on both HGT’s near-term portfolio performance outlook and private equity deal activity. Still, the secular digitalisation trend remains intact with, as Gartner forecasted in October 2022, growth in global software and IT services spending of 11.3% and 7.9% in 2023, respectively. HGT’s shares trade at a 18% discount to NAV, while they traded close to NAV in 2021.
Investec view: HgCapital Trust gives investors access to a unique investment proposition, with a concentrated portfolio comprising software and business service companies with resilient, recurring revenue streams. On an aggregated basis, this would be the second largest software business in Europe. The manager can demonstrate a significant depth of resource, with more than 160 investment professionals, complemented by a network of portfolio partners. The long-term record is exceptional; the 20-year share price total return is 1,737% or 15.7% annualised vs. a FTSE All Share compound total return of 6.5%, and as the chart below shows, the margin of outperformance has accelerated in recent years. Notably, while the market environment has become more challenging, with many software companies under increasing pressure, the portfolio has proved resilient this year, with an NAV total return of 3.3%. To put this into context, the MSCI World Software (£) index is 27% below peak levels. However, while the portfolio has so far proved resilient, we expect a deteriorating economic backdrop and growing risk aversion in the tech sector to provide much greater challenges moving forward. Against this backdrop, what may prove to be peak cycle valuation multiples, leverage levels and earnings growth offer no margin of safety, while a relatively immature portfolio following record realisations in recent years is likely to be a drag on NAV progression. We downgrade to Hold. Valuation/debt multiples at record levels (pg 2): Strong revenue and earnings growth has been a feature for several years, with the top 20 investments (which have typically accounted for c.85% of the portfolio) averaging 25% and 27% respectively over the past five years. However, there has also been a material increase in both valuation and debt multiples as the cycle has progressed. On 30 June 2022, the EV/EBITDA multiple was 27.1x compared to a 10-year average of 17.2x and just 7.7x at the end of 2009. Meanwhile, debt/EBITDA is now 7.5x versus a 10-year average of 5.3x and 3.1x at end of 2009. Robust balance sheet with multiple levers to manage exposure efficiently: In addition to current liquidity, the company has a £250m loan facility, which expires in December 2025. Outstanding commitments are £1.1bn, although the company can opt-out of any new transaction without penalty. The manager will also make co-investments, seeking to hold 10-15% across the cycle. Relatively immature portfolio: We estimate that around two-thirds of the portfolio (c.56% of NAV) has been invested in the past three years. These may be a drag on shorter term returns as these underlying investments mature.
Specialist private equity trust, on a rare discount to NAV...
HgCapital Trust (HGT) consistently executes its successful active ownership strategy, undeterred by the turbulent macroeconomic conditions. It has invested a net amount of c £332m ytd (16% of opening NAV) in announced deals (closed and to be closed), all in the manager’s (Hg’s) core areas of software and services expertise. Moreover, HGT should receive net proceeds of c £180m from exits and refinancings announced so far this year (with more exits in the near-term pipeline). HGT posted a 1.8% NAV per share total return (TR) in H122 and a one-year NAV TR of 20.6% (22.2% per year over the last five years). HGT’s discount to end-June 2022 NAV is now c 17%, while it has traded much closer to NAV in recent years.
HgCapital Trust - Partial sale of Intelerad to have +0.5% impact on pro-forma NAVHICL Infrastructure - £160m capital raise
HGCapital Trust PLC HICL Infrastructure PLC
HgCapital Trust - Additional investment in team.blue at increased valuationJPEL Private Equity - Update on strategic planImpact Healthcare REIT - £22m capital raise
HGCapital Trust PLC JPEL Private Equity Ltd
Foresight Sustainable Forestry - Proposed placing to fund pipeline investmentsHgCapital Trust - MEDIFOX DAN exit adds 0.7% to NAV
HgCapital Trust’s (HGT’s) sector expertise has allowed it to consistently deliver strong performance, with a 10-year NAV total return (TR) at 17.6% per year (with 30.9% over the last 12 months), materially above the FTSE All-Share of 7.2% per year and LPX Europe NAV Index of 11.5% per year. Importantly, this has largely been driven by top-line and earnings growth (90% of returns on HGT’s software and services holdings exited in 2001–2022 ytd) rather than multiple expansion, with five-year EBITDA growth to end-2021 across HGT’s top 20 holdings of 28% per year. While HGT typically assumes a multiple contraction as part of its asset investment case, it has not actually seen much of this historically, due to its successful repositioning of portfolio companies, most notably through boosting recurring software-as-a-service (SaaS) revenues.
JLEN Environmental Assets - Material NAV uplift in Q1NextEnergy Solar Fund - Co-investment in Portuguese construction projectHgCapital Trust - Confident outlook despite market headwindsHydrogenOne Capital Growth - £20m investment in Elcogen
HgCapital Trust (HGT) delivered a strong NAV total return of c 36% in the first nine months of 2021, including c 12% in Q321, driven primarily by double-digit earnings growth across the portfolio (LTM EBITDA for top 20 holdings up 29% y o y). Its transaction activity remains high, with the volume of completed and announced investments and realisations at £378m and £204m, respectively in 2021 so far (vs £403m and £364m in the record-high 2020). HGT’s coverage ratio was a healthy c 85% at 10 December 2021 and its liquidity position has been supported with tap equity issues (c £126m in 2021 to 10 December) and a £200m credit facility, £45m of which was undrawn as at 15 November 2021.
HgCapital Trust (HGT) posted a strong NAV TR of 8.4% in Q121, driven primarily by double-digit earnings growth across the portfolio (LTM EBITDA for top 20 holdings up 30% y-o-y). After record-high transaction volumes in FY20 (investments at £403m and realisations at £364m), HGT has maintained a high transaction activity to date in 2021 (£147m and £112m, respectively). Its coverage ratio was a healthy 69% at 12 May 2021, supported by tap equity issues, which totalled c £50m to 8 June 2021 (versus £25m in FY20), and a £200m credit facility agreed in Q420, which remains undrawn.
HgCapital Trust (HGT) reported a strong NAV total return of 24.0% in FY20, driven by double-digit earnings growth across the portfolio (last 12 months EBITDA for top 20 holdings up 31% y-o-y) and solid uplifts to end-2019 book values on exits (50% on average in FY20). Investments and realisations reached record-high levels in FY20 and HGT had a healthy coverage ratio of c 64% as at 24 March 2021 (vs 48% on average between 2015 and 2019), backed by a £200m credit facility secured in Q420 and c £56m raised in tap equity issues in FY20 and FY21 to end-March 2021.
PRS REIT - Improved outlook on dividend coverHgCapital Trust - Two disposals to add c.4p to NAVBMO Private Equity - 10% NAV uplift from Dotmatics saleBiopharma Credit - $150m loan investment
Octopus Renewables Infrastructure Trust - Large pipeline of potential investmentsHgCapital Trust - 24% NAV return in 2020RTW Venture Fun - Prometheus IPO demonstrates latent portfolio upsideAberdeen Standard European Logistics Income - £19.4m capital raise
HgCapital Trust (HGT) continues to outperform its benchmark over the short and long term, with NAV total return strongly increasing c 20% in the nine months to end-September 2020 (vs a fall of c 20% for the FTSE All-Share Index in the period). Following a record amount of investments and realisations in FY20, we estimate HGT’s commitment ratio stood at 60% in mid-December (vs 48% on average between 2015 and 2019), supported by a new £200m credit facility that it secured in early October 2020. The manager expects transaction activity to remain high and highlights his confidence in the value creation potential of HGT’s software and technology portfolio, driven by the ongoing digitalisation of businesses, accelerated by COVID-19.
2020 has not exactly been ‘topping’. Following a K-shaped recovery from COVID-19, the divergence between the haves and have nots has been stark. This trend is reflected in the graph below, which illustrates how dramatic the impact of COVID-19 has been on swathes of the equity market. The positive effect on consumer staples and technology has been almost as shocking as the negative impact COVID has had on the energy and financials sectors. The dispersion in returns has been staggering, with the difference between the energy and technology sectors being 78% in the first three quarters of 2020.
HGT ICGT NBPU OCI
Following a solid H120, HgCapital Trust (HGT) announced several portfolio transactions representing a considerable uplift to the carrying value at end March 2020 and translating into a c 12.0% ytd NAV total return (TR) to end August. On completion of these deals, HGT’s cash resources will improve significantly to £314m from £123m in early July, while its unfunded commitments will decline to £814m. Consequently, HGT’s commitment coverage ratio will improve markedly to c 39% vs 13% in early July.
HgCapital Trust’s (HGT) 12-month NAV TR to end-March 2020 was a solid 13.8% despite the COVID-19 market downturn in March 2020 (ytd NAV performance since end-December 2019 was a 6.2% decline). The coverage ratio reached a historically low level (13% vs three-year average of 53%) after HGT notably increased its investment activity and commitments in Q120. However, a significant part of these new commitments will not be drawn in the near term. The board continues to review its future funding arrangements and may also opt out of a new investment without penalty across all funds. HGT’s portfolio focus is on the resilient software and technology sector and the manager expects a limited direct earnings impact on its portfolio from the COVID-19 pandemic.
HgCapital Trust (HGT) is a private-equity trust offering direct exposure to companies in the software and services sectors, typically in northern Europe. Compared to typical equity funds, the trust is highly concentrated: the top 20 companies add up to 88.4% of NAV, with the largest investment at 20.7%. The managers provide active, hands-on management to the companies HGT holds as they undergo rapid development or transformation. The sector focus and higher-growth companies that HGT invests in mean that it is differentiated relative to most of the listed private equity (LPE) sector. The trust is also unique in that it is the only one in the sector that has been recently able to issue shares at a premium to NAV. HGT’s long-term track record is very impressive, as is its record over the short term. Over the past five years HGT has delivered a compound annual NAV return of c. 17% p.a. (to 31/03/2020), significantly ahead of the FTSE All-Share return over the same period of 0.6% p.a. As anyone who has invested in listed private equity in the past knows, these returns do not come without risk (to valuations or discount).
Hg Capital Trust’s (HGT) investment activity in 2019 to end-November has been broadly in line with last year, while the volume of realisations was lower following an exceptionally strong 2018 and 2017. HGT’s NAV total return (TR) to end-September 2019 was a solid 18.4%, backed by revaluations of portfolio holdings, which continue to deliver good operational performance. Following several major new and follow-on investments in 2019 (including team.blue, Transporeon, Visma, Litera Microsystems and Argus Media), HGT’s coverage ratio increased to c 80% in September 2019 from 50% at end-2018. That said, HGT expects to announce further commitments to invest alongside Hg funds in early 2020.
The NAV and shareholder total returns were 22.5% and 13.9% respectively vs 13% for the FTSE All Share. Over 10 years, the annualized excess returns relative to this index is 3.2%, while over 20 years, the NAV total return is 1,429% vs 171% for the FTSE All Share. Around two-thirds of the uplift in H1 came from growth in profits of the underlying investments, while after a strong couple of years for realisations, just one company was sold outright (at a 79% uplift to book value). A number of businesses were refinanced. The company invested £100m in three companies in Germany, North America and Belgium, and follow-on investments in several others. While multiples on acquisitions are relatively high, the manager looks to grow the portfolio through bolt-on acquisitions by existing portfolio companies, which can be at significantly lower valuation multiples. 14% of the NAV is invested in co-investments, which do not attract fees or carried interest. Over the year to 30 June 2019, a period which has seen companies continue to struggle to deliver earnings growth, the top 20 portfolio companies (88% of the portfolio) delivered sales and EBITDA growth of 26% and 35% respectively. The Chairman notes that these are the strongest operational figures the company has ever reported, which reflects the quality of the underlying portfolio. More than 80% of the portfolio is focused on software and services that make use of technology. In the year to 30 June 2019, the largest 20 portfolio companies reported aggregate sales of £3.7bn and EBITDA of £1bn, with EBITDA margins of 28%. To put this into context, this would make the company one of the largest software businesses in Europe. The Partners and staff of Hg now hold c.13m shares, with a current market value of c.£30.6m. In addition, they will make commitments to each vintage fund that Hg raises, typically c.2% of the total funds raised. Investec view: A solid set of results, but it is the long-term performance numbers that are genuinely exceptional. The underlying portfolio is in rude health and looking forward, we expect the strong operational performance to underpin superior returns, while the manager has advised that it expects to see further exits and re-financings over the next 12 months. That said, it is prudent to note that the portfolio EV to EBITDA multiple has moved to a record 19.5x, while the net debt to EBITDA ratio has risen to 6.3x; although the valuation multiple is a function of the strong operational characteristics, these features are likely to contribute to short-term volatility in a more challenging environment. Continued overleaf
HgCapital Trust (HGT) is the largest single investor in funds managed by Hg, one of Europe’s leading private equity (PE) investment managers in the software and services sectors, with strong involvement in the strategic development and value creation of its portfolio holdings. Hg partners closely with its portfolio companies, supporting management to drive change. It has more than £10bn in assets under management (AUM) and nearly 30 years of overall PE experience. This expertise has been reflected in HGT’s average compound share price return of c 14% pa over the last 10 years vs the FTSE All-Share at c 10% pa (on a total-return basis).
HGT – HgCapital Trust – Finals to 31 December 2018 and 28 February 2019 NAV
Pershing Square Holdings-Total share acquisition by manager in excess of $300m | CATCo Reinsurance-Further share acquisitions by manager and board | Hg Capital Trust-£14m investment in a workforce solutions provider
BBGI - Positive full-year update | HgCapital Trust - Mobility acquisition for 2% of NAV
HgCapital Trust : Updated forecasts
While HGT’s H1’s NAV of 1,797pps was 3.5% behind our forecast of 1,850pps, we weren’t massively adrift and believe that HGT remains on track regarding our FY17 forecast. The quantum of the portfolio write downs (2.6% of NAV impact) negatively surprised but the new portfolio valuation (16x EV/EBITDA) didn’t. It has been heavily impacted by the Visma transaction.
HgCapital (Hg), the trust’s manager, is in exit mode. Four exits (YTD) have added 141p (8.8%) to the NAV and more are expected. Reflecting the combination of the announced exits, strong EBITDA growth, neutral FX and supportive markets, we are forecasting a strong FY17 result (17.1% NAV TR). We increase our FY17 price target to 1,840p (13.7%pa TSR) and move to a Buy rating. Belatedly updating our forecasts, price target and rating, this note revisits our outlook for the trust (HGT) and updates investors in anticipation of the interim result to 30 June 2017 (expected 11 September).
Trading on 5.4% discount to its historic NAV, significantly above its 12 month average of 17% and within a whisper of the fund’s all time share price high, it would be easy to view the trust (HGT) as expensive. We would disagree. While priced richly on a relative value basis (and possibly vulnerable in a wider market correction) our view is that HGT’s valuation reflects an awareness (by investors) of the implications of levered 20% EBITDA growth for the NAV TR. Our increased price target (+5%) principally reflects a review of our core model assumptions including a tightening of our discount assumption from 15% to 10% in recognition of investor’s orientation on the fundamental outlook.
HgCapital Trust’s (HGT) H1 results outperformed our forecast by 4%pts as the earnings growth rate accelerated and the multiple compression incorporated into our forecasts failed to materialise. Our updated price target (1,488p up 5.8%, 8.3%annualised TSR over the forecast period), rating (Hold) and model assumptions (discount widening and multiple compression) are fairly down beat; these are issues of valuation not investee fundamentals. Item’s likely to cause us to review the forecasts and share price target include our view on discount and valuation multiples. Given that multiples have continued to expand (mainly modestly, except Sage) since the period end, the risks feel as though they are on the upside but we feel no compulsion to act
We expect the market to continue to sweat the outlook and HGT’s portfolio valuation while bidding up stocks (e.g. consumer staples) that continue to deliver reliable earnings growth. Given this environment, we remain comfortable that HGT will continue to perform. Our forecasts have taken a conservative outlook on valuation and we believe HGT’s NAV offers the capacity for upside surprise. We increase our price target from 1,180p to 1,369p (TSR 9.5%pa) but move to a Hold rating (previously Buy) reflecting the recent strength of the fund’s share price (+20% YTD) driven by positive news flow. The fund’s interim results to 30 June are scheduled to be published on 12 September.
Historically, we have expected a frisson and a little bounce as private equity funds unveil their updated valuation marks. Unfortunately for HgCapital Trust (HGT), investors and the market have already moved on. The focus will be on the future and the implications of market moves YTD for the NAV not the year end results which are unveiled on 7 March.Our call is that the 2015 year-end NAV will be in touch with our forecast (1,377p, 5% above the last proforma, 6.4% over the half year and 10% YoY TR) but possibly a little light as we aren't convinced that we are estimating the carry effectively.Essentially, statements made by either Hg or the investees covering c70% of the fund's portfolio standout as being fundamentally positive. Our index and weathervane analysis shows markets were broadly supportive during H2 2015. Valuations in the global small cap sectors that private equity is biased towards (consumer, services, healthcare, technology and industrials) were either broadly flat (+/-0) or mildly positive (0-1) while index composites were mildly negative (0 to -1) with strain showing in sectors such as financials and telecomsThe outlook is a little trickier. We are forecasting a flattish FY 2016 3% NAV TR (with pain being taken in H1 followed by NAV recovery in H2) as the valuation process incorporates the new market multiples (assuming the market stays at these valuation levels). However, on a share price basis, a lot has already been priced in and we are forecasting a 12 month TSR of 22% and share price of 1,180p (previously 1,213p, established 30 July).We retain our Buy rating, acknowledging that given recent turbulence investors may prefer to sit it out and reflect on the wider environment. Since we last updated our forecast, the share price has declined 10% and the fund's discount (to the proforma NAV) widened from 7.6% to 25.2%.
Historically, we have expected a frisson and a little bounce as private equity funds unveil their updated valuation marks. Unfortunately for HgCapital Trust (HGT), investors and the market have already moved on. The focus will be on the future and the implications of market moves YTD for the NAV not the year end results which are unveiled on 7 March. Our call is that the 2015 year-end NAV will be in touch with our forecast (1,377p, 5% above the last proforma, 6.4% over the half year and 10% YoY TR) but possibly a little light as we aren’t convinced that we are estimating the carry effectively. Essentially, statements made by either Hg or the investees covering c70% of the fund’s portfolio standout as being fundamentally positive. Our index and weathervane analysis shows markets were broadly supportive during H2 2015. Valuations in the global small cap sectors that private equity is biased towards (consumer, services, healthcare, technology and industrials) were either broadly flat (+/-0) or mildly positive (0-1) while index composites were mildly negative (0 to -1) with strain showing in sectors such as financials and telecoms. The outlook is a little trickier. We are forecasting a flattish FY 2016 3% NAV TR (with pain being taken in H1 followed by NAV recovery in H2) as the valuation process incorporates the new market multiples (assuming the market stays at these valuation levels). However, on a share price basis, a lot has already been priced in and we are forecasting a 12 month TSR of 22% and share price of 1,180p (previously 1,213p, established 30 July). We retain our Buy rating, acknowledging that given recent turbulence investors may prefer to sit it out and reflect on the wider environment. Since we last updated our forecast, the share price has declined 10% and the fund’s discount (to the proforma NAV) widened from 7.6% to 25.2%.
The fund’s significant exposure to SaaSy Cloud companies has tied it to a hot segment of the equity market whose valuations are elevating(ed). If the portfolio truly delivers and/or HgCapital times the dismount to perfection, this is highly positive for investors. However, it does increase the prospects for a volatile ride. Updating our forecasts, we are now estimating a FY 2015 NAV TR of 10.4% (Y/E NAV 1,379p) and 10% TSR with target price of 1,213p (cd). Our forecasts, slightly down on prior, are driven by a combination of earnings growth, modest multiple expansion, adverse FX and a widening of discount expectations from 8% to 12%.
Investors face a wall of worry. The macro environment is tricky, FX rates are volatile, a global monetary tussle (US Fed versus the world) is overdue, valuation metrics are elevated and even HgCapital (Hg) is prepared to describe the environment as ‘warm-to-hot’. HgCapital Trust’s (HGT) portfolio of largely mature-growth and growth assets is in good shape and increasingly, but not pressingly, mature. Specifically, underlying EBITDA growth is running at c12-13%pa and leverage is reasonable (4.5x EBITDA). In our opinion, HGT’s portfolio is and will remain perennially attractive (until it goes ex-growth) to strategic and/or private equity investors. It is well positioned for opportunistic exits at the right price in a warm-to-hot market that is prepared to supply plenty of cheap finance. We retain our Buy rating, 1,240p target price and NAV forecasts made in September 2014.
Its very easy to make the bear case for HgCapital Trust (HGT) so we have included one. The Buy case requires a little more nuanced thinking about the portfolio value drivers and confidence in management’s ability to execute. The near term execution risks, a cautious management statement and weak NAV performance all weigh on the share price. Our increased price target, giving an 18% TSR, is a call on the capacity of underlying earnings growth (est 14-16%pa) to drive NAV. This growth rate is a function of the fund’s significant exposure (60% of the portfolio) to technology enabled business service companies and underpins both portfolio valuation (12.4x) and the investment return.
We welcome HgCapital Trust’s (HGT) return to NAV growth (+5.8%) and the announcement of a special dividend (19p per share). However, the NAV growth’s dependence on expanded valuation multiples increases the valuation risks attached to the portfolio and we wouldn’t be surprised if the market focuses on the portfolio multiple (12.4x) rather than the nature of the underlying value drivers. Trading on a 13% discount to NAV after a lacklustre 18 months, HGT has lost its halo. We are not suggesting that an immediate turnaround in valuation is likely – investors will probably wait for further evidence. The return to NAV growth and the potential in the portfolio is highly positive; we remain comfortable with our total return target price of 1,220p (TSR 15%) and our recommendation (Buy). We will look to provide a more detailed analysis and update following a manager meeting that we have penciled in the diary (due shortly).
Acknowledging that the 12 months results underwhelmed, the management team highlighted opportunity and value within the existing portfolio. Hg reminded the assembled of their investment strategy (invest for growth, don’t worry that it depresses EBITDA), valuation strategy (buyouts are only valued on EBITDA multiples) and highlighted improving portfolio revenue and EBITDA growth multiples (9% each versus 9% and 6% respectively 12 months ago). They also acknowledged issues such as a further write down in renewables due to proposed Spanish legislation that will impact 1.4% (17p) of the NAV. We retain our Buy recommendation. Ignoring FX and assuming a stable economic environment, HGT should produce at least reasonable NAV growth in 2014. HGT’s share price has been marked down on the back of the results and now trades on a 12.4% discount; which we think is fair.
Overall we view the statement as quietly confident. No serious issues were highlighted. There was a hint that underlying trading is trending upwards. Given this, and the improved comparison period, we expect the LTM sales and EBITDA numbers to show a useful increase between the pre-close statement, on 31 October, and the final results, due on 31 December. We also note that markets and broad comps look to be supportive. We are comfortable maintaining our Buy recommendation and targets (price £12.20 or 13% upside, NAV £14.08 or 23% upside), acknowledging that our NAV forecast is ambitious.
On the back of a disappointing set of results from HgCapital Trust (HGT) (NAV down 2.2%, c6% excluding positive FX translation) the easy decision would be to downgrade our Buy recommendation on the basis of valuation (parity) and performance (poor, 4% attributable to write downs) during the period. We have resisted this temptation and retained our 12 month forecasts established last February (share price target £12.20 – 6% upside, year-end NAV £14.08 – 21% upside) for the near term. Our confidence reflects what wasn’t written up at the half year. Our belief in the fund’s potential reflects the combination of a stabilising economic environment, expanding valuation multiples and the increasing maturity of HGT’s 2010 vintage assets (c30% of the portfolio including Visma). We highlight that Visma and Team Systems (13.2% of NAV) have not featured as value drivers since at least June 2012.
HgCapital Trust (HGT) reported a year end (31 December) NAV of 1,221.7p (NAV TR 15.3%). A final dividend of 23p was declared. Since the year end, the NAV has rise by 3.1% to 1,259.8p as of 8 March reflecting subsequent events and currency effects. The results were a little (3%) behind our expectations (1,257.8p) but have no negative implications for our price target (1220p) or recommendation (Buy). We have a positive bias to future changes in our Price Target.
We initiate coverage of HG Capital Trust (HGT) with a BUY rating and a 12 month price target of 1220p (11.6% upside). We believe that the fund’s NAV has the capacity to grow at c15%pa for the period until December 2016 and for its discount to narrow as NAV momentum develops. Our 12 month forcast doesn’t incorporate discount narrowing. Whilst HGT’s discount has narrowed recently , we believe that it largely reflects a response to exit activity and rising equity markets (which are likely to be reflected in the December NAV) rather than a significant re-rating. As a result, we believe HGT’s share price should respond positively to the publication of its results due on 8 March 2013.
