We called our 6 July initiation Outperformance through every stage of cycle. In this note, we explore ICGT’s resilience to a downturn in more detail. We first explain why private equity (PE) is so resilient, and then we deep dive into what ICGT has done to further reduce risk. Its performance through the initial stages of COVID19, earlier NAV returns through downturns and academic research all confirm our view of PE’s and ICGT’s market-beating resilience. For ESG investors, this aspect of ICGT shows good “S” (jobs are preserved) and “G” (better governance, especially managing for the long term, is key to this performance).
Companies: ICG Enterprise Trust
The COVID-19 pandemic has had a significant impact globally in many areas. While primarily a health issue, it has had wide-ranging implications for stock markets, which have now rallied after the plunge in share prices in mid-March when the full severity of the emerging pandemic became more widely appreciated. Nonetheless, the FTSE 100 Index remains almost 20% off its late February 2020 figure.
Companies: AVO ARBB ARIX CLIG DNL GDR ICGT NSF PCA PIN PXC PHP RECI STX SCE TRX SHED VTA YEW
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
ICGT, the 39-year listed private equity (PE) investor, has delivered a total NAV return of 178% over 10 years (comparable FTSE All Share return 61%). Since Intermediate Capital became the manager in 2016, ICGT has earned mid-teen p.a. underlying returns every year. This has been achieved by leveraging the attractive PE market with incremental manager synergies. It has a concentrated portfolio of “high-conviction” investments (19% p.a. average returns over five years, 42% of portfolio, defensive growth focus) and a diversified third-party PE funds book. ICGT manages over-commitment tightly. The 33% discount to NAV is above peers.
The market sell-off has not been kind to the listed private equity (LPE) sector. The share price of ICG Enterprise Trust (ICGT) has fallen more than most, and so we ask: do the fundamentals justify this treatment? ICGT invests in profitable, cash-generative unquoted companies, primarily in Europe and the US. Increasingly it does so by the team deciding on individual investments themselves (rather than committing to third-party managers). The ‘high conviction’ portfolio now represents 41% of the total portfolio. Overall the trust retains a bias towards large- and mid-market buyouts, accounting for 88% of the total portfolio. As we discuss in the Portfolio section, the overriding theme for quite some time – which is reflected in the sector exposure – has been for the managers to favour investments which exhibit ‘defensive growth’. At an operational level, we believe that private-equity-backed companies are used to dealing with change, being well set up to evaluate new circumstances and adapt, enabling continued growth. Managers should be able to take a long-term view without the pressure of short-term performance which is found in public markets. As such, we believe that there are good reasons to think that on a NAV basis over Q1 2020, ICGT may at the very least not perform any worse than the average of the peer group, and possibly better than wider equity indices. In the Performance section, we evaluate the various listed and privateequity comparators available and conclude that ICGT’s NAV is likely to see a mark-to-market fall of between 12% and 18% for its 31/03/2020 valuation. This would indicate a discount range of 27% to 32% at the current price.
Discounts across the investment trust sector have widened –- dramatically at first – but in most cases have now narrowed back in somewhat. At first glance, the listed private equity (LPE) sector has widened most of all, and remains on a significantly bigger discount than other sectors. Does this present an opportunity?
Companies: OCI HGT ICGT NBPU AGT
De-equitisation refers to the shrinking of the amount of public market equities in issue through share buybacks and M&A. It’s a trend which means many investors are looking to find ways to invest in the parallel world of private investments. Among other things, investors are attracted by two features of private investments: the very different types of companies that have not yet made it to public markets; and the potentially strong returns that have been captured by the early backers of some well publicised unicorns. But accessing private markets is rather harder than investing in public equity funds. As a result, those investment trusts that do offer exposure to private market investments are in hot demand, and currently rank amongst the highest rated investment trusts in that universe. The selections below all have a significant proportion of their assets in growth equities and have an average premium to NAV of 17.6%.
Companies: ICGT OCI NBPU
On a quiet August afternoon, we found ourselves reviewing the constituents of ICG Enterprise Trust’s top 30 underlying holdings. It triggered a thought: what does the UK’s FTSE All-Share Index look like beneath the surface? Understanding ‘what lies beneath’ is critical to investors because, for example, owning a passive investment product means being exposed to specific risks that active investors might not be. Private equity should offer investors portfolio diversification opportunities. Interestingly, the net asset value of private equity has grown >7x since 2002 whilst, over a similar time period, the number of public companies in the US and Europe has declined. Private markets have outperformed public equities across multiple cycles and, as a result, allocations are increasing. For retail investors, private equity investment trusts offer the only exposure to this growing asset class. ICG Enterprise Trust (Ticker: ICGT) invests in profitable, cash generative unquoted companies primarily in Europe and the US. Its 30 largest investments represent 46% of the portfolio at present. By comparison, 46% of the total market capitalisation of the FTSE All-Share is accounted for by just 14 companies; a much more concentrated profile. The sector spread of these companies is also relatively narrow. In this research note, we compare and contrast the characteristics presented by the FTSE All-Share and the ICGT portfolio of companies across: portfolio composition, investment style, earnings growth and valuations. Our analysis shows that ICGT is less exposed to cyclical industries, such as oil & gas and financials, whilst maintaining higher weightings towards sectors with greater defensive characteristics, such as healthcare and education. Later in this note, we compare the underlying growth characteristics of the top 46% of each portfolio over the last five years and find that earnings growth has been more consistent at ICGT. This consistency leads to a greater compounding effect: 11.8% compound earnings growth for ICGT vs. 9.5% for the top 46% of the FTSE All-Share. The difference is even more apparent when comparing ICGT to the whole of the FTSE All-Share.
“Active ownership” is one part of this strategy that crops up across all three of the broad ESG strategies and is an increasingly “hot topic”. Traditionally, many institutional investors have neglected to engage with corporates, but with a growing awareness that owners of businesses have responsibilities not only to the ultimate underlying investors, but also to other stakeholders. As described above, it involves the use of shareholder rights to support good practices, normally through proxy voting and corporate engagement. Ultimately, “engagement” is taken to its fullest extent where the investment manager owns a majority of a company, such as with private equity, of which there are plenty of listed vehicles. An example of a trust that utilises ESG engagement is ICG Enterprise. ICG, the manager of ICG Enterprise, believes that companies which are successful in managing ESG risks while capturing ESG opportunities will outperform over the longer term and the ICG Enterprise investment team include ESG screening in their due diligence on new managers and co-investments before they invest. One of the higher profile trusts which fit many of the “impact” strategies is Impax Environmental Markets. The trust has been managed by the same individuals since launch, co-managed by Bruce Jenkyn-Jones and Jon Forster. The trust seeks to invest in companies which will benefit from the ever- increasing need for resource efficiency, focusing on companies which operate in the water, energy, waste management and food / agriculture sectors. Impax aim to “anticipate the second bounce of the ball” and enable investors to benefit from superior earnings growth generated by companies exposed to resource efficiency, but also benefit from a re-rating from being early into specialist small and mid-cap companies located all around the world. A byproduct of their investment is the impact that is felt, illustrated by the graphic below.
Companies: ICGT IEM PAC
“The single greatest edge an investor can have is a long-term orientation”, according to Seth Klarman, the American billionaire hedge fund investor. On the Hargreaves Lansdown platform the number of people with more than £1m in their ISA has increased from just three in 2012 to 168 today. However while this sounds very impressive, £1m doesn’t seem that fanciful given full historic contributions to PEPs and ISAs since 1987 would have added up to more than £291,000. We calculate that an investor would “only” have to have generated an IRR of 7.74% on every year’s subscription to have generated a seven-figure sum today. ISAs offer an excellent way to grow capital and benefit from compounding (that eighth “wonder of the world”) over the very long- term entirely free from the clutches of HMRC. Investments are tax neutral within the ISA wrapper, and in contrast to a SIPP, there is zero tax payable on the entire amount when capital or income is withdrawn. Another contrast to a SIPP is that there is no size limit – under current legislation an individual’s ISA can be as big as it gets. Whilst building an ISA pot of £1m is clearly a huge achievement, our analysis suggests that many investment trust managers would have delivered significantly more. There are around 48 trusts for which we have meaningful statistics going back to 1987 which have had broadly the same strategy and/or elements of the same management team over this time. Of these, an incredible 34 trusts would have delivered a total ISA value (share price returns net of fund fees, but before the ISA wrapper fees) of over £1m, if an individual had put their entire PEP / ISA subscriptions in the same trust every year.
Companies: SMT IIT JEO IEM JEO ICGT OCI SUPP ATST LWI FGT
Market volatility, concerns around a trade war and worries over a slowing global economy have led to falls in markets during the latter half of 2018. Market sentiment has clearly changed since the summer. In the world of investment trusts this has led to discounts widening. The listed private equity sector has shared in this, but nowhere has this de-rating been more heavily felt than in the fund of fund sub-sector. Discounts have widened considerably this year, but most especially from the position in May 2018. As the graph below shows, the average discount for the five fund of fund private equity trusts has widened by 9% since May. In the case of ICG Enterprise, the discount has widened from 9% in May 2018 to 21% at the end of December 2018 – yet the portfolio continues to perform and fundamentals of the drivers of ICG Enterprise’s returns remain unchanged. With an approach that has produced strong returns through the cycle, we take a closer look at the trust which moved to appoint ICG as manager three years ago. The investment team believe the trust’s strategy provides shareholders with the “best of both worlds” in terms of having a relatively concentrated investment portfolio, with the diversification benefits of a third-party funds portfolio. The managers’ choice of ICG as a home nearly three years ago is relevant at the current stage in the economic cycle. ICG’s flagship funds are aiming for private equity type returns, but with lower volatility. The team aims to increase what they term “high conviction” investments - co-investments and ICG originated deals - where they (or the wider ICG investment team) has made the investment decision to invest in the underlying company. Indeed, the team have increased their deployment rate into co-investments to c. 2.5% of NAV per investment (versus c.1% whilst at Graphite). We expect the top 30 holdings to increase to perhaps 55-60% of NAV (currently 47%). Over the past 12 months 39% of all capital deployed has been invested in and alongside ICG as the team take advantage of the proprietary deal flow the trust now benefits from. Given the backdrop of the past year or so, the team believe that a highly selective approach is key and remain cautious. As such, and across the portfolio and the recent investments, three themes dominate. The team have been investing in companies which in their view exhibit defensive growth (recurring revenue, quality earnings, barriers to entry), structural downside protection (including investing in the debt and equity of deals), and relative value (where deal dynamics has facilitated investment at very attractive valuations).
Investors have become increasingly aware in recent years of the rich pickings which can be found among companies which are yet to see an IPO. Indeed, statistics show that the range of companies which have already listed on a stock exchange are less and less representative of all of the growth opportunities which exist in an economy. Investment trusts have been quick to respond to this trend, and an increasing number have come to market in recent years looking to invest into unquoted, private companies. Certainly, there are success stories – witness Scottish Mortgage’s investment in Alibaba way before it IPO’d. Naturally, examples like this can lead to investors worrying about missing out and, without addressing the private company investment universe, clearly investors are limiting themselves to only a sub-set of the complete opportunity set. For many investors the worry is that the companies they are ignoring, arguably, have the best long-term wealth creating characteristics. However, there are risks involved in unquoted stocks, and before getting carried away with the new trusts targeting them, it is worth bearing in mind that listed private equity sector, within which many trusts have demonstrated strong returns over various cycles, has for some time been focused exclusively on this area.
Companies: SMT PHI USA AUGM ICGT SLPE NMCN
ICG Enterprise invests in profitable cash generative unquoted companies, delivering consistently strong returns through its flexible mandate and highly selective investment approach. It occupies a unique position in the Listed Private Equity sector in having a portfolio of “high conviction” investments, underpinned by a portfolio of leading third party private equity funds, offering investors the best of both the direct and fund of funds worlds. The company recently released interim results, which showed NAV total return of 8.1% over the six months to 31 st July 2018, a continuation of the excellent long term track record the team have of outperforming the FTSE All-Share, which rose 5% over the same period. Over the past five years, the trust has delivered total returns of 66.8% compared to the FTSE AllShare return of 44.9%. Indeed, according to the company – if an investor had invested in the NAV or share price at the year end, or interim date in the last twenty years and held to 31 st July 2018, the investment would have outperformed the FTSE All-Share every time. The recent performance continues to be driven by earnings growth and realisation activity. The top 30 companies are being valued on a very similar multiple as at the year end, but earnings have grown by 14% over the last 12 months. In addition, NAV growth has also been boosted by realisations which continue apace, with 34 full exits and £85m of proceeds received in the six months (representing 14% of the opening portfolio value). These realisations were achieved at a 31% uplift to the previous valuation (last five years average of 33%) and overall averaged 2.3x the original cost (last five years average of 2.2x). Cash levels have modestly fallen over the six months, from 12% of net assets at the year end to 10% at 31 st July 2018. The managers invested £76m over the past six months, the majority of which (61%) was into the “high conviction” investments (companies that the team have a high conviction will outperform and have proactively increased exposure to). The team continues to reap the benefits of being part of ICG’s global platform, with a number of new high conviction investments directly sourced from ICG. The high conviction part of the portfolio has generated constant currency returns of c.18% pa over the past five years, and the team has an ambition to increase the proportion of the trust invested in the high conviction investments from the current 44% towards 50-60%. The team remains focused on investments with defensive growth characteristics in sectors with non-cyclical growth drivers, such as healthcare and education. ICG Enterprise trades on a discount of 14.4%, marginally narrower than peers. The trust has paid interim dividends this year of 10p, and the Board recently announced a move to a progressive annual dividend policy and quarterly payments. Based on last financial year’s dividend of 21p, the shares yield 2.3%. We will be meeting with the investment team in the coming week and will publish a fuller note post this.
At the latter stages of a bull market, enthusiasm can sometimes get the better of all of us. Investors always find ways to justify prices for companies at any stage in the cycle. To contrarians, the fact that the price of something has gone up tenfold doesn’t necessarily make it more attractive. However, momentum (as it is now called) is popularly touted as a sustainable investment strategy for the long term. Have the proponents of the ‘ever the greater fool’ theory had a re-brand? Within the world of investment trusts, ‘excessive optimism’ is more easily measured in terms of premiums to net asset value (NAV). This is particularly the case where the majority of a trust’s assets are themselves quoted. Of the 90 trusts (or investment companies) which currently stand on premiums, 55% have illiquid and/or unlisted assets representing greater than 50% of their portfolios. With these trusts, overenthusiasm is perhaps a little less easy to gauge – it is entirely possible that either valuations have moved on since the last official valuation, or that the board is being conservative in its valuations. Either way, each is likely to have its own story and a premium is not necessarily an indicator of excessive optimism. We list below the trusts which have greater than 50% of their assets in listed or publicly traded investments, yet trade at significant premiums. One of the common themes observable is that of strong relative performance over recent times. However, whether you are a contrarian or not (or a follower of momentum as a strategy), we believe that paying anything over a very modest premium is setting yourself up for a fall. Premiums are very rarely sustainable and tend to evaporate at inflection points, exacerbating a poor period of performance from a manager in absolute or relative terms. Indeed, the table below shows how quickly a premium can be eroded, with a corresponding effect on shareholder returns, irrespective of manager performance.
Companies: MAJE SUPP IBT SLPE ICGT IIT SEC JEO SYNC III
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FY20A results largely reflect a period prior to the Covid-19 lockdown, yet show Duke entering a more challenging FY21E with momentum. Yesterday's trading update demonstrated another notable rise in quarterly cash receipts for Q2/21, as royalty partner trading continues to improve. As some partners' forbearance measures will expire this month, Q3/21 receipts should continue this upwardly momentum. This opens the door to a return to cash dividends at some future point. Today, Duke also confirms it is now seeking new royalty partners, alongside follow-ons.
Companies: Duke Royalty
With the sale of the Singaporean operations for £1.6bn, the new CEO, Amanda Blanc, shows her intention to focus rapidly on its preferred markets (the UK, Ireland and Canada). The next candidate for sale is the French unit. This transaction is more complicated than the previous one, with the necessity to obtain the agreement of Afer, its key partner in France. With potential proceeds of £2.9bn, Aviva could reduce its debts significantly and allocate more capital to the UK bulk annuity business.
Companies: Aviva Plc
Oil posted its first back-to-back weekly loss since April's rout with the end of the summer driving season and concern about OPEC's production compliance weighing on prices.
Futures in New York edged up on Friday, but prices fell 6.1% this week coinciding with a retreat in U.S. equities. Traders are also examining data indicating the United Arab Emirates since July has been regularly exceeding its quota under a deal between the Organization of Petroleum Exporting Countries and its allies.
The uncertainty over how much supply OPEC+ is returning to the market adds another wrench in the recovery for oil prices still reeling from the pandemic-driven blow to consumption. While U.S. supplies had grown tighter in past months and producers were expected to restrain production amid a weak financial backdrop, stockpiles rose again last week for the first time since mid-July.
Companies: XOM HES KOS JSE 88E ADV CAD CHAR ECHO ENOG EME I3E PMG RBD SQZ SOU TLW VGAS WTE PHAR
What’s new: CLIG results have beaten Zeus expectations at revenue, EPS and DPS. On 14 July CLIG provided an update which revealed $338m of net inflows (6% of opening FUM), outperformance of the Emerging Market and Developed strategies (98% of FuM) and 25% rise in FuM in 4Q to $5.5bn and an indication that the final dividend would be not less than last year. In our opinion, key features of CLIG’s full year results include:
4.4% rise in revenue to £33.3m (Zeus forecast: £32.0m);
6.1% fall in adj PBT to £10.7m (Zeus forecast: £10.3m), excluding gains/losses on seed investment 9.4% rise to £11.6m (FY19: £10.6m);
3.2% rise in adj EPS to 35.3p (Zeus forecast 32.5p);
11.1% rise in final DPS to 20.0p (Zeus forecast: 18p) with the total DPS of 30p (Zeus forecast: 28p) is 11.1% above the prior year excluding special DPS.
Net cash of £14.6m (Zeus forecast: £10.0m)
The acquisition of KMI is expected to complete on 1 October 2020.
Companies: City of London Investment Group Plc
S4 Capital had an extraordinary week with strong interims and an impressive CMD accompanied by a further merger and topped off with winning its third Whopper. Interims were ahead of our expectations and we were particularly encouraged by LFL Gross Profit growth of +18% in July. The group announced the merger with Dare.Win, an award-winning digital creative agency which extends the geographical presence of MediaMonks to France. BMW and MINI consolidated its Pan-European account into a team led by MediaMonks, which is the third whopper account for S4 Capital, and notable in our view for being won in a pitch, rather than by land & expand, and being an automotive rather than technology client. The group held a three day CMD and our summary would be i) Day One demonstrated the compelling strategic logic and strict financial discipline underpinning the group ii) Day Two illustrated the already formidable partner/client list of S4 Capital, including Adobe, Amazon, Google and CAA and iii) Day Three highlighted the chemistry between the individual agencies brought together to form S4 Capital and the outstanding work that they produce. To reflect BMW and Dare.Win we raise our FY21 EPS forecast by +8% to 10.8p (was 10.0p) and continue to view 15p as a realistic target with further whoppers in prospect and the balance of the recent equity raise to deploy. On a 30x multiple, we raise our target price to 450p (was 375p) and retain our Buy recommendation.
Companies: S4 Capital Plc
Frontier IP has announced it has invested £320k in a £720k convertible loan financing of Nandi Proteins. Nandi Proteins is developing functional proteins for food ingredients aimed at reducing levels of fat, additives and gluten in processed foods addressing important social, health and environmental concerns about processed food. Frontier IP holds a 20.1% equity stake in Nandi Proteins; the last disclosed value of the holding was back in July 2017 at approx. £2.9m. Connected in part to the announcement today, we have used the opportunity to refresh our cash flow forecasts to reflect the net £2.1m proceeds of the July 2020 fundraise, the planned deployment of proceeds into bridge financing and refreshed our Sum-of-the-Parts valuation analysis to reflect the excellent portfolio progress made in FY’20. We anticipate a 50% increase in the unrealised profit on the revaluation of investments in FY’20e to £5.82m (vs. £3.0m prior estimate; £3.85m in FY’19). Applying the peer group multiple of 1.6x on Yr1 Book value of late-stage assets and incorporating the £2.1m proceeds and dilution associated with the July placing, implies an intrinsic value of 82p/share, 27% above the current share.
Companies: Frontier IP Group Plc
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
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.
Companies: Hgcapital Trust
Artemis Alpha Trust (ATS LN) has undergone a radical transformation over the past two years following a comprehensive strategic review. In April 2018, the trust held around 90 stocks with approximately 25% of NAV held in unquoted positions. Following the implementation of the review, Kartik Kumar (who has been with Artemis since 2012) was appointed lead manager alongside John Dodd remaining in place with an overseeing role. Kartik has since significantly reduced the number of stocks to a much more concentrated high conviction portfolio of just 36 stocks, and has significantly reduced the unquoted exposure to only 7%. This shift in focus has at the same time improved portfolio liquidity by moving up the market capitalisation scale.
Companies: Artemis Alpha Trust
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.
Companies: Legal & General Group Plc
Avation is a lessor of commercial aircraft to a diversified airline client base. In relation to the ongoing administration process of Virgin Australia, Avation has this morning announced that following the successful placing of five of the original thirteen aircraft that were on lease to the airline (two Fokker 100s plus three ATR 72-500s, with the latter having gone to two new customers), the remaining eight aircraft will be returned to Avation, being made up of three ATR 72-500s and five ATR 72-600s. Additionally, subject to approval at a creditors' meeting scheduled for 4 September 2020, the expected return to unsecured creditors is now anticipated at between 9-13% being paid prior to 30 June 2021.
Companies: Avation Plc
Deltic Energy is entering an exciting phase in its development based on its fully funded joint-venture projects with Shell. Preparations are now underway for an exploration well to test the Pensacola Zechstein prospect in the SNS (Southern North Sea). Deltic has indicated that it expects the current contingent well commitment to become firm on schedule by December 1, 2020. Drilling, according to Deltic, should follow in H2 2021. We see scope for positive news flow over the next few months, not least from the evaluation of Shell’s recently obtained processed 3-D seismic over Pensacola. Following Pensacola, the Selene prospect is scheduled to be drilled in mid-2022. The recent 32nd Round UKCS licence awards greatly expands Deltic’s exploration potential in the CNS and particularly the SNS Carboniferous fairway. Here some highly prospective acreage has been obtained.
Companies: Deltic Energy Plc
Belvoir’s H1 results evidence both strategic progress and profits growth. Given the challenges presented by COVID-19, this bodes very well for the group’s long-term growth potential. H1 adj. EPS grew +16%, the acquisition of Lovelle contributed well and in July the group entered into a strategic alliance with The Nottingham Building Society. Cash flow remained strong and the progressive dividend policy has been reinstated, with a 3.4p interim declared plus an additional 2p, as partial compensation for the missed 2019 final. With the resilience of lettings and the current record activity levels in sales and new mortgages the Board is optimistic that full-year results will hit its pre-COVID expectations and we make no changes to our PBT/EPS forecasts. Our target price of 233p (48% upside) assumes a 10% discount to the small/mid cap market. Given the above average performance in H1 and continued evidence that the long-term growth strategy is yielding value we see good upside to this target over time.
Companies: Belvoir Group Plc
S4 Capital has reported interim results that are ahead of our expectations and indicates an acceleration in the pace of recovery in Q3. LFL Gross Profit rose +12.2% in H1, with Q1 +18.8% and Q2 +6.5%. Encouragingly, after the trough of +3% in April, recovery accelerated to +5% in May, +11% in June and July was an impressive +18% ahead. PBT and EPS were both slightly better than our forecasts, while the group delivered a particularly impressive cash performance leaving it with net cash in June even before the £113m July placing. While we maintain our FY20 LFL Gross Profit growth forecast of +14% (Q3 +12%, Q4 +18%), the strong July result makes this look conservative. Further, the group awaits the outcome of two 'whopper' pitches each worth $20m+ with one due 'very shortly' and it can now see the pathway to 20 whoppers. S4 Capital is in a growth sweetspot and has already started to deploy the funds from the July placing to build capability in eCommerce (Orca Pacific) and econometrics/media optimisation (Brightblue). There are a number of moving parts in our forecasts and overall we retain our EPS estimates of 7p for this year, rising to 10p in 2021. We believe landing the whoppers combined with further M&A as the group deploys its recent equity raise & increased debt facility could see EPS of 15p next year.
RECI released its quarterly investor update on 17 August and factsheet on 8 September. This note updates investors with the key developments in both these documents. The key messages are i) robust performance of existing portfolio through COVID-19, ii) full interest and capital repayments expected on bond portfolio, iii) strong volume in investment pipeline, iv) lower-risk business is being added, v) pricing on new business 2%-5% above pre-COVID-19 levels like-for-like, vi) low gearing, and vii) stable dividends. All this appears anomalous with the 17% discount to NAV.
Companies: Real Estate Credit Investments