Strategic Equity Capital Plc - Half-year Report
Half Year Report and Financial Statements for the six months ended
The Board of
Highlights for the six months ended
-- NAV per share up 1.7%, despite challenging UK equity market conditions
-- Portfolio remains highly focused with 18 holdings and top 10 accounting
for 84% of NAV
# Fully invested, with around 1% of NAV held in cash at period end
-- 2022 measures to address share price discount now well established and
successful:
o Discount has tightened from 8.3% (before measures announced), to 7.3%
at period end, versus average sector1 discount which stands at 12.7%
o Ongoing commitment to share buyback from divestment proceeds,
including £15.4 million contribution from takeover of Medica Group plc
in July 2023
o Over 2.6 million shares repurchased during 2023 calendar year
o Gresham House commitment to invest £5 million in SEC shares now
complete investment manager now has an 11.1% equity stake
o Successful co-ordinated bookbuild in September 2023 to diversify SEC’s
shareholder register
o Ongoing investment manager fee reinvestment where share price discount
exceeds 5%
-- Performance contributors during the period include:
o XPS Pensions Group, which delivered expectation-beating results and divested a non-core business at a significantly accretive valuation multiple to the wider group o Fintel, a regulatory technology service provider, which has made several strategic acquisitions to increase capabilities and scale o Education service provider Tribal delivered strong performance and bid interest at a 42% premium from a US-based, private equity-owned, education business, although this takeover offer subsequently lapsed oTen Entertainment , a leadingUK tenpin bowling operator, received a recommended cash offer fromTrive Capital at a 33% premium to share price, completing post period end o Wilmington, the business information and training provider, delivered strong results and signalled expectations of continued strong organic growth
“Macroeconomic uncertainty, geopolitical volatility and weak equity fund flow dynamics have continued to act as a drag on
A benefit of these weaker equity markets, particularly in
SEC’s resilient positioning should enable it to continue to outperform in the current challenging environment and deliver attractive long-term capital growth when markets stabilise. The enhanced marketing programme and ongoing share buybacks should support the Company’s ability to maintain a structurally narrower share price discount to NAV over the coming years.”
“Although SEC lagged its peer group during the reporting period this followed a strong period of outperformance in the prior year. Absolute returns remained comfortably positive with the majority of portfolio companies seeing values increase during the period, despite volatile market conditions. The portfolio remains high-conviction and highly concentrated, invested in quality businesses which trade on attractive valuations that have the potential to be strategically valuable.
Takeover bids for portfolio companies are evidence to support our valuation thesis. We saw this with the successful bid for Medica in the first half of 2023 and continue to see it with recommended bids for
Across SEC’s small cap universe, valuations remain significantly undervalued relative to history, global equity indices and private M&A transaction multiples. However, the challenging macroeconomic backdrop further fuels the need for careful assessment of the bottom-up characteristics of each company.
In the long run, we expect that disparity to narrow. In the meantime, in conjunction with strong underlying fundamentals across the portfolio, this valuation dynamic adds to the margin of safety around prospective equity returns.”
FINANCIAL SUMMARY
______________________________________________________________________________ | |As at 31 Dec|As at 30 June| |Six months % | |Capital Return |2023 |2023 |As at 31 Dec 2022|change to 31 Dec| | | | | |2023 | |________________|____________|_____________|_________________|________________| |Net asset value | | | | | |(“NAV”) per |345.83p |342.47p |293.08p |1.0% | |shareǂ | | | | | |________________|____________|_____________|_________________|________________| |Ordinary share |320.50p |309.00p |275.00p |3.7% | |price | | | | | |________________|____________|_____________|_________________|________________| |Comparative |5,353.66 |4,970.43 |5,026.45 |7.7% | |index* | | | | | |________________|____________|_____________|_________________|________________| |Discount1 of | | | | | |Ordinary share |(7.3)% |(9.8)% |(6.2)% | | |price to NAV | | | | | |________________|____________|_____________|_________________|________________| |Average discount| | | | | |of Ordinary | | | | | |share price to |(8.0)% |(7.4)% |(7.8)% | | |NAV for the | | | | | |period1 | | | | | |________________|____________|_____________|_________________|________________| |Total assets |169,447 |170,784 |151,033 |(0.8)% | |(£’000) | | | | | |________________|____________|_____________|_________________|________________| |Equity | | | | | |shareholders’ |168,512 |170,223 |150,550 |(1.0)% | |funds (£’000) | | | | | |________________|____________|_____________|_________________|________________| |Ordinary shares | | | | | |in issue with |48,726,211 |49,704,711 |51,368,273 | | |voting rights | | | | | |________________|____________|_____________|_________________|________________|
ǂ Net asset value or NAV, the value of total assets less current liabilities. The net asset value divided by the number of shares in issue produces the net asset value per share.
* FTSE SmallCap (ex Investment Trusts) Index.
_____________________________________________________________________________ | |Six month period to 31|Year ended| | | |Dec | |Six month period to 31| |Performance | |30 June |Dec 2022 | | |2023 | | | | | |2023 | | |____________________|______________________|__________|______________________| |NAV total return for|1.7% |9.2% |(6.7)% | |the period1 | | | | |____________________|______________________|__________|______________________| |Share price total | | | | |return for the |4.6% |11.2% |(1.0)% | |period1 | | | | |____________________|______________________|__________|______________________| |Comparative index* | | | | |total return for the|9.6% |(0.4)% |(1.1)% | |period | | | | |____________________|______________________|__________|______________________| |Ongoing charges1 - |1.19% |1.22% |1.21% | |annualised | | | | |____________________|______________________|__________|______________________| |Ongoing charges1 | | | | |(including |1.43% |1.22% |1.21% | |performance fee) - | | | | |annualised | | | | |____________________|______________________|__________|______________________| |Revenue return per |2.74p |3.53p |2.16p | |Ordinary share | | | | |____________________|______________________|__________|______________________| |Dividend yield |n/a |0.81% |n/a | |____________________|______________________|__________|______________________| |Proposed final | | | | |dividend for the |n/a |2.50p |n/a | |period | | | | |____________________|______________________|__________|______________________|
Alternative Performance Measures
1 Please refer to pages 25 and 26 of the Half-Year Report for definitions and reconciliations of the Alternative Performance Measures for the Half-Year results.
_________________________________________ |Interim period’s Highs/Lows|High |Low | |___________________________|______|______| |NAV per Ordinary share |346.8p|317.9p| |___________________________|______|______| |Ordinary share price |323.5p|290.0p| |___________________________|______|______|
The full Half Yearly Report and Financial Statements can be accessed via the Company’s website at: www.strategicequitycapital.com or by contacting the Company Secretary as below.
Copies of the announcement, annual reports, quarterly update presentations and other corporate information can be found on the Company’s website at: www.strategicequitycapital.com
For further information, please contact:
Strategic Equity Capital plc (via Juniper Partners )
William Barlow (Chairman) +44 (0)131 378 0500
Liberum Capital Limited (Corporate Broker)
Chris Clarke
+44 (0)20 3100 2000
Darren Vickers Owen Matthews Juniper Partners Limited (Company Secretary)
+44 (0)131 378 0500
Steven Davidson KL Communications (PR Adviser)
Charles Gorman gh@kl-communications.comAdam Westall
+44 (0)20 3995 6673
Charlotte Francis
About
Actively managed, it maintains a highly-concentrated portfolio of 15-25 high-quality, dynamic,
SEC’s investment manager is
About
Further information on
CHAIRMAN’S STATEMENT
The six-month period to the end of December followed similar themes to the prior period, namely macroeconomic uncertainty, geopolitical volatility and weak equity fund flow dynamics, all of which acted as a drag on equity market performance. Ongoing uncertainty will continue to throw up more challenges as the current financial year progresses, but will also present opportunities for your Manager to uncover attractive long term investment opportunities.
The Company’s investment portfolio remains highly concentrated with almost 84% of the Company’s Net Asset Value (“NAV”) made up of the top ten holdings as at the end of
Weaker equity markets, particularly in the area of
The Company is positioned as a high conviction concentrated portfolio of high quality businesses on attractive valuations that have the potential to be strategically valuable. As such it remains susceptible to further approaches while valuation multiples remain depressed. This, together with the underlying financial health of the portfolio, provides the Board with confidence that our investment management team will be able to generate good long term returns for shareholders in the Company.
Performance
During the six months to
1 The recommended offer for Tribal Group lapsed following certain shareholder feedback, notwithstanding the 42% spot premium implied by the offer price.
Whilst positive, NAV performance during the period lagged the relevant index, although remains significantly ahead of the benchmark index over the three year period to
Development of the Company
Gresham House plc purchased 123,166 shares in the Company during the period ended
The Board is pleased with the progress made by Gresham House since
Discount and Discount Management
The average discount to NAV of the Company’s shares during the period was 8.0%, compared to the equivalent 7.5% figure from the prior year. The discount range was 11.6% to 4.6%.
Many of the measures implemented in Q1 2022 to address the persistent share price discount to NAV are now complete. These included a 10 per cent. tender offer; the implementation of a share buyback programme with 2,642,062 shares repurchased during the 2023 calendar year; and a commitment by Gresham House to use £5 million of its cash resources to purchase shares in the Company. Gresham House now has a 11.1% equity stake in the Company. These have been successful, resulting in the discount narrowing from 9.8% at the beginning of the period to 7.3% at the end of the period. For comparison, over the same period the average
Other measures, also implemented in Q1 2022, remain ongoing. These include: a buy back policy to return 50 per cent. of proceeds from profitable realisations, at greater than a 5 per cent. discount on an ongoing basis, in each financial year; an ongoing commitment by
Gearing and Cash Management
The Company has maintained its policy of operating without a banking loan facility. This policy is periodically reviewed by the Board in conjunction with the Manager and remains under review.
Dividend
The Directors continue to expect that returns for shareholders will derive primarily from the capital appreciation of the shares rather than from dividends. In line with previous years, the Board does not intend to propose an interim dividend.
Outlook
The global macroeconomic and geopolitical environment continues to drive uncertainty, although evidence of disinflation and growing consumer confidence should support both corporate earnings and equity valuations.
The resilient positioning of the Company’s portfolio should enable it to outperform in the current challenging environment and deliver attractive long-term capital growth when markets stabilise. The enhanced marketing programme and ongoing share buybacks should support the Company’s ability to maintain a structurally narrower share price discount to NAV over the coming year.
The Board, once again, thanks you for your continued support.
Chairman
INvestment Manager’s report
Investment Strategy
In the following section, we remind shareholders of our strategy and investment process.
Our Strategic Public Equity strategy
The appointment of Gresham House as Manager in
Investment focus
Our investment focus is to invest into high quality, publicly listed companies which we believe can materially increase their value over the medium to long term through strategic, operational or management change. To select suitable investments and to assist in this process we apply our proprietary Strategic Public Equity (“SPE”) investment strategy. This includes a much higher level of engagement with management than most investment managers adopt and is closer, in this respect, to a private equity approach to investing in public markets companies. Our path to achieving this involves constructing a high conviction, concentrated portfolio; focusing on quality business fundamentals; undertaking deep due diligence including engaging our proprietary network of experts and assessing ESG risks and opportunities through the completion of the ESG decision tool; and maintaining active stewardship of our investments. Through constructive, active engagement with the management teams and boards of directors, we seek to ensure alignment with shareholder objectives and to provide support and access to other resource and expertise to augment a company’s value creation strategy.
We are long-term investors and typically aim to hold companies for three-to-five years to back a thesis that includes an entry and exit strategy and a clearly identified route to value creation. We have clear parameters for what we will invest in and areas which we will deliberately avoid.
Smaller company focus
We believe that
The key attractions of smaller companies are:
Inefficient markets – Smaller companies remain under-researched and below the radar for most investors thus creating an opportunity for those willing to devote time and resource to this area.
A large universe
– Most
Valuation discounts – Such discounts, arising for whatever reason, present attractive entry points at which the intrinsic worth of a company’s long-term prospects are undervalued.
M&A activity – Smaller companies often offer strategic opportunities within their niche markets and can become attractive, bolt-on acquisitions to both trade and private equity buyers. These buyers provide an additional source of liquidity and realisation of value for smaller company investors.
Portfolio construction
We will maintain a concentrated portfolio of 15-25 high conviction holdings with prospects for attractive absolute returns over our investment holding period. The majority of portfolio value is likely to be concentrated in the top 10-15 holdings with other positions representing potential “springboard” investments where we are still undertaking due diligence or awaiting a catalyst to increase our stake to an influential, strategic level.
Bottom-up stock picking determines SEC’s sector weightings which are not explicitly managed relative to a target benchmark weighting. The absence of certain sectors such as Oil & Gas, Mining and Banks, as well as limited exposure to overtly cyclical parts of the market, and the absence of early stage or pre-profit businesses typically result in a portfolio weighted towards, but not exclusively, profitable cash generative service sector businesses particularly in Technology, Healthcare, Financial Services and Industrial Goods & Services. The underlying value drivers are typically company specific and exhibit limited correlation even within the same broad sectors. Figure 3 on page 8 of the Half-Year Report sets out the sector exposure of the Company as at
Our smaller company focus and specialist expertise leads us to prioritise companies with a market capitalisation between £100m and £300m at the point of investment. This focus, in combination with the size of the Company and its concentrated portfolio approach, provides the potential to build a strategic and influential stake in the highest conviction holdings. In turn this provides a platform to maximise the likelihood that our constructive active engagement approach will be effective and ultimately successfully contribute to shareholder value creation.
Once purchased there is no upper limit restriction on the market capitalisation of an individual investment. We will run active positions regardless of market capitalisation provided they continue to deliver the expected contribution to overall portfolio returns and subject to exposure limits and portfolio construction considerations.
The weighted average market capitalisation of portfolio holdings increased to £276m as at
We set out a description of the Top 10 holdings as at
Constructive Active Engagement Approach
As far as possible,
Operating with a highly-focused portfolio, SEC’s management team can build and maintain a deep understanding of its portfolio companies and their potential. The team engages with company management teams and boards in a number of areas including:
Strategy – Working with boards to ensure that business strategy and operations are effectively aligned with long term value creation and focused on building strategic value within a company’s market.
Corporate activity – Support for acquisition and divestment activity through advice, network introductions and the provision of cornerstone capital.
Capital allocation – Seeking to work with boards to optimise capital allocation by prioritising the highest return and value added projects and areas of focus for investment of both capital and resource.
Board composition – Ensuring that boards are appropriately balanced between executive and non-executive directors and contain the right balance of skills and experience; we actively use our talent network to introduce high quality candidates to enhance the quality of investee company boards as appropriate.
Management incentivisation – Ensuring that key management are appropriately retained and incentivised to deliver long term shareholder value with schemes that fit with GHAM’s principles and are well aligned to our objectives as shareholders.
ESG – Leveraging the GHAM sustainable investing framework and central resource to help to identify, understand and monitor key ESG risks and opportunities as well as seeking to drive enhancements to a company’s approach where there are critical material issues with a particular focus on corporate governance.
Investor Relations – Helping management teams to hone their equity story, select appropriate advisors and target their investor relations activities in the most effective way to ensure that value creation activity is understood and reflected by the market.
Engagement is undertaken privately, as far as possible. The team will also work to leverage its extensive network to the benefit of portfolio companies. We seek to make introductions to our network in as collaborative way as appropriate where we believe there is an opportunity to support initiatives to create shareholder value.
In summary, we follow a practice of constructive corporate engagement and aim to work with management teams in order to support and enhance shareholder value creation. We attempt to build a consensus with other stakeholders and prefer to work collaboratively alongside like minded co-investors.
Portfolio review for the six months to
Over the course of the six months to
Market Background
Over the six months to the end of December, the FTSE Small Cap (ex Investment Trusts) Index (“the index”) increased by 9.6% on a total return basis outperforming both the FTSE All Share (+5.1%) and the FTSE AIM (+2.3%). The first half of the period saw value outperform growth (as evidenced by the relative performance of the MSCI
The
Whilst this demonstrates the value opportunities in the
Source: Peel Hunt
Performance Review
The net asset value (“NAV”) increased 1.7%, on a total return basis, over the six months to the end of
The Company underperformed its benchmark during the period, as the FTSE Small Cap (ex Investment Trusts) Index increased by 9.6%. This reflected the relatively defensive positioning of the portfolio compared to the wider market – focused on high quality businesses in less cyclical parts of the market and with resilient business models and robust balance sheets. In particular, consumer discretionary businesses contributed strongly to index outperformance in the period, and represent a materially greater weight in the index relative to the Company.
Despite the market volatility experienced over the year, we remain confident about the resilient underlying fundamentals of the portfolio companies and their ability to withstand the macroeconomic headwinds that look set to persist through the current financial year.
Top Five Absolute Contributors to Performance
The top five absolute contributors to the Company’s NAV performance in the six months to
2
The shareholder vote for Tribal Group’s Recommended Cash Offer was narrowly defeated in
Bottom Five Absolute Contributors to Performance
In challenging equity market conditions certain portfolio holdings suffered from share price weakness during the period, typically in response to short term developments that, we believe, do not fundamentally change the long term values of the holdings. The largest detractors included
R&Q Insurance Holdings
, a provider of core services of legacy acquisitions and program management, following the proposed sale of the company’s Program Management business at a valuation materially below market expectations;
Inspired Energy
, an energy procurement and ESG consultancy, despite strong current trading and limited newsflow;
Ricardo
, an engineering, environmental and strategic consultancy, following the release of an in-line full year 2023 trading update, which indicated some downward pressure on outer year forecasts due to higher interest costs;
Iomart
, a datacentre and cloud services provider, on no specific news flow; and
Portfolio Review
The portfolio remained highly focused with a total of 18 holdings, of which the top 10 accounted for almost 84% of the NAV at the end of the period. Around 1% of the NAV was held in cash at period end.
Over the period positions in Medica (IRR [1] of 25% / 12%) and Carr’s Group (IRR [2] of 17%) were exited.
The Company currently has a number of key holdings that we believe trade at material valuation discounts to comparable private market transaction values, which provides a strong margin of safety underpinning the long term upside potential of the portfolio.
Changes in sector weightings have seen exposure to Healthcare decrease from 21.6% to 3.5%, with exposure to Financial Services decreasing from 32.6% to 27.0%, and exposure to Technology increasing from 10.9% to 16.7%.
Top 10 Investee Company Review
______________________________________________________________________________ |Company |Investment Thesis |Developments | |_____________________|___________________________|____________________________| | |# Leading ‘challenger’ | | | | brand in the pensions |# Divested a non-core | | | administration and advice| business at a | | | market with organic | significantly accretive | | | market share opportunity | valuation multiple to the | | | following industry | broader group | | | consolidation |# Strong visibility of | | |# Highly defensive – high | regulatory changes driving| |XPS Pensions | degree of revenue | sector demand | | | visibility and largely |# Strong pipeline of | | | non-discretionary, | opportunities as the | | | regulation driven client | current yield environment | | | activity with inflation | encourages corporates to | | | protected contracts | explore pension risk | | |# Trades at a material | transfer solutions | | | discount to comparable |# Strong cash generation | | | M&A transactions despite | supporting growing | | | competitive positioning, | dividend | |_____________________|__operational_delivery_____|____________________________| | |# Leading UK provider of | | | | technology | | | |enabled regulatory | | | |solutions and services to |# New LTIP scheme | | |IFAs, financial | implemented which strongly| | |institutions and other | aligns to absolute equity | | |intermediaries | value creation | |Fintel | |# Execution of several | | |# Strategically valuable | small, strategic bolt-on | | | technology platform with | acquisitions | | | opportunity to drive |# Cash generation strong | | | material growth in | resulting in significant | | | revenues and margins | balance sheet de-gearing | | | through supporting | | | | customers’ digitisation | | |_____________________|__journeys_________________|____________________________| | |# Datacentre and cloud | | | | services provider |# HY24 results demonstrating| | |# Structurally growing | 18% YoY revenue growth | |Iomart | market with particular |# New CEO with a strong | | | demand for hybrid cloud | pedigree in IT services | | |# Exceptional quality of | (incl. BT, Equiniti) | | | earnings with >90% | | |_____________________|__recurring_revenue________|____________________________| | |# UK focused wealth |# Improvement in net fund | | | management platform; | flows despite market | | | structural growth given | weakness | | | continuing transition to |# Strategic technology | | | self-investment | partnership with SS&C | |Brooks Macdonald |# Opportunity to leverage | underpins future | | | operational investments | scalability | | | to grow margin and |# Continued sector M&A | | | continue strong cash flow| activity (e.g. 7IM / | | | generation | September 2023) at | | |# A consolidating market; | significant valuation | | | opportunity for Brooks as| premia to Brooks | |_____________________|__both_predator_and_prey___|__Macdonald’s_rating______ | | |# Global strategic, |# Successfully extended its | | | environmental and | McLaren relationship (now | | | engineering consultancy | in its fourth generation) | | |# Ongoing strategic | demonstrating the | | | transformation to refocus| stickiness of Ricardo’s | | | and prioritise the | customer relationships | |Ricardo | business towards higher |# Strong FY23 results with a| | | growth, higher margin and| record orderbook and | | | less capital intensive | particularly high growth | | | activities | in its Environmental & | | |# Strong market position | Energy Transition | | | underpinned by | divisions, in line with | | | significant sector | the strategic ambition | |_____________________|__expertise________________|____________________________| | |# International provider of| | | | B2B data and training in | | | | the compliance, |# Profit and cash generation| | | insurance, financial and | ahead of expectations | | | healthcare sectors | driving forecast upgrades | |Wilmington |# New top team have |# Recovery in live events | | | reshaped the strategy and| underpinning growth and | | | portfolio of businesses | margin recovery | | |# Operational momentum |# Sector consolidation | | | driving revenue and | underlines valuation | | | margin growth with | opportunity | | | potential for a valuation| | |_____________________|__re-rating________________|____________________________| | |# International provider of| | | | student administration | | | | software with market | | | | leading positions in the | | | | UK, Australia and NZ |# Recommended Cash Offer | | |# Strong defensive | announced from Ellucian | | | characteristics with high| (Blackstone / Vista backed| |Tribal | visibility of earnings | competitor) at a 42% spot | | |# Transition to cloud-based| premium – N.B. the offer | | | platform has potential to| subsequently lapsed | | | drive growth, margins and| following lack of support | | | rating | from Tribal’s shareholders| | |# Low valuation relative to| | | | software sector averages | | | | and sector transaction | | |_____________________|__multiples________________|____________________________| | |# Leading online travel | | | | agent serving the global |# Revenues have recovered to| | | niche segment of | pre- Covid levels with | | | hostelling | further volume recovery | | |# Business rationalised and| still to come | |Hostelworld | optimised during Covid |# Average order value and | | | with enhanced customer | customer lifetime values | | | value proposition | improving | | |# Recovery from Covid |# Technology and app | | | market dynamics well | investment starting to | | | advanced with strong | deliver a positive impact | |_____________________|__margin_recovery_potential|____________________________| | |# Leading provider of | | | | services to the UK | | | | residential property | | | | sector with activities |# Depressed UK residential | | | spanning mortgage | housing transaction | | | broking, surveying and | volumes have provided a | | | real estate agencies | challenging backdrop, | | |# Significant opportunity | particularly for LSL’s | |LSL Property Services| to reallocate capital to | surveying business | | | the Financial Services |# Successful transition of | | | division which is | LSL’s estate agency | | | strategically valuable, | business from owned to | | | high growth and | franchised | | | underappreciated by the |# Significant open market | | | market | share buying (December | | |# Potential for a material | 2023) by LSL’s Chair | | | re-rating as business mix| | | | shifts to higher quality | | |_____________________|__less_cyclical_divisions__|____________________________| | |# UK B2B corporate energy | | | | services and procurement | | | | specialist with strong | | | | ESG credentials | | | |# Leading player in a | | | | fragmented industry; |# High energy costs have | |Inspired Energy | significant opportunity | driven accelerated growth | | | to gain market share | in optimisation services | | | through client wins, |# ESG revenues accelerating | | | proposition extension and| from a low base | | | M&A | | | |# Valued at a substantial | | | | discount to comparable | | | | private market | | |_____________________|__transaction_multiples____|____________________________|
Outlook
The Manager’s core planning assumption is that continued geopolitical and macroeconomic uncertainty will drive market volatility throughout 2024. However, signs of disinflation and warming consumer confidence provide a helpful tailwind for business performance entering into 2024. As in prior periods, it is likely that increasing focus on company fundamentals and valuation discipline will be required to outperform in this environment, which plays to the strengths of the Company’s investment strategy and the Manager’s approach.
The Manager does not seek to make major macroeconomic predictions or to tilt portfolio construction materially in any direction to mitigate or benefit from macro trends. Rather the core focus remains building a portfolio bottom up by investing in high-quality, resilient companies exposed to structural growth, key competitive advantages or self-help opportunities and maintain valuation discipline such that they could drive attractive investment returns over the medium-to-long term regardless of the economic environment and where the Manager’s constructive active engagement approach can help to support or unlock that potential.
The Manager continues to believe that stock-level volatility across the market, while creating some challenges, will provide an attractive environment for investors to back quality companies with attractive long-term structural capital growth at reasonable valuations across the market cap spectrum. The economic environment and market discontinuity will provide agile smaller businesses with strong management teams the opportunity to take market share and build strong, enduring franchises.
Continuing the theme from the first half of the calendar year, levels of takeover activity within the
We continue to believe that our fundamental focused investment style has the potential to outperform over the long term. We see significant opportunities for long term investors to back quality growth companies at attractive valuations in an environment where agile smaller businesses with strong management teams can take market share and build strong long-term franchises. We will maintain our focus on building a high conviction portfolio of less cyclical, high quality, strategically valuable businesses which we believe can deliver strong returns through the market cycle regardless of the performance of the wider economy.
Portfolio as at
% of % of
Date of Cost Valuation invested invested % of
Company Sector first portfolio portfolio net
Classification investment £’000 £’000 at 31 at 30 assets
December June 2023
2023
XPS Pensions Group Business Jul 2019 16,851 33,994 20.4 15.0 20.2
Services
Fintel Financial Oct 2020 13,771 18,182 10.9 6.4 10.8
Services
Iomart Technology Mar 2022 16,272 15,226 9.2 5.4 9.0
Brooks Macdonald Financial Jun 2016 15,302 14,750 8.9 7.0 8.8
Services
Ricardo Business Sep 2021 13,579 13,946 8.4 6.8 8.3
Serivices
Wilmington Media Oct 2010 6,818 11,490 6.9 5.6 6.8
Tribal Technology Dec 2014 11,742 9,110 5.5 3.9 5.4
Hostelworld Travel & Oct 2019 6,505 8,826 5.3 4.8 5.2
Leisure
LSL Property Financial Mar 2021 13,256 7,935 4.8 5.1 4.7
Services Services
Inspired Energy Business Jul 2020 13,754 7,318 4.4 6.1 4.3
Services
Benchmark Healthcare Jun 2019 6,734 5,837 3.5 3.6 3.5
Netcall Technology Mar 2023 4,367 3,848 2.3 1.8 2.3
Ten Entertainment Travel & Oct 2020 1,592 3,745 2.2 3.3 2.2
Leisure
Trufin Financial Jul 2023 4,111 3,253 2.0 - 1.9
Services
Property Franchise Real Estate Oct 2023 3,000 3,205 1.9 - 1.9
Belvoir Group Real Estate Oct 2023 2,499 2,830 1.7 - 1.7
Team 17 Media Dec 2023 1,487 1,492 0.9 - 0.9
R&Q Insurance Financial Jun 2022 10,308 1,406 0.8 4.3 0.8
Holdings Services
Total investments 166,393 98.7
Cash 2,979 1.8
Net current (860) (0.5)
liabilities
Total 168,512 100.0
shareholders'equity
Statement of Directors’ Responsibilities, Going Concern, Principal Risks and Uncertainties
Statement of Directors’ Responsibilities
The Directors confirm that to the best of their knowledge:
-- the condensed set of financial statements contained within the
Half-Yearly Report has been prepared in accordance with IAS 34, ‘Interim
Financial Reporting’, and give a true and fair view of the assets,
liabilities, financial position and profit of the Company as required by
Disclosure Guidance and Transparency Rules (“DTR”) 4.2.4R;
-- the Half-Yearly Report includes a fair review of the information
required by:
(a) DTR 4.2.7 of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and
(b) DTR 4.2.8 of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period; and any changes in the related party transactions described in the last Annual Report that could do so.
This Half-Yearly Report was approved by the Board of Directors on
Going Concern
The Company has adequate financial resources to meet its investment commitments and, as a consequence, the Directors believe that the Company is well placed to manage its business risks. After making appropriate enquiries and due consideration of the Company’s cash balances, the liquidity of the Company’s investment portfolio and the cost base of the Company, the Directors have a reasonable expectation that the Company has adequate available financial resources to continue in operational existence for the foreseeable future and accordingly have concluded that it is appropriate to continue to adopt the going concern basis in preparing the Half-Yearly Report, consistent with previous periods.
Principal Risks and Uncertainties
The overriding risks and uncertainties to an investor relate to the markets on which are traded the Company’s shares and the shares of the companies in which the Company invests.
The principal risks and uncertainties are set out on pages 17 and 18 of the Annual Report for the year ended
The Company’s principal risks and uncertainties have not changed since the date of the Annual Report and are not expected to change for the remaining six months of the Company’s financial year.
Statement of Comprehensive Income
for the six month period to
Six month period ended Year ended Six month period to
31 December 2023 30 June 2023 31 December 2022
unaudited audited unaudited
Revenue Capital Revenue Capital Revenue Capital
Total Total Total
Note return return return return return return
£'000 £’000 £'000
£'000 £'000 £’000 £’000 £'000 £'000
Investments
Gains/
(losses) on
investments (13,459
held at fair 6 - 1,573 1,573 - 10,602 10,602 - (13,459) )
value through
profit or
loss
- 1,573 1,573 - 10,602 10,602 - (13,459) (13,459
)
Income
Dividends 2 2,344 - 2,344 3,782 - 3,782 2,124 - 2,124
Interest 2 31 - 31 78 - 78 35 - 35
Total income 2,375 - 2,375 3,860 - 3,860 2,159 - 2,159
Expenses
Investment 8 (616) - (616) (1,228) - (1,228) (603) - (603)
Manager’s fee
Performance 9 - (369) (369) - - - - - -
fee
Other 3 (408) - (408) (803) - (803) (397) - (397)
expenses
Total (1,024) (369) (1,393) (2,031) - (2,031) (1,000) - (1,000)
expenses
Net return (12,300
before 1,351 1,204 2,555 (1,829) 10,602 12,431 1,159 (13,459) )
taxation
Taxation - - - - - - - - -
Net return
and total (12,300
comprehensive 1,351 1,204 2,555 (1,829) 10,602 12,431 1,159 (13,459) )
income for
the period
pence pence pence pence pence pence pence pence pence
Return per
Ordinary 5 2.74 2.44 5.18 3.53 20.44 23.97 2.16 (25.08) (22.92)
share
The total column of this statement represents the Statement of Comprehensive Income. The supplementary revenue and capital columns are both prepared under guidance published by the AIC.
All items in the above statement derive from continuing operations. No operations were acquired or discontinued in the period.
The notes form an integral part of these Half-Yearly financial statements.
Statement of Changes in Equity
for the six month period to
Share Capital
Share Special Capital Revenue
premium redemption Total
Note capital reserve reserve reserve
account reserve £'000
£'000 £'000 £'000 £'000
£'000 £’000
For the six
month period
to 31December
2023
unaudited
1 July 2023 6,353 11,300 3,590 142,952 2,897 3,131 170,223
Net return
and total
comprehensive - - - 1,204 - 1,351 2,555
income for
the period
Dividend paid 4 - - - - - (1,231) (1,231)
Share - - (3,035) - - - (3,035)
buy-backs
31 December 6,353 11,300 555 144,156 2,897 3,251 168,512
2023
For the year
to 30 June
2023 audited
1 July 2022 6,353 11,300 19,767 132,350 2,897 2,363 175,030
Net return
and total
comprehensive
income for - - - 10,602 - 1,829 12,431
the
year
Dividend paid 4 - - - - - (1,061) (1,061)
Share - - (16,177) - - - (16,177)
buy-backs
30 June 2023 6,353 11,300 3,590 142,952 2,897 3,131 170,223
For the six
month period
to 31December
2022
unaudited
1 July 2022 6,353 11,300 19,767 132,350 2,897 2,363 175,030
Net return
and total
comprehensive - - - (13,459) - 1,159 (12,300)
income for
the period
Dividend paid 4 - - - - - (1,061) (1,061)
Share - - (11,119) - - - (11,119)
buy-backs
31 December 6,353 11,300 8,648 118,891 2,897 2,461 150,550
2022
The notes form an integral part of these Half-Yearly financial statements.
Balance Sheet
as at
As at As at As at
31 December 30 June 31 December
Note 2023 2023 2022
unaudited audited unaudited
£'000 £'000 £'000
Non-current assets
Investments held at fair value through 6 166,393 169,274 140,283
profit or loss
Current assets
Trade and other receivables 75 268 27
Cash and cash equivalents 2,979 1,242 10,723
3,054 1,510 10,750
Total assets 169,447 170,784 151,033
Current liabilities
Trade and other payables (935) (561) (483)
Net assets 168,512 170,223 150,550
Capital and reserves
Share capital 7 6,353 6,353 6,353
Share premium account 11,300 11,300 11,300
Special reserve 555 3,590 8,648
Capital reserve 144,156 142,952 118,891
Capital redemption reserve 2,897 2,897 2,897
Revenue reserve 3,251 3,131 2,461
Total shareholders’ equity 168,512 170,223 150,550
pence pence pence
Net asset value per share 345.83 342.47 293.08
number number number
Ordinary shares in issue 7 48,726,211 49,704,711 51,368,273
The notes form an integral part of these Half-Yearly financial statements.
Statement of Cash Flows
for the six month period to
Six month Six month
Year ended
period to period to
30 June
31 December 31 December
2023
2023 2022
audited
unaudited unaudited
£’000
£'000 £'000
Operating activities
Net return before taxation 2,555 12,431 (12,300)
Adjustment for (gains)/losses on investments (1,573) (10,602) 13,459
Operating cash flows before movements in 982 1,829 1,159
working capital
Decrease in receivables 321 374 615
Increase/(decrease) in payables 209 22 (101)
Purchases of portfolio investments (32,988) (30,473) (8,264)
Sales of portfolio investments 37,479 30,463 13,229
Net cash flow from operating activities 6,003 2,215 6,638
Financing activities
Equity dividend paid (1,231) (1,061) (1,061)
Shares bought back in the period (3,035) (16,275) (11,217)
Net cash flow from financing activities (4,266) (17,336) (12,278)
Increase/(decrease) in cash and cash 1,737 (15,121) (5,640)
equivalents for period
Cash and cash equivalents at start of period 1,242 16,363 16,363
Cash and cash equivalents at 31 December 2,979 1,242 10,723
The notes form an integral part of these Half-Yearly financial statements.
Notes to the Financial Statements
1.1 Corporate information
The Company carries on business as an investment trust within the meaning of Sections 1158/1159 of the Corporation Tax Act 2010.
1.2 Basis of preparation/statement of compliance
The condensed Half-Yearly financial statements of the Company have been prepared on a going concern basis and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. They do not include all the information required for a full report and financial statements and should be read in conjunction with the report and financial statements of the Company for the year ended
The condensed Half-Yearly financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. The financial statements for the six month periods to
Convention
The financial statements are presented in Sterling, being the currency of the Primary Economic Environment in which the Company operates, rounded to the nearest thousand.
Segmental reporting
The Directors are of the opinion that the Company is engaged in a single segment of business, being investment business.
1.3 Accounting policies
The accounting policies, presentation and method of computation used in these condensed financial statements are consistent with those used in the preparation of the financial statements for the year ended
1.4 New standards and interpretations not applied
Implementation of changes and accounting standards in the financial period, as outlined in the financial statements for the year ended
2. Income
Six month period to Year ended 30 June Six month period to 31
31 December 2023 2023 December 2022
unaudited audited unaudited
£'000 £'000 £'000
Income from
investments
UK dividend income 2,344 3,782 2,124
Other operating
income
Liquidity interest 31 78 35
Total income 2,375 3,860 2,159
3. Other expenses
Six month period to Year ended 30 June Six month period to
31 December 2023 2023 audited 31 December 2022
unaudited unaudited
£'000 £'000 £'000
Secretarial services 92 171 85
Auditor’s
remuneration for:
Audit services 39 65 36
Directors’ 92 161 74
remuneration
Other expenses 185 406 202
405 803 397
4. Dividend
The Company paid a final dividend of 2.50p in respect of the year ended
5. Return per Ordinary share
Six month period to Year ended Six month period to
31 December 2023 30 June 2023 31 December 2022
Revenue Capital Revenue Capital Revenue Capital
Total Total Total
return return return return return return
pence pence pence
pence pence pence pence pence pence
Return per
Ordinary 2.74 2.44 5.18 3.53 20.44 23.97 2.16 (25.08) (22.92)
share
Returns per Ordinary share are calculated based on 49,290,313 (
6. Investments
31 December 2023
£’000
Quoted investments at fair value through profit or loss 166,393
The Company is required to classify its investments using a fair value hierarchy that reflects the subjectivity of the inputs used in measuring the fair value of each asset. The fair value hierarchy has the following levels:
Investments whose values are based on quoted market prices in active markets are classified within level 1 and include active listed equities. The Company does not adjust the quoted price for these instruments.
The definition of level 1 inputs refers to ‘active market’ which is a market in which transactions take place with sufficient frequency and volume for pricing information to be provided on an ongoing basis. Due to the liquidity levels of the markets in which the Company trades, whether transactions take place with sufficient frequency and volume is a matter of judgement, and depends on the specific facts and circumstances. The Investment Manager has analysed trading volumes and frequency of the Company’s portfolio and has determined these investments as level 1 of the hierarchy.
Financial instruments that trade in markets that are not considered to be active but are valued based on quoted market prices, dealer quotations or alternative pricing sources supported by observable inputs are classified within level 2. As level 2 investments include positions that are not traded in active markets and/or are subject to transfer restrictions, valuations may be adjusted to reflect illiquidity and/or non-transferability, which are generally based on available market information.
Level 3 instruments include private equity, as observable prices are not available for these securities the Company has used valuation techniques to derive the fair value. In respect of unquoted instruments, or where the market for a financial instrument is not active, fair value is established by using recognised valuation methodologies, in accordance with
The level in the fair value hierarchy within which the fair value measurement is categorised is determined on the basis of the lowest level input that is significant to the fair value of the investment.
Financial instruments at fair value through profit or loss as at
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
Equity investments 166,393 - - 166,393
Liquidity funds - 1 - 1
Total 166,393 1 - 166,394
A list of the portfolio holdings is given in the Investment Manager’s report above.
31 December 2023
Total
£’000
Analysis of capital gains(losses):
Gains on sale of investments 12,901
Movement in investment holding gains (11,328)
1,573
7. Share capital
31 December
Number 2023
£’000
Allotted, called up and fully paid Ordinary shares of
10p each:
Ordinary shares in circulation at 30 June 2023 63,529,206 6,353
Shares held in treasury at 30 June 2023 (13,824,495) (818)
Ordinary shares in issue per Balance Sheet at 30 June 49,704,711 5,535
2023
Shares bought back during the period to be held in (978,500) (98)
treasury
Ordinary shares in issue per Balance Sheet at 31 48,726,211 5,437
December 2023
Shares held in treasury at 31 December 2023 14,802,995 916
Ordinary shares in circulation at 31 December 2023 63,529,206 6,353
8. Investment Manager’s fee
A basic management fee is payable to the Investment Manager at the annual rate of 0.75% of the NAV of the Company. The basic management fee accrues daily and is payable quarterly in arrears.
The Investment Manager is also entitled to a performance fee, details of which are set out below.
9. Performance fee arrangements
The Company’s performance is measured over rolling three-year periods ending on 30 June each year, by comparing the NAV total return per share over a performance period against the total return performance of the FTSE Small Cap (ex Investment Companies) Index. A performance fee is payable if the NAV total return per share (calculated before any accrual for any performance fee to be paid in respect of the relevant performance period) at the end of the relevant performance period exceeds both:
(i) the NAV per share at the beginning of the relevant performance period as adjusted by the aggregate amount of (a) the total return on the FTSE Small Cap (ex Investment Companies) Index (expressed as a percentage) and (b) 2.0% per annum over the relevant performance period (“Benchmark NAV”); and
(ii) the high watermark (which is the highest NAV per share by reference to which a performance fee was previously paid).
The Investment Manager is entitled to 10% of any excess of the NAV total return over the higher of the Benchmark NAV per share and the high watermark. The aggregate amount of the Management Fee and the Performance Fee in respect of each financial year of the Company shall not exceed an amount equal to 1.4% per annum of the NAV of the Company as at the end of the relevant financial period.
A performance fee of £369,000 has been accrued in respect of the six months ended
10. Taxation
The tax charge for the half year is £nil (
Alternative Performance Measures
Alternative Performance Measures are numerical measures of the Company’s current, historical or future performance, financial position or cash flows, other than financial measures defined or specified in the applicable financial framework. The Company’s applicable financial framework includes IFRS and the AIC SORP. The Directors assess the Company’s performance against a range of criteria which are viewed as particularly relevant for closed-end investment companies. The Alternative Performance Measures chosen are widely used in the investment trust sector and thus provide information for users of the accounts to compare the results with other closed-end investment companies.
Discount
The amount by which the Ordinary share price is lower than the NAV per Ordinary share. The discount is normally expressed as a percentage of the NAV per share.
Six month Six month
period to Year ended period to
31 December 30 June 31 December
2023 2023 2022
NAV per Ordinary share a 345.83p 342.47p 293.08p
Share price b 320.50p 309.00p 275.00p
Discount c c=(b-a)/a 7.3% 9.8% 6.2%
Average discount
The average discount is calculated by taking the average of each day’s share price discount to NAV over the course of the period. The discount range during the six month period to
NAV Total return
NAV Total return is the increase/(decrease) in NAV per Ordinary share plus dividends paid, which are assumed to be reinvested at the time the share price is quoted ex-dividend.
Six month Six month
period to Year ended period to
31 December 30 June 31 December
2023 2023 2022
Opening NAV 342.47p 316.21p 316.21p
Increase/(decrease) in NAV 3.36p 26.26p (23.13)p
per Ordinary share
Closing NAV 345.83p 342.47p 293.08p
% Increase/(decrease) in NAV 1.0% 8.3% (7.3)%
Impact of dividends reinvested 0.7% 0.9% 0.6%
NAV total return 1.7% 9.2% (6.7)%
Share price total return
Share price total return is the increase/(decrease) in share price plus dividends paid, which are assumed to be reinvested at the time the share price is quoted ex-dividend.
Six month Six month
period to Year ended period to
31 December 30 June 31 December
2023 2023 2022
Opening share price 309.00p 280.00p 280.00p
Increase/(decrease) in share price 11.50p 29.00p (5.00)p
Closing share price 320.50p 309.00p 275.00p
% Increase/(decrease) in share price 3.7% 10.4% (1.8)%
Impact of dividends reinvested 0.9% 0.8% 0.8%
Share price total return 4.6% 11.2% (1.0)%
Ongoing charges - annualised
Ratio of expenses as a percentage of average daily shareholders’ funds calculated as per the
Six month Six month
Year ended
period to period to
31 December 30 June 31 December
2023 2023 2022
Investment management fee 1,225 1,228 1,186
Administrative expenses 731 803 793
Non recurring costs in
relation to the recruitment
of Directors - (48) (48)
Ongoing charges a 1,956 1,983 1,931
Average net assets b 164,971 162,849 159,587
Ongoing charges ratio (%) c c=a/b 1.19% 1.22% 1.21%
Ongoing charges (including performance fee) - annualised
As per above, with the addition of the performance fee.
Six month Six month
period to Year ended period to
31 December 30 June 31 December
2023 2023 2022
Investment management fee 1,225 1,228 1,186
Administrative expenses 762 803 793
Non recurring costs in
relation to the recruitment
of Directors - (48) (48)
Performance fee 369 - -
Ongoing charges (including
performance fee) a 2,356 1,983 1,931
Average net assets b 164,971 162,849 159,587
Ongoing charges
ratio (including
performance fee) (%) c c=a/b 1.43% 1.22% 1.21%
Directors and Advisors
Directors
Auditor
Broker
Custodian
Depositary
Investment Manager
80 Cheapside
Tel: 020 3837 6270
Registrar
The Pavilions
Tel: 0370 707 1285
Website: www.computershare.com
Solicitor
1 Finsbury Circus
Company Secretary and Administrator
Tel: 0131 378 0500
Registered Office
c/o
1 Finsbury Circus
Shareholder Information
Investment Policy
The Company invests primarily in equities quoted on markets operated by the
The Company may invest up to 20% of its gross assets at the time of investment in unquoted securities, provided that, for the purpose of calculating this limit, any undrawn commitments which may still be called shall be deemed to be an unquoted security.
The maximum investment in any single investee company will be no more than 15% of the Company’s investments at the time of investment.
The Company will not invest more than 10%, in aggregate, of the value of its total assets at the time the investment is made in other listed closed-end investment funds.
Other than as set out above, there are no specific restrictions on concentration and diversification. The Board does expect the portfolio to be relatively concentrated, with the majority of the value of investments typically in the securities of 10 to 15 issuers across a range of industries. There is also no specific restriction on the market capitalisation of securities into which the Company will invest, although it is expected that the majority of the investments by value will be invested in companies too small to be considered for inclusion in the
The Company’s Articles of Association permit the Board to take on borrowings of up to 25% of the NAV at the time the borrowings are incurred for investment purposes.
Financial calendar
Company’s year-end 30 June
Annual results announced September
Annual General Meeting November
Company’s half-year 31 December
Half-yearly results announced February/March
Share price
The Company’s Ordinary shares are premium listed on the main market of the
Share dealing
Shares can be traded through your usual stockbroker.
Share register enquiries
The register for the Ordinary shares is maintained by
NAV
The Company’s NAV is announced daily to the
Website
Further information on the Company can be accessed via the Company’s website: www.strategicequitycapital.com
An investment company as defined under Sections 833 of the Companies Act 2006
REGISTERED IN
A member of the
The Half Yearly Report will be posted to shareholders shortly. The Report will also be available for download from the following website: www.strategicequitycapital.com or on request from the Company Secretary.
National Storage Mechanism
A copy of the Half Yearly Report will be submitted shortly to the National Storage Mechanism and will be available for inspection at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism
Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into, or forms part of this announcement.
[1]
12% reflects the IRR from the Company’s initial investment in Medica in 2017. 25% reflects the IRR since
[2] Annualised figure based on c.6 month holding period.
