TIDMGHS
RNS Number : 9064E
Gresham House Strategic PLC
11 November 2020
Gresham House Strategic plc
Interim results for the six months to 30 September 2020
Realisations, new investments and portfolio re-balancing drive
further NAV growth
Gresham House Strategic plc (GHS or the Company) is pleased to
announce its unaudited half year results for the period ended 30
September 2020.
Financial highlights
-- Strong NAV recovery, with NAV Total Return of 15.1% in the
period versus the FTSE All Share Total Return of 7.3% and in line
with the FTSE Small Cap Index Total Return of 15.2%
-- GBP9.1m of new investments during the period
-- 20% increase in the proposed interim dividend
-- NAV Total Return of 29.9% since inception [1] - outperforming
comparator indices such as the FTSE Small Cap Index ex-Investment
Trusts by 28.1%
Investment Management highlights
-- Four significant investments - GBP2.4m equity investment into
Flowtech Fluidpower plc, GBP2.6m into RPS Group plc, GBP2.1m into
Van Elle Holdings plc and a significant upweighting of Fulcrum
Utility Services plc. Three further new initial investments
-- Full exit of IMImobile plc shares, generating a +23.8% IRR
and 1.85x Money Multiple - GBP14.6m realised profit
-- Further portfolio re-balancing progress within the period
with three other investments fully exited, including receiving a
premium on the Convertible Loan Note held in Be Heard Group plc
which was subject to a takeover
-- Re-negotiation of Convertible Loan Note at Northbridge
Industrial Services plc, reducing conversion price
-- Material engagement across the portfolio supporting the
unlocking and driving of shareholder value
-- Positive share price performances from recent new investments
Fulcrum Utility Services plc, Van Elle Holdings plc and ULS
Technology plc and resilient financial results from Augean plc
David Potter, Chairman of Gresham House Strategic plc,
commented:
"In difficult times for markets and the economy, we have full
confidence in the investment team, strategy and portfolio. We look
forward to further NAV growth, while narrowing the share price
discount and are pleased to continue growing our dividends ahead of
the market."
Richard Staveley, Fund Manager and Managing Director of
Strategic Public Equity, Gresham House, said:
"It has rarely been more important for investors to have a
strong investment philosophy and process to tackle the challenges
presented in 2020, fortunately we have one in the Strategic Public
Equity strategy. This means we are able to cut through the market
noise and focus on business fundamentals, the medium-term outlook
for companies, not only the immediate issues, and spend focused
time on severely undervalued and under researched small companies.
UK Equities have rarely been cheaper compared to history, other
international markets and different asset classes. We have grasped
this rare opportunity with both hands and deployed capital to drive
material NAV growth in the years ahead."
The full version of the GHS interim report will be available on
its website shortly at www.ghsplc.com .
This announcement contains inside information for the purposes
of Article 7 of Regulation (EU) No 596/2014 (MAR). Upon the
publication of this announcement, this inside information is now
considered to be in the public domain. For the purposes of MAR and
Article 2 of Commission Implementing Regulation (EU) 2016/1055,
this announcement is being made on behalf of GHS by David Potter,
Chairman.
For further information, please contact:
Gresham House Strategic plc 07711 450
Chairman David Potter 391
Gresham House Asset Management 07864 802
Ltd Richard Staveley 532 020 3837
Fund Managers Tony Dalwood 6278
finnCap Matt Goode/William
Nominated Adviser Marle 0207 220
Joint Broker Mark Whitfeld 0500
Panmure Gordon (UK) Limited Tom Scrivens 020 7886
Joint Broker Michael Bateman 2500
Charles Gorman
KL Communications Camilla Esmund 020 3995
PR Alex Hogan 6699
About Gresham House Strategic plc
GHS invests in UK smaller public companies, applying private
equity techniques and due diligence alongside a value investment
philosophy to construct a portfolio focused in 10-15
companies..
The Investment Manager, Gresham House Asset Management Ltd
(Gresham House, GHAM, or Investment Manager), aims for a high level
of engagement with investee company stakeholders, including
management, shareholders, customers, suppliers and competitors,
with the aim of identifying market pricing inefficiencies and
supporting a clear equity value creation plan and targeting above
market returns over the longer term.
About Gresham House Asset Management Ltd (GHAM)
Gresham House Asset Management Ltd, the operating business of
Gresham House plc (GHE), manages funds and co-investments across a
range of differentiated alternative investment strategies for
third-party clients. The company is built around a long term
investment philosophy and applies private equity techniques to due
diligence and investment appraisal.
Chairman's statement for the half year to 30 September 2020
The six months since the depths of the "COVID crash" in March
have seen two major trends. Firstly, share prices have in general
recovered although the sectors most affected by COVID-19 driven
restrictions (such as travel and hospitality) have continued to be
depressed. As mentioned in March, GHS is invested in only one
company exposed to these sectors. As is so often the case after a
market sell-off, share prices of smaller companies take longer to
rebound. Secondly, there is often an abundance of investment
opportunities created, especially in under researched smaller
companies which is our area of focus.
After the initial COVID panic in March, the willingness of the
UK Government to support individuals and companies undoubtedly
stabilised both markets and future expectations. Whether the
optimism created will be maintained throughout a long winter of
discontent, is not clear.
Against this background GHS made three new investments as
described in the Investment Managers' Report. At the end of the
period the Company had GBP3.9m in cash.
Whilst the performance of the Company has continued to exceed
many benchmarks and indices, it was disappointing to see the
discount to NAV widen to 18% as at 2 October 2020 but pleasing
since to see this narrow again to 8.35% (as at 6 November 2020).
The biggest problem this creates is that it inhibits our ability to
raise new funds, which under City conventions, can only be done at
a premium to, or at NAV. The Investment Managers, who have rarely
seen so many attractive investment possibilities, have investment
capacity and a well-resourced team in place and so we will have to
continue to be highly selective in choosing which opportunities to
pursue.
The small size of the Company can also be an inhibitor to some
larger wealth managers and institutional investors. We have devoted
much effort to widening and increasing the shareholder base through
marketing, roadshows, the coverage of Edison Research, direct
advertising and PR. The Board expects that these efforts will, in
conjunction with continued good performance, eventually narrow the
discount sufficiently to be able to increase our size via
fundraisings. We are also constantly alert to opportunities to grow
by acquisition and merger although such transactions occur
infrequently in the investment trust world.
The success of the Company depends on the investment decisions
made by the Manager. Recent investments have been made during a
period of significant market volatility and temporary economic
stress, usually an opportunity for the patient and careful
investor. Over the last three years GHS's outperformance can be
measured by NAV growth of 17.7% vs the FTSE Small Cap ex-Investment
Trusts which has fallen 19%.
The Board remains confident that the Company will continue to
prosper and provide above average returns, given its focused
investment strategy. This confidence was demonstrated by raising
the dividend target for next year by a further 5%. Over the last
four years, since dividends have been initiated, the annual
dividends have increased from 15p to 22.9p.
During the period, the Board has observed the transition to
largely 'virtual' operations of both the Investment Manager and
investee companies which happened rapidly and largely seamlessly.
The longer-term ramifications of remote working remain unclear.
While Board members and longer-serving staff at listed companies
"know everybody on the zoom calls", how those newer to the firm
develop their networks, learnings, experience, information feeds
and social and cultural interactions will be a challenge.
The Board have reviewed all the Company's operations and the
operations of the Company's investee companies from an ESG
perspective and will continue to strive for the best levels of
corporate governance. These are set out on the website in our
updated statements, and we encourage active discussion regarding
ESG best practice in our investee companies.
I would also like to congratulate the Investment Managers for
navigating an incredibly difficult and unprecedented six months. I
would like to thank my Board colleagues and all our stakeholders
for their continued support.
David Potter
Chairman, Gresham House Strategic plc
10 November 2020
Investment Manager's Report
Introduction
We are pleased to be able to report to shareholders that during
a challenging and unprecedented six months for equity markets we
have navigated the investment and operational challenges of the
COVID-19 virus well. While the UK equity market and small cap
investment sentiment have been downbeat, we have used this period
to provide capital to a number of businesses, valued at
highly-attractive discounts to our view of their intrinsic worth
and made a number of new investments which will drive NAV growth in
future years. The investment team have re-allocated over 30% of NAV
into new opportunities during the past nine months.
We are pleased to deliver relatively strong NAV returns for our
investors in the period with a GHS NAV Total Return of 15.1% versus
the FTSE All Share Total Return of 7.3% and matching the FTSE Small
Cap Index ex-Investment Trusts Total Return of 15.2%. The share
price has had a more muted six months, yet still produced a 10.2%
Total Shareholder Return, set against a tough market environment
for UK investment companies where discounts to NAV widened across
the sector (see market commentary) and a strong preceding 12 months
where the shares reached an all-time high of 1,355p.
Highlights for the period include:
-- Strong NAV performance, with NAV Total Return of 15.1% in the
period
-- 20% increase in the proposed dividend - GHS shares now offer
a prospective 2.8% yield
-- NAV Total Return of 29.9% since inception ([2]) -
outperforming comparator indices materially
-- Four significant investments - GBP2.4m equity investment into
Flowtech Fluidpower plc, GBP2.6m into RPS Group plc, GBP2.1m into
Van Elle Holdings plc and a significant upweighting of Fulcrum
Utility Services plc
-- Three further new initial investments via re-financing
opportunities at Bonhill Group plc, Ted Baker plc and Infrastrata
plc and additional investment into Centaur Media
-- Full exit of IMImobile plc shares, generating a +23.8% IRR
and 1.85x Money Multiple - GBP14.6m realised profit
-- Full exits of Be Heard plc Convertible Loan Note IRR +22.2%,
Equity IRR -37%, Brand Architekts Group plc IRR -38.2% and MJ
Hudson plc IRR +8.8%
-- Re-negotiation of Convertible Loan Note at Northbridge
Industrial Services plc, reducing conversion price
-- Material engagement with a range of holdings, supporting the
unlocking and driving of shareholder value
In this Investment Manager's Report, we write to shareholders
about our high-level views of the UK economy and equity markets,
summarise the NAV performance, portfolio and major dealing activity
in the first half of the financial year. The report ends with our
outlook for GHS.
Market Commentary
1. This six-month period of investment encompasses one of the
fastest stockmarket recoveries on record (S&P500 +51.7% from a
low point on 23 March to the end of September) after the COVID-19
pandemic induced the market crash of March 2020. The UK market
recovery has lagged other countries (FTSE All Share +20.7% from a
low point on 24 March to the end of September). The main market
dynamics have been as follows:
- Fast growing companies have accelerated their recent
outperformance of the rest of the market. This has driven the
dispersion in the valuation of fast growing versus slower growing
companies within the market to extreme levels compared to stock
market history
- These fast growing companies have been alighted upon across
industry sectors but have been heavily weighted towards Technology,
eCommerce and Healthcare. The AIM market has more of these
companies than the FTSE All Share and has therefore
outperformed
- Retail investor activity has materially increased, both in the
US (often through the use of single-stock options) and in the UK,
evidenced by market operator reports. Passive Index trackers have
continued to acquire more shares in their underlying indices,
irrespective of valuations or, particularly in the case of the US,
higher concentration in a handful of market leaders
- Companies with excess leverage have underperformed. The
economic impact of COVID-19 has forced a range of businesses to
address balance sheet debt levels and loss of cash liquidity
through the issuance of new equity, often highly dilutive to
existing investors. This phase has accompanied net outflows from UK
equities. Less AUM, but more requests for capital
- Certain industry sectors are facing incredible business model
stress, mainly in Transportation, Consumer Leisure activities and
physical Retail. Commercial property rent collection and tenant
strength has been severely tested. The vast majority of companies
have cut dividends to shareholders materially, despite many having
the capability to continue to distribute, accessing government
schemes being a sensitive factor
- There have been pockets of winners in the face of the crisis;
including the computer games industry, DIY and gardening retail,
vaccine developers, food delivery, online retail, gold miners,
video conferencing and cycling. The UK Government policy has
stimulated the housing market
- Banks' shares have performed very poorly around the world,
despite strong capital positions, whilst sustained weakness in the
oil price and mass investor adoption of the ESG agenda has meant
traditional Energy shares have also been out of favour
- Regional economic activity has broadly reflected differences
in lockdown rules and efficacy with the UK GDP in Q2 down a huge,
estimated -20.4%, whilst Chinese GDP, where the virus originated,
is expected to grow its economy overall in 2020 by c.4%
- The level of monetary and fiscal stimulus has been enormous
around the world. As a result, M2 and saving rates have soared and
government bond yields have been kept extremely low with many
territories negative (e.g. Germany, France, Switzerland), indeed
total negatively yielding debt now exceeds a record $16 trillion.
Bonds aren't the investment they once were
- UK Government debt has ballooned to the highest ever, now
above GBP2 trillion and is on track compared to GDP to WW2 levels,
above 100%. These are genuinely rare economic times. The fiscal
outlook has therefore deteriorated markedly with tax collection
down and government spending up. Governments around the world will
be grappling with how to solve this in the coming years, without
choking off economic recovery, alongside central banks who will
surely be considering further innovative policies to meet their
mandates, which are being re-orientated to allow for more
inflation
- In Q3, concerns over a second wave of the virus and likely
renewed lockdown restrictions, impending easing of fiscal help and
the inevitable pick-up in unemployment weighed on sentiment and
confidence in the strength and timing of recovery. In the UK this
is combined with worries over the likelihood of a hard Brexit,
scheduled for the end of the year
- A range of government leaders contracted and recovered from
COVID-19. Data suggests death rates are highly concentrated in the
very old and those with pre-existing conditions. The UK Government
has pre-ordered over 400 million doses of potential vaccines
currently in various stages of development. Insolvency and
unemployment rates began to rise by the end of the period. 'Lives'
versus 'livelihoods' will dominate national debate for at least the
rest of the financial year
2. Portfolio Performance
The portfolio is very concentrated and therefore it should be
expected that over any shorter period, such as a year, a dominant
stock or two will drive performance.
http://www.rns-pdf.londonstockexchange.com/rns/9064E_1-2020-11-10.pdf
Source: Bloomberg, as at 30 September 2020
Performance (all indices are H1 2020 1 years 3 years From inception
excluding investment trusts) (Aug 2015
- Sep 2020)
(Mar -
Sept)
GHS Share Price Total Return 10.2% (6.4%) 22.7% 37.2%
-------- -------- -------- ---------------
GHS NAV Total Return 15.1% (1.3%) 17.7% 29.9%
-------- -------- -------- ---------------
FTSE Small Cap Total Return
ex-Investment Trusts 15.2% (12.7%) (19.0%) 1.8%
-------- -------- -------- ---------------
FTSE All Share Total Return 7.3% (16.5%) (9.3%) 10.6%
-------- -------- -------- ---------------
Relative performance
-------- -------- -------- ---------------
vs FTSE Small Cap Total Return
ex-Investment Trusts -0.1% +11.4% +36.8% +28.1%
-------- -------- -------- ---------------
vs FTSE All Share Total Return +7.8% +15.2% +27.1% +19.3%
-------- -------- -------- ---------------
The NAV Total Return per share rose to 15.1% in the half year to
30 September 2020, including the 12.8p dividend paid in September.
Performance was materially ahead of the FTSE All Share Total Return
Index, which rebounded 7.3% in the same period. From inception, in
August 2015, to the end of September, NAV Total Return has been
29.9%, outperforming the FTSE Small Cap Total Return Index
ex-investment trusts by 28.1% in the same period.
The H1 performance share price reflected two distinct quarters
with a strong bounce back, during lockdown in the quarter to June,
matched by NAV recovery, followed by a resilient NAV during the
three months to the end of September 2020, but a weakening share
price causing a widening of the discount, broadly in-line with the
wider investment trust market.
We currently hold investments in 15 UK companies (13 >2.0%
NAV) with 9.3% of the portfolio in cash and other working capital
items.
Top ten shareholdings [3] GBPm Shareholding Portfolio
in the NAV
company
Augean plc 10.8 6.1% 25.6%
------ ------------- ----------
Northbridge Industrial Services
plc 4.5 11.8% 10.7%
------ ------------- ----------
RPS Group plc 2.6 2.1% 6.1%
------ ------------- ----------
The Lakes Distillery Company
plc 2.5 - 5.9%
------ ------------- ----------
ULS Technology plc 2.4 6.6% 5.6%
------ ------------- ----------
Fulcrum Utility Services plc 2.3 2.8% 5.5%
------ ------------- ----------
Flowtech Fluidpower plc 2.2 4.8% 5.2%
------ ------------- ----------
Van Elle Holdings plc 2.1 5.5% 4.9%
------ ------------- ----------
Pressure Technologies plc 1.8 15.2% 4.2%
------ ------------- ----------
Centaur Media plc 1.7 5.9% 4.1%
------ ------------- ----------
Other investments 5.3 - 12.9%
------ ------------- ----------
Cash and other working capital
items 3.9 - 9.3%
------ ------------- ----------
Total NAV 42.1 100.0%
------ ------------- ----------
Top contributors to returns:
Investment Total Contribution Uplift
(GBPm) to NAV
Augean plc 2.2 5.8%
------------------- --------
Be Heard Group plc 1.7 4.6%
------------------- --------
Fulcrum Utility Services
plc 1.0 2.6%
------------------- --------
ULS Technologies plc 0.9 2.3%
------------------- --------
Van Elle Holdings plc 0.5 1.3%
------------------- --------
Top detractors from returns:
Investment Total Contribution Detraction
(GBPm)
Pressure Technologies
plc (0.7) (1.9%)
------------------- -----------
MJ Hudson Group
plc (0.3) (0.7%)
------------------- -----------
Centaur Media plc (0.2) (0.4%)
------------------- -----------
IMImobile plc (0.1) (0.3%)
------------------- -----------
PCF Group (0.2) (0.5%)
------------------- -----------
During the period our largest holding, Augean, announced very
solid interim results. These demonstrated the economic resilience
of the business, its excellent recovery in profitability and
impressive cash generation, leading to a fully repaired balance
sheet, and the shares responded accordingly.
Be Heard Group plc received a takeover offer (accepted in June
2020). We have been heavily engaged with the company helping drive
a positive outcome for our investment. We received an attractive
premium on our Convertible Loan Note holding and some recovery on
our equity investment.
We have an investment horizon of three to five years and are
therefore delighted to benefit relatively early in the investment
period from new investments contributing to NAV growth such as
Fulcrum Utility Services plc, ULS Technologies plc and Van Elle
Holdings plc. One common feature of all three is end-market
exposure to the housing sector which has been recovering strongly
and is clearly heavily supported by government policy. However, we
would also point to positive management and Board changes in all
three companies since our involvement.
Pressure Technologies plc and Centaur Media plc have been more
affected than the other holdings with regard to COVID-19. The
former has meaningful sales into the oil & gas industry and
experienced a severe reduction in demand, and more generally sales
cycles have lengthened. The potentially huge opportunity the
company has in hydrogen infrastructure is too early a stage to
offset this in the near-term.
Centaur Media plc has a meaningful B2B events business which
like its peers has been impacted heavily by lockdown and travel
restrictions, however its wider activities have been more
resilient, and it retains a strong balance sheet position to enable
patience for recovery. MJ Hudson plc achieved a full valuation at
IPO in December 2019 when our pre-IPO convertible instrument
converted to equity. A partial de-rating of the shares has since
occurred, despite solid financial performance and we have chosen to
realise this holding to rotate into new investments.
3. Investment activity
Since the start of the Company's financial year, we have
invested GBP9.2m cash whilst realising GBP7.2m from sales and
redemptions of investments.
Flowtech Fluidpower plc
The dramatic market correction at the start of the period
created an opportunity for us to build a significant stake in
Flowtech Fluidpower; a specialist distribution business on which we
had been conducting due diligence for several months pre-COVID. We
are targeting significant returns for our investors from a
combination of improved operational and financial management, sales
and profit recovery and a valuation re-rating of the shares to the
levels paid by the private equity market for these sorts of
businesses. Once the successful integration of past acquisitions
has been demonstrated, the opportunity to re-start value accretive
corporate activity will emerge. This process is being overseen by
new Chairman, Roger McDowell, who sits on the Board of another of
our investments, Augean plc, and who has significant relevant
industry experience.
RPS Group plc
We added another core holding to the portfolio in September,
participating in the GBP20m liquidity raise by RPS Group plc and
built a c.6% weighting in the company in the process. RPS Group plc
is an environmental planning and consultancy business serving the
infrastructure, energy, transport and property sectors, tapping
into some key growth drivers such as urbanisation, infrastructure
spend and renewables. Significant revenues are derived from the
public sector which should benefit from increased government
spending. Our investment case centres around operational
improvements driving margin recovery to sector averages, a repaired
balance sheet and, following post-COVID recovered sales levels,
improved organic growth delivery. There has been significant
consolidation activity in the sector. RPS Group plc was two years
into a turnaround under a new management and Board, with green
shoots emerging just as COVID-19 struck. The fundraise has allowed
us to gain exposure to the upside that the earnings recovery can
deliver after much of the 'heavy lifting' has already been
undertaken.
Van Elle Holdings plc
We also used the crisis to build a significant 7% stake in Van
Elle Holdings plc, a specialist piling business focused on rail,
infrastructure and housebuilding. We are targeting improved returns
from the introduction of a new management team and Chairman who are
overseeing strategic and operational changes within the business to
recover operating margins and revenues. In this instance, these
self-help initiatives are supported by a thematic structural trend
of anticipated significant infrastructure and construction spend
supported by the UK Government over the next five years including
smart motorways, wind-power, HS2, housing and rail
electrification.
Fulcrum Utility Services plc
Fulcrum Utility Services plc became a core position during the
COVID crisis at attractive valuations and has quickly started to
deliver returns for the company. Having identified a value
opportunity based on the potential to dispose of utility assets and
recover margins while growing the top line, we started engaging
with the company pre-Christmas. This process accelerated during
lockdown and the investment is emerging as a clear 'COVID winner'
as Fulcrum is a direct play on the push for net-zero emissions and
a 'green' recovery. The company specialises in designing and
constructing electricity connections such as EV charging points,
smart meters, housing developments and infrastructure as well as
fibre optics. Over the next five years we envisage material
earnings growth supplemented by returns of cash to shareholders
from disposals driving our targeted investment returns.
Other investments
During the period we participated in re-financing opportunities
in three companies, two of which were brought on by the economic
effects of COVID-19.
- Bonhill plc: A leading international B2B media company
providing analysis, insight, networking and research to
international business, financial services and governance
communities. Key brands include InvestmentNews, Portfolio Adviser,
ESG Clarity, DiversityQ amongst others. The business has been hit
hard by the inability to hold physical events; however, its dynamic
management team have been pivoting to digital solutions and
re-structuring costs aggressively. The company has been driving out
synergies from its various acquisitions and we expect material
profit recovery in future years.
- Ted Baker plc: The company's strategic review had begun prior
to COVID-19 and is being driven by a new management team and Board.
With a strong international brand, there is material scope to
enhance profitability across a huge range of identified
initiatives. A material re-financing and sale of the Head Office
freehold has re-capitalised the business. With historic sales of
over GBP600m we see a significant recovery opportunity.
- Infrastrata plc: Under new and dynamic management, the company
has taken its strategic gas storage project to the edge of
commercialisation. However, we are mainly excited about the
potential to build a new domestic industry player in UK
shipbuilding/refurbishment and maintenance. The iconic Harland
& Wolff yard in Belfast and the Appledore yard in Devon, should
be able to access the government's and commercial sectors' desire
for more competition and we expect their multi-sector business plan
to generate meaningful contracts to support a re-launch in the
years ahead.
Divestments
During the period we exited the last of our IMImobile plc
position, realising GBP14.6m profits in total at a +23.8% IRR. The
shares have been an important driver of NAV growth in recent years,
and the position dominated the portfolio historically. The
valuation now far better reflects the company's future prospects,
there are limited strategic or engagement angles remaining after
our material involvement in past years, and a positive IRR was
locked-in via secondary market sales.
We have also exited Be Heard Group plc. This has been a more
challenging investment, however through heavy levels of involvement
and engagement we contributed to management and Board evolution,
steadying of the business and an eventual takeover approach which
was successful in the period. The flexibility of our investment
mandate was such that our investment was via both a Convertible
Loan Note and equity ownership. Whilst a loss was booked on the
equity, we received a premium on takeover on the Convertible Loan
Note which is generating a profit of GBP1.2m.
Finally, we exited Brand Architekts Group plc and MJ Hudson plc.
The former has been heavily affected by the COVID-19 pandemic while
it has been going through a period of management and Board change.
While the business has retained material cash balances from its
strategic divisional sale, we have re-assessed the risks inherent
in future unidentified M&A, the large pension deficit and the
disrupted industry, and chose to re-allocate capital. MJ Hudson
successful concluded its IPO in 2019 upon which we converted our
Convertible Loan Note into equity. We retained limited influence
post this event and have sold.
4. Outlook
Governments around the world have had a novel but material issue
to deal with during the last six months. The policy response has
unsurprisingly been difficult to calibrate effectively,
particularly with many competing demands and perspectives from
different parts of society. What has been uniform, is a massive
fiscal and monetary response from government institutions.
The direct impact of 'lockdowns' and restricted economic
activity and movement will clearly leave permanent 'scarring' in
many regions, industries and companies. However, given time, many
behaviours will return to 'normal'. It seems credible though that
for a number of trends initiated or accelerated by the pandemic,
long-lasting change will occur. It will be critical for investors
to identify and differentiate therefore the opportunities for
mean-reversion, the underappreciated longer-term changes to the
nature of demand and supply and most importantly any structural
effects which could create 'value traps'.
While market commentary remains focused on the very short term
such as the US Presidential Election and the timing or likelihood
of an effective vaccine for COVID-19, there appears to be little
analysis on the medium-term effects of this historic stimulus. The
burden of debt on governments and many companies will linger;
austerity appears a highly unpalatable option, and tax increases
across society are likely to be necessary alongside a change in
perspective on inflation, which some central banks have already
begun to acknowledge.
With regards to Gresham House Strategic plc:
-- The biggest determinant of medium-term future returns is the
entry valuation on investments made. UK equities are very good
value relative to historic and other international markets. Within
the UK market, the smaller company discount has widened relative to
large companies and is now wider than it has been for many years.
Our approach invests predominantly in UK smaller companies and is
set to capitalise on the opportunities these metrics offer.
-- The portfolio is now focused on a small number of companies
where we see substantial profit recovery potential. Naturally, a
post-vaccine/'lockdown' environment will contribute to this, but
the bulk of future profit growth will be generated by self-help
measures, already identified by new management teams, incentivised
to deliver them and, if achieved, will result in our view in large
increases on their valuation multiples back to historic or sector
norms.
-- Our value-oriented approach has produced a portfolio which is
attractively valued on a relative and absolute basis and we
continue to see substantial upside within individual investee
companies as well as the portfolio as a whole. Whilst this bias to
value hasn't stopped outperformance to date, if the market were to
adjust from its extreme positioning in 'growth' or actively seek
out more 'value', our holdings should benefit.
-- Structural factors, such as the introduction of MiFID II in
2018 and the concentration of industry AUM have, in our view,
exacerbated inefficiencies at the smaller end of the market,
providing a greater number of opportunities for discerning
investors to find hidden value. With Private Equity firms sitting
on huge levels of cash we expect them and trade buyers to exploit
these overlooked companies if the public markets continue to ignore
them. COVID-19 has enabled us to recycle capital at depressed share
prices, sowing the seeds of future NAV growth.
-- We believe the closed-end nature of GHS allows the strategy
to embrace the illiquidity of smaller companies, adopt the time
horizon of genuine medium-term investors and build a concentrated
portfolio of the very best opportunities that this unique market
backdrop is providing.
Richard Staveley
Fund Manager, GHS plc & Strategic Public Equity Investment
Committee Member
Anthony (Tony) Dalwood
Fund Manager, GHS plc & Chairman of the Strategic Public
Equity Investment Committee
10 November 2020
Unaudited Condensed Statement of Comprehensive Income
for the six months ended 30 September 2020
Six months Six months
to to Year to
30-Sep-20 30-Sep-19 31-Mar-20
Note GBP'000 GBP'000 GBP'000
Unaudited Unaudited Audited
-------------------------------------------- ----- ----------- ----------- ----------
Gains / (losses) on Investments 5 5,350 374 (5,728)
-------------------------------------------- ----- ----------- ----------- ----------
Revenue
Loan note interest income 6 1,202 395 782
Portfolio dividend income - 89 265
Bank interest income 2 5 8
Other income 1 - -
1,205 489 1,055
Administrative expenses
Investment management fees (383) (427) (858)
Salaries and other staff costs (69) (63) (138)
Other costs (357) (231) (505)
-------------------------------------------- ----- ----------- ----------- ----------
Total administrative expenses (809) (721) (1,501)
-------------------------------------------- ----- ----------- ----------- ----------
Profit / (loss) before taxation 5,746 142 (6,174)
Taxation 8 - - -
-------------------------------------------- ----- ----------- ----------- ----------
Profit / (loss) for the financial period
/ year 5,746 142 (6,174)
--------------------------------------------------- ----------- ----------- ----------
Attributable to:
Equity shareholders of the Company 5,746 142 (6,174)
Basic and Diluted earnings per ordinary
share for profit / (loss) from continuing
operations and for profit / (loss)
for the period / year (pence) 9 165.06p 3.98p (174.34p)
-------------------------------------------- ----- ----------- ----------- ----------
There are no components of other comprehensive income for the
current period (Sep 2019: GBPNil, Mar 2020: GBPNil).
Unaudited Condensed Statement of Financial Position
as at 30 September 2020
30-Sep-20 30-Sep-19 31-Mar-20
GBP'000 GBP'000 GBP'000
Note Unaudited Unaudited Audited
------------------------------------ ----- ---------- ---------- ----------
Non-current assets
Investments at fair value through
profit or loss 5 38,461 39,128 29,960
------------------------------------ ----- ---------- ---------- ----------
38,461 39,128 29,960
Current assets
Trade and other receivables 72 191 266
Cash and cash equivalents 3,852 5,329 6,864
------------------------------------ ----- ---------- ---------- ----------
3,924 5,520 7,130
------------------------------------ ----- ---------- ---------- ----------
Total assets 42,385 44,648 37,090
------------------------------------ ----- ---------- ---------- ----------
Current liabilities
Trade and other payables (173) (155) (178)
------------------------------------ ----- ---------- ---------- ----------
Total liabilities (173) (155) (178)
------------------------------------ ----- ---------- ---------- ----------
Net current assets 3,751 5,365 6,952
------------------------------------ ----- ---------- ---------- ----------
Net assets 42,212 44,493 36,912
------------------------------------ ----- ---------- ---------- ----------
Equity
Issued capital 1,751 1,788 1,751
Share premium 13,063 13,063 13,063
Revenue reserve 16,524 18,805 11,224
Capital redemption reserve 10,874 10,837 10,874
------------------------------------ ----- ---------- ---------- ----------
Total equity 42,212 44,493 36,912
------------------------------------ ----- ---------- ---------- ----------
Net asset value per ordinary share 1,212.7p 1,251.4p 1,060.4p
------------------------------------ ----- ---------- ---------- ----------
Number Number Number
'000 '000 '000
------------------------------------ ----- ---------- ---------- ----------
Ordinary shares in issue 3,481 3,555 3,481
------------------------------------ ----- ---------- ---------- ----------
Shares in issue for net asset
value per share calculation 3,481 3,555 3,481
------------------------------------ ----- ---------- ---------- ----------
These financial statements were approved and authorised for
issue by the Board of Directors on 10 November 2020. Signed on
behalf of the Board of Directors.
David Potter Charles Berry
Chairman Director
Unaudited Condensed Statement of Cash Flows
for the six months ended 30 September 2020
30-Sep-20 30-Sep-19 31-Mar-20
Note GBP'000 GBP'000 GBP'000
Unaudited Unaudited Audited
--------------------------------------------- ------ ---------- ---------- ------------
Cash flow from operating
activities
Cash flow from operations a (636) (3,050) (3,157)
--------------------------------------------- ------ ---------- ---------- ------------
Net cash outflow from operating
activities (636) (3,050) (3,157)
Cash flows from investing
activities
Purchase of financial investments 5(*) (9,173) (5,600) (11,360)
Sale of financial investments 5(*) 7,243 7,646 16,313
--------------------------------------------- ------ ---------- ---------- ------------
Net cash (outflow) / inflow from
investing activities (1,930) 2,046 4,953
Cash flows from financing
activities
Dividends paid 7 (446) (395) (752)
Share buy backs - - (908)
--------------------------------------------- ------ ---------- ---------- ------------
Net cash outflow from financing
activities (446) (395) (1,660)
Change in cash and cash
equivalents (3,012) (1,399) 136
Opening cash and cash equivalents 6,864 6,728 6,728
--------------------------------------------- ------ ---------- ---------- ------------
Closing cash and cash equivalents 3,852 5,329 6,864
--------------------------------------------- ------ ---------- ---------- ------------
Note
a) Reconciliation of profit / (loss) for the period / year to
net cash outflow from operations
GBP'000 GBP'000 GBP'000
--------------------------------------------- ------ ---------- ---------- ------------
Profit / (loss) for the
period / year 5,746 142 (6,174)
Rolled up interest (1,020) (82) (329)
(Losses) / gains on investment 5 (5,350) (374) 5,728
--------------------------------------------- ------ ---------- ---------- ------------
Operating results (624) (314) (775)
Change in trade and other
receivables (7) (85) 42
Change in trade and other
payables (5) (2,651) (2,424)
--------------------------------------------- ------ ---------- ---------- ------------
Net cash outflow from operations (636) (3,050) (3,157)
--------------------------------------------- ------ ---------- ---------- ------------
(*) The purchase and sale of financial investments are the cash
paid or received during the period and excludes unsettled
investments as at 30 September 2020.
Unaudited Condensed Statement of Changes in Equity
for the six months ended 30 September 2020
Six months to 30 September
2019
------------------------------------ --------- --------- -------- -------- ----------- --------
D shares Ordinary Share Revenue Capital Total
Share Premium Reserve Redemption Equity
Capital Reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- --------- -------- -------- ----------- --------
Balance at 31 March 2019
(audited) 10 1,778 13,063 19,058 10,837 44,746
------------------------------------ --------- --------- -------- -------- ----------- --------
Profit and total comprehensive
income
for the period - - - 142 - 142
------------------------------------ --------- --------- -------- -------- ----------- --------
Total profit and comprehensive
income for the period 10 1,778 13,063 19,200 10,837 44,888
Contributions by and distributions
to owners
Dividends paid - - - (395) - (395)
------------------------------------ --------- --------- -------- -------- ----------- --------
Balance at 30 September
2019 (unaudited) 10 1,778 13,063 18,805 10,837 44,493
------------------------------------ --------- --------- -------- -------- ----------- --------
Year to 31 March 2020
--------- --------- -------- -------- ----------- --------
D shares Ordinary Share Revenue Capital Total
Share Premium Reserve Redemption Equity
Capital Reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- --------- -------- -------- ----------- --------
Balance at 31 March 2019
(audited) 10 1,778 13,063 19,058 10,837 44,746
------------------------------------ --------- --------- -------- -------- ----------- --------
Loss and total comprehensive
loss
for the year - - - (6,174) - (6,174)
------------------------------------ --------- --------- -------- -------- ----------- --------
Total loss and comprehensive
income for the year 10 1,778 13,063 12,884 10,837 38,572
Contributions by and distributions
to owners
Share buy back - (37) - (908) 37 (908)
Dividends paid - - - (752) - (752)
------------------------------------ --------- --------- -------- -------- ----------- --------
Balance at 31 March 2020
(audited) 10 1,741 13,063 11,224 10,874 36,912
------------------------------------ --------- --------- -------- -------- ----------- --------
Six months to 30 September
2020
--------- --------- -------- -------- ----------- --------
D shares Ordinary Share Revenue Capital Total
Share Premium Reserve Redemption Equity
Capital Reserve
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
------------------------------------ --------- --------- -------- -------- ----------- --------
Balance at 31 March 2020
(audited) 10 1,741 13,063 11,224 10,874 36,912
------------------------------------ --------- --------- -------- -------- ----------- --------
Profit and total comprehensive
income
for the period - - - 5,746 - 5,746
------------------------------------ --------- --------- -------- -------- ----------- --------
Total profit and comprehensive
income for the period 10 1,741 13,063 16,970 10,874 42,658
------------------------------------ --------- --------- -------- -------- ----------- --------
Contributions by and distributions
to owners
Dividends paid - - - (446) - (446)
Balance at 30 September
2020 10 1,741 13,063 16,524 10,874 42,212
(unaudited)
------------------------------------ --------- --------- -------- -------- ----------- --------
Notes to the Unaudited Condensed Interim Financial
Statements
1. General information
Gresham House Strategic plc (the "Company") is a company
incorporated in the UK and registered in England and Wales
(registration number: 03813450). The information set out in these
unaudited condensed interim financial statements for the periods
ended 30 September 2020 and 30 September 2019 does not constitute
statutory accounts as defined in section 435 of the Companies Act
2006. Comparative figures for 31 March 2020 are derived from the
financial statements for that year. The financial statements for
the year ended 31 March 2020 have been delivered to the Registrar
of Companies and contain an unqualified audit report and did not
contain a statement under emphasis of matter or statements under
section 498(2) or (3) of the Companies Act 2006. These unaudited
condensed interim financial statements have been prepared in
accordance with the AIM rules.
2. Basis of accounting
The annual financial statements are prepared under International
Financial Reporting Standards (IFRS) as adopted by the European
Union. The principal accounting policies adopted in the preparation
of the financial information in these unaudited condensed interim
financial statements are unchanged from those used in the Company's
financial statements for the year ended 31 March 2020 and are
consistent with those that the Company expects to apply in its
financial statements for the year ended 31 March 2021. These
unaudited condensed interim financial statements have been prepared
based on IFRSs in issue that are effective at the Company's annual
reporting date as at 31 March 2020, except as noted below.
These unaudited condensed interim financial statements have been
prepared in accordance with IAS 34: Interim Financial Reporting as
adopted by the European Union. They do not include all of the
information required for full annual financial statements and
should be read in conjunction with the annual financial statements
for the year ended 31 March 2020.
New Standards and interpretations not yet applied
Other standards and amendments that are effective for subsequent
reporting periods beginning on or after 1 January 2020 and which
have not been early adopted by the Company include:
-- Definition of Material (Amendments to IAS 1 and IAS 8);
-- Revised Conceptual Framework for Financial Reporting
These standards and amendments are not expected to have a
significant impact on the financial statements in the period of
initial application and therefore detailed disclosures have not
been provided.
3. Estimates
The preparation of the unaudited condensed interim financial
statements requires management to make judgements, estimates and
assumptions that affect the application of accounting policies and
the reported amounts of assets and liabilities, income and
expenses. The valuation of unquoted investments represents the key
estimate. Actual results may differ from these estimates.
In preparing these unaudited condensed interim financial
statements, the significant judgements made by management in
applying the Company's accounting policies and the key sources of
estimation were the same as those that applied to the Company
financial statements as at and for the year ended 31 March 2020.
The areas involving a high degree of judgement or complexity, or
areas where assumptions and estimates are significant to the
unaudited condensed interim financial statements are disclosed in
note 5 in relation to the valuation of unquoted investments.
4. Financial risk management
The Company's financial risk management objectives and policies
are consistent with those disclosed in the Company financial
statements as at and for the year ended 31 March 2020.
Notes to the Unaudited Condensed Interim Financial Statements
(continued)
5. Investments at fair value through profit or loss
The Company's investments are valued using the following
basis:
(a) Quoted investments are recognised on trading date and valued
at the closing bid price at the period end.
(b) Investments considered to be mature are valued according to
the Directors' best estimate of the Company's share of that
investment's value. This value is calculated in accordance with
International Private Equity and Venture Capital Valuation
Guidelines (the IPEV guidelines) and industry norms which includes
calculations based on appropriate earnings or sales multiples.
The movements in the investments at fair value through profit or
loss are as follows:
Value Additions Disposal Gain Revaluation Value
at 31 Proceeds on Disposal at 30
March September
2020 2020
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- -------- ---------- ---------- ------------- ------------ -----------
Investments in quoted
companies
(Level 1) 23,558 9,173 (5,204) 108 5,073 32,708
Other unquoted investments
(Level 3) 6,402 1,020 (1,838) - 169 5,753
Total investments
at fair value through
profit or loss 29,960 10,193 (7,042) 108 5,242 38,461
---------------------------- -------- ---------- ---------- ------------- ------------ -----------
Value Additions Disposal Loss Revaluation Value
at 31 Proceeds on Disposal at 30
March September
2019 2019
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
---------------------------- -------- ---------- ---------- ------------- ------------ -----------
Investments in quoted
companies
(Level 1) 31,849 3,385 (4,975) (326) 666 30,599
Other unquoted investments
(Level 3) 8,869 2,297 (2,671) (5) 39 8,529
Total investments
at fair value through
profit or loss 40,718 5,682 (7,646) (331) 705 39,128
---------------------------- -------- ---------- ---------- ------------- ------------ -----------
Investments in quoted companies have been valued according to
the quoted share price as at 30 September 2020.
Investments in Other unquoted investments represent the
following:
-- Hanover Active Equity Partners II LP was purchased on 11 July
2017. The interest in Hanover Active Equity Partners II LP was
fully realised on 1 October 2020, through a transfer to the
Company's sister fund, Gresham House Strategic Public Equity Fund
LP. It is valued based on the NAV of the Limited Partnership which
approximates to the net proceeds received on sale;
-- Be Heard Group plc Bond was purchased on 28 November 2017,
and a further investment was made on 10 July 2019.
Be Heard Group plc was taken over via a Scheme of Arrangement on
1 September 2020. The principal of the Bond was repaid during the
period as part of the Scheme. Within the terms of the Bond, a
redemption premium is receivable and is structured as a loan. This
is valued at fair value which approximates to the loan issue
amount;
-- Northbridge Convertible Bond was purchased on 10 April 2018,
and a further investment was made on 3 July 2018. The Bonds are
valued at fair value which approximates the bond issue amount plus
the "in the money" value of the conversion right, valued using a
Black Scholes valuation model; and
-- The Lakes Distillery Company plc Convertible Bond was
purchased on 20 June 2019. It is valued at fair value which
approximates to the bond issue amount plus rolled up "payment in
kind" notes and capitalised interest.
The revaluations and the gain/loss on disposal above are shown
on the face of the statement of comprehensive income as gains /
(losses) on investments.
Notes to the Unaudited Condensed Interim Financial Statements
(continued)
5. Investments at fair value through profit or loss
(continued)
The following table analyses investments carried at fair value
at the end of the period, by the level in the fair value hierarchy
into which the fair value measurement is categorised. The different
levels are defined as follows:
(i) level one measurements are at quoted prices (unadjusted) in
active markets for identical assets or liabilities;
(ii) level two measurements are valuation techniques with all
material inputs observable for the asset or liability, either
directly (that is, as prices) or indirectly (that is, derived from
prices); and
(iii) level three measurements are valuations not based on
solely observable market data (that is, the measurement requires
significant unobservable inputs).
30 September 31 March
2020 2020
GBP'000 GBP'000
--------- ------------- ---------
Level 1 32,708 23,558
Level 2 - -
Level 3 5,753 6,402
----------- ------------- ---------
38,461 29,960
--------- ------------- ---------
6. Loan note interest income
Loan note interest income includes redemption premium of
GBP833,932 (30 September 2019: GBPnil) and loan note interest of
GBP367,858 (30 September 2019: GBP394,572).
7. Dividends
The Company paid GBP445,553 during the period which represents a
final dividend for the year ended 31 March 2020. A final dividend
for the year ended 31 March 2019 (GBP394,642) was paid on 30
September 2019.
8. Taxation
The Company has no tax charge for the period ended 30 September
2020 (30 September 2019: GBPnil).
9. Earnings per share
Six months Six months
to to Year to
30-Sep-20 30-Sep-19 31-Mar-20
GBP'000 GBP'000 GBP'000
---------------------------------------- ----------- ----------- ----------
Earnings
---------------------------------------- ----------- ----------- ----------
Profit / (loss) for the period /
year 5,746 142 (6,174)
Number of shares ('000)
---------------------------------------- ----------- ----------- ----------
Weighted average number of ordinary
shares in issue for basic and diluted
EPS 3,481 3,555 3,541
---------------------------------------- ----------- ----------- ----------
Earnings per share
---------------------------------------- ----------- ----------- ----------
Basic and diluted earnings per share 165.06p 3.98p (174.34p)
---------------------------------------- ----------- ----------- ----------
Notes to the Unaudited Condensed Interim Financial Statements
(continued)
10. Related party transactions
The related parties of Gresham House Strategic plc are its
Directors, persons connected with its Directors, its Investment
Manager and Gresham House plc as a significant shareholder.
Details of related party transactions between the Company and of
non-salary related transactions involving Directors are detailed
below.
During the half year to 30 September 2020, Gresham House
Strategic plc was charged management fees of GBP382,661 (2019:
GBP427,081) by Gresham House Asset Management Limited (GHAM). As at
30 September 2020, management fees of GBP64,984 (2019: GBP66,297)
were due to GHAM.
The Company has not made a provision for performance fees as at
30 September 2020. Under the terms of the Investment Management
Agreement, the Company will pay the Investment Manager a
performance fee in respect of each performance fee period in which
the Net Asset Value per Ordinary Share on the last business day of
such performance fee period exceeds both a compounding hurdle
growth in Net Asset Value per share of 7% per annum (compounding
weekly, the 'Hurdle Net Asset Value per share') and the highest Net
Asset Value per share at which a performance fee was previously
paid (the 'High Watermark'). The performance fee shall be
calculated at a rate of 15% of the amount by which the Net Asset
Value per share exceeds the High Watermark, multiplied by the time
weighted number of shares in issue during such performance fee
period, provided that the Performance Fee payable will be reduced
to ensure that the Net Asset Value per share after the payment of
such Performance Fee does not fall below the Hurdle Net Asset Value
per share.
Up to 50% of any performance fee may (at the Board's discretion)
be satisfied by the issue of Ordinary Shares.
The provision represents the Company's estimate of what would
have been payable had the Net Asset Value per share as at 30
September 2020 been the Net Asset Value per share on 31 March 2021,
being the next date on which a Performance Fee may become payable
and is calculated with reference to the expected Hurdle Net Asset
Value per share on 31 March 2021.
As at 30 September 2020, the following shareholders of the
Company, that are related to GHAM had the following interests in
the issued shares of the Company:
A L Dalwood 33,381 Ordinary Shares
Gresham House Holdings 812,913 Ordinary Shares
Ltd
R Staveley 6,087 Ordinary Shares
The Company has signed a co-investment agreement with Gresham
House Strategic Public Equity Fund LP (SPE Fund LP), a sister fund
to the Company launched by GHAM on 15 August 2016. Under the
agreement, the Company undertook to co-invest GBP7.5m with the SPE
Fund LP.
There are no other related party transactions of which we are
aware in the six months ended 30 September 2020.
11. Subsequent events note
On 1 October 2020, the investment in Hanover Active Equity
Partners II LP was fully realised through a transfer to the
Company's sister fund, SPE Fund LP. The Company received proceeds
of GBP214,566 and realised cost of GBP157,277.
The COVID-19 pandemic continues to adversely impact the UK and
world economy. The effect of this on the investment portfolio has
been reflected in the fair value of investments at 30 September
2020. As the full impact of the pandemic and Government
restrictions remains unknown, there may be further information that
emerges but the impact of this could not be known at 30 September
2020.
There were no other material events after the statement of
financial position date that have a bearing on the understanding of
these unaudited condensed interim financial statements.
[1] Inception - 14 August 2015
2. Inception - 14 August 2015
[3] As at 30 September 2020
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