Strategic Equity Capital plc
Unaudited results for the period ended 30 June 2006
Key highlights:
� The Company listed on 19 July 2005 having raised �70.4 million . In November
2005, a further 2,226,000 shares were issued at a small premium to net asset
value, raising a further �2.3 million.
� At 30 June 2006, the Company had net assets of �75.6 million (104.1p per
share).
� At 30 June 2006, the investment portfolio was approximately 83% invested and
committed1 and we anticipate that the Company's portfolio will be fully
invested by the end of 2006.
� Since inception, eight out of the 16 portfolio companies have been involved
in corporate activity either in the form of M&A, capital raisings or
organisational restructuring.
� The Board proposes to declare a final dividend of 1.3p to shareholders on the
register at the close of business on 13 October 2006, payable on 8 November
2006.
John Hodson, Chairman of Strategic Equity Capital plc, commented:
"Following a successful launch in July 2005, th ese are Strategic Equity
Capital's first full preliminary results and I am pleased to report on the
progress made to date. It was the Company's intention to be substantially
invested by its year-end and this has been achieved. With each portfolio
company the Investment Manager has identified a specific route for exit and
value creation for shareholders. As these companies undertake strategic,
management or operational change over the medium term, I believe we will see
further results and opportunities for value creation taking effect."
For further information, please contact:
Capita Sinclair Henderson Limited 01392 412 122
Tracey Brady/ Michael Buckley
SVG Investment Managers Limited 020 7010 8900
Tony Dalwood / Rebecca Hartley
Penrose Financial 020 7786 4888
Emma Thorpe
Copies of the press release and other corporate information can be found on the
company website at: http://www.strategicequitycapital.com
Chairman's statement
Following a successful launch in July 2005, th ese are Strategic Equity
Capital's first full results and I am pleased to report on the progress made to
date.
It was the Company's intention to be substantially invested by its year-end and
this has been achieved. At 30 June 2006, the investment portfolio is
approximately 83% invested and committed and we anticipate that the Company's
portfolio will be fully invested by the end of 2006.
Performance
Strategic Equity Capital listed on London Stock Exchange on 19 July 2005 with
net assets of �69.3 million (98.5p per share). In October, the Company issued
a further 2,226,000 shares at a small premium to net asset value, raising a
further �2.3 million and taking net assets to �72.6 million (99.9p).
At 30 June 2006, the Company had net assets of �75.6 million (104.1p per
share).
Share Price performance
The Company's shares have traded at an average premium to net asset value of 3%
since it listed in July. Recently, the Company's share price has been impacted
by the general correction in equity markets and at the year-end was trading at
a 2 .5% discount to net asset value.
Investment Manager
The Company's portfolio is managed by SVG's Public Equity Team. Their
investment processes and techniques are modelled on that of successful private
equity investors, focusing on companies that can benefit from strategic,
operational or management initiatives.
Investment strategy
The Company's investment strategy is to achieve absolute returns for
shareholders through a strategy of using private equity techniques and a
practice of constructive corporate engagement.
In the Company's first year it has been particularly pleasing to see evidence
of the value of the Investment Manager's investment model realised with
companies such as Mowlem (acquired by Carillion) and Chorion (taken private by
3i Group) exiting from the portfolio at attractive valuations. The only other
disposal during the year, Sanctuary, was disappointing and it was realised at a
loss.
With each portfolio company the Investment Manager has identified a specific
route for exit and value creation for shareholders. As these companies
undertake strategic, management or operational change over the medium term, I
believe we will see further results and opportunities for value creation taking
effect.
The Board
During the Company's first year the Board has worked well together. Full
details can be found in the Company's Annual Report and Accounts, available on
request from the Company Secretary or the Investment Manager.
Dividend
The Directors expect that any returns for shareholders will derive primarily
from the capital appreciation of the Ordinary shares rather than from
dividends. The Directors intend only to declare final dividends and then to
the extent necessary to maintain investment trust status. Accordingly, the
Board proposes to declare a final dividend of 1.3p to shareholders on the
register at the close of business on 13 October 2006, payable on 8 November
2006.
Annual General Meeting
The AGM for the Company will be held at 11.30am on Wednesday, 1 November 2006,
at 111 Strand, London WC2R OAG. In addition to the formal business of the
meeting, the Investment Managers will provide an update on the Company's
investment portfolio and answer any questions from shareholders.
Directorate Appointment
We are delighted to announce the appointment of John Cornish as a non-executive
Director of the Company with effect from 6 September 2006. We believe his
extensive experience and knowledge of the investment trust sector will be of
considerable value to the Board.
Outlook
I believe the Investment Manager's experience of applying private equity
investment techniques in the public markets, involving an in-depth screening,
due-diligence and investment strategy will ensure that we will continue to see
further value creation from the portfolio holdings.
Applying private equity techniques within the public markets is becoming
increasingly relevant as boundaries between asset classes have started to
merge. Established in 2002, SVG's Public Equity Team has become a leading
specialist in this field .
John Hodson, Chairman
8 September 2006
Investment Manager's report
At 30 June 2006, Strategic Equity Capital had net assets of �75.6 million and
was approximately 83% invested and committed, with a portfolio of 16
companies. We are currently at varying stages of due-diligence on a number of
potential further investments and expect the portfolio to be fully invested by
the end of 2006.
The investment process is focused on identifying companies that we believe are
undervalued and could benefit from strategic, management or operational
initiatives in order for their value to be fully realised.
Throughout the investment process, wherever possible, we work alongside
management and/or other shareholders as a supportive investor to identify long
term shareholder value. Past experiences have shown that where we have
developed a strong relationship with the management team and have been able to
support the company in a shared vision of the strategy of the business, the
investment has proved more successful.
Performance
At 30 June 2006, the gross IRR on portfolio investments was 10.6%. Key
positive contributors to performance since launch have been Filtronic,
Elementis, Hampson Industries and Chorion, which was taken private by 3i Group
in May this year.
Filtronic is a manufacturer of complex components for mobile telecommunications
systems. Following Strategic Equity Capital's initial investment in March
2006, Filtronic have announced the proposed sale of its wireless infrastructure
division to Powerwave, which has resulted in a re-rating of its share price.
In March, Elementis announced the results of the second stage of its strategic
review, in which attention was focused on the Specialties division. Trading
for the first half of 2006 was ahead of expectations due to an improved
operating environment. We believe the steps taken within the strategic review
will continue to provide a platform for future growth and cash flow generation.
Hampson Industries, the international precision engineering group, continues to
make good progress. In November 2005, Strategic Equity Capital participated in
a discounted equity placing to fund the acquisition of two US aerospace
companies. These two acquisitions have been successfully integrated and are
performing ahead of management's expectations. We believe that the group is
well placed to build on their strong platform for continuing growth.
Key negative contributors to performance include Communisis, a print and direct
mail business, Sanctuary, a music rights and management company, and the media
conglomerate SMG.
In January 2006, Communisis disappointed the market by announcing that talks
with potential buyers of the business had been called off. The company is now
focused on reducing capacity in its print manufacturing business and changes
have been announced at both the CEO and CFO level. Rationalisation of the
manufacturing business and a reinvigoration of the strategy under new
management should deliver benefits.
In March 2006 we participated in the rescue rights issue in which Sanctuary
Group raised �110 million through an equity placing to repay debt, anticipating
a significant recovery in earnings coupled with strategic and senior management
change. Following the equity placing, Sanctuary's auditors issued an adverse
audit opinion on the year-end results and the company warned that trading would
be significantly worse than had previously been expected. The holding was sold
at a loss.
SMG has been negatively impacted by the uncertain outlook for commercial
television advertising. However, as evidenced by the recent approach to ITV,
there is corporate interest in this area and we remain positive that
significant value can be unlocked in SMG through strategic change as we believe
the company continues to trade at a significant discount to comparable
transaction multiples. Since the period end, the group has announced the
resignation of its Chief Executive with immediate effect and a search has begun
for a replacement.
Portfolio activity
Given the relatively long term investment horizon of our investment process, we
are encouraged with the progress of the portfolio to date. Since inception,
eight out of the 16 portfolio companies have been involved in corporate
activity either in the form of M&A, capital raisings or organisational
restructuring. In addition to Sanctuary Group (discussed above), two other
portfolio holdings have been fully realised, Chorion and Mowlem, both of which
were the subject of takeover offers.
Chorion is an intellectual property business, with brands such as Agatha
Christie, Enid Blyton and Mr Men. Funds managed by SVG's Public Equity Team
originally invested in Chorion in 2002. In the four years since, we have
worked extensively with the company's management, supporting capital raisings
to fund the growth of the business and ultimately encouraging the public to
private offer led by 3i Group, which was completed in May 2006.
We announced the partial realisation of Mowlem in the interim accounts.
Following Carillion's completion of its acquisition of Mowlem, the remaining
holding in the company was realised in February 2006.
New investments
Since December 2005, the Company has made six new investments:
Alpha Airports is a provider of retail and catering services for airlines and
airports. A significant deterioration in profitability, brought about by the
loss of a major contract, as well as losses experienced in various parts of its
overseas business led to a de-rating of Alpha's share price. At the same time,
there has been considerable structural change in the airline catering industry
whilst passenger numbers continue to rise. It is our belief that profitability
will recover and that significant value can be created through implementing
strategic change to recognise the value in the distinct retail and catering
businesses. Since our investment there have been management changes. We
believe that the new management team will drive the necessary strategic and
operational change to realise the value of the business.
Cardpoint, is an independent cash machine supplier with operations in the UK,
Germany and The Netherlands. The company acquired Moneybox, a leading provider
of independent UK ATM's in July 2005 and is in the process of integrating the
business. SVG's Public Equity Team had done significant due-diligence on
Moneybox prior to this acquisition. We believe Cardpoint's current valuation
does not reflect the potential for growth within the industry or the strategic
benefits of the Moneybox acquisition given the embedded value of the enlarged
ATM estate.
Entertainment Rights is a global media group focused on the ownership of
children's and family programming, characters and brands. The group has a well
diversified portfolio of children's properties, including Postman Pat�, Rupert
Bear� andHe-Man and the Masters of the Universe�. The group's value is
underpinned by an extensive library of over 1800 hours of programming content
which we believe will benefit from the continued convergence in the media
sector. There has been significant private equity activity in this sector over
the last couple of years.
As mentioned previously, Filtronic is a manufacturer of complex components for
mobile telecommunications systems. Following the proposed sale of its wireless
infrastructure division to Powerwave, which is expected to be completed in the
third quarter of 2006, the majority of the remaining business is represented by
the semi-conductor fabrication plant located at Newton Aycliffe in County
Durham. Historically Newton Aycliffe has operated at a loss, but recent
technological developments have resulted in strong market growth within the
Compound Semiconductor division as the mobile handset industry continues to
adopt switches based on this technology. In our view, the market price of
Filtronic continues to place little value on the Newton Aycliffe foundry and we
believe there is further value upside in this remaining part of the business.
Melrose is a specialist aerospace and precision engineering business. The
company has a management team with a history of shareholder value creation and
its key businesses are highly cash generative, with strong market positions.
We do not believe that the current valuation of this company correctly values
the company's future cashflows, nor does it recognise the potential for value
accretive disposals.
Finally Strategic Equity Capital made its first unlisted investment; Ora
Capital Partners. Ora is a start up company which aims to build a franchise by
investing in specialist public and private equity situations in four key
sectors: resources, financials, special situations and intellectual property.
Ora will look to invest in six to 12 companies a year with an investment size
of �100,000 to �8 million.
Portfolio analysis
The investment portfolio is typically focused towards small and medium sized
companies, with market capitalisations ranging from approximately �30 million
to �500 million. It is our experience that we have a greater ability to create
value through strategic, management and operational initiatives in companies
within this size range.
Our stock specific investment approach ensures that we do not focus on any
particular sector. Although the current portfolio has a greater emphasis
towards companies within media and support services, these two sectors in
themselves are both very diverse and have given rise to particular
opportunities where valuation anomalies exist.
Top 10 holdings
A summary of the activities of the top 10 investments, which represent
approximately 65% of net assets is given below.
Company Sector classification Cost Valuation % of invested % of net
portfolio assets
�'000 �'000
Melrose Industrial engineering 5,634 6,115 11.1 8.1
Watermark Support services 6,102 6,068 11.0 8.0
Group
Filtronic Technology, hardware & 4,646 5,691 10.3 7.5
equipment
Hampson Aerospace & defence 4,624 5,314 9.7 7.0
Industries
Pinewood Media 4,510 5,190 9.4 6.9
Shepperton
Elementis Speciality chemicals 4,104 5,158 9.4 6.8
Evolution Investment services 5,155 5,139 9.3 6.8
Group
SMG Media 4,216 3,855 7.0 5.1
Mecom Group Equity investment 3,547 3,398 6.2 4.5
instruments
Cardpoint Support services 3,591 3,276 6.0 4.3
Outlook
In June 2006, Strategic Equity Capital committed to be a cornerstone investor
in Redstone's �20 million equity placing to fund the acquisition of Symphony
Telecom Holdings plc. During the last year the new Chief Executive of Redstone
has successfully integrated the acquisition of Xpert Technologies, announced in
April 2005 and proving his ability to integrate businesses. We believe the
acquisition of Symphony will lead to significant further earnings growth for
the group. There has been considerable corporate activity in the industry and
the valuation differential between private equity transactions in this sector
and Redstone's valuation remains substantial. We believe the company is well
placed to benefit from this sector consolidation. The placing was completed on
18 July 2006 making Redstone the Company's largest holding representing 7.7% of
net assets (as at 31 August 2006).
Since the period end, Strategic Equity Capital's NAV has fallen from 104.1p to
95.0p as at
1 September 2006, due largely to a fall in the share price of Watermark, a
portfolio company providing products and services to the airline industry. We
are actively engaged with the company, working closely to recover the position.
Also since 30 June 2006, Strategic Equity Capital has exited its investment in
Elementis. The company's recent results were evidence of our original
investment and we have subsequently realised our holding.
Since March 2003, the UK market has performed strongly. In our opinion, this
was initially driven by M&A activity and the general re-rating of small and mid
cap stocks. More recently, performance has been driven by earnings momentum
and the out-performance of a few specific sectors, such as resources.
Since May 2006 we have experienced increased volatility as macroeconomic
factors have had a negative effect on the broader equity markets. Uncertainty
surrounding rising inflation coupled with increases in commodity and energy
prices have put pressure on markets, and as a result the early gains of 2006
were given up.
On a price to earnings and yield basis, the market appears to be reasonably
valued however corporate profit margins are historically high. Rising input
costs including energy, rents and the cost of money may put pressure on
corporate earnings. In this environment, the ability to create value in a
controlled way through our focused stock selection and investment process
should be of benefit.
SVG Investment Managers Limited
All statements of opinion and/ or belief contained in this Investment Manager's
report and all views expressed and all projections, forecasts or statements
relating to expectations regarding future events or the possible future
performance of the Company represent SVG Investment Managers Limited's own
assessment and interpretation of information available to it as at the date of
this report. As a result of various risks and uncertainties, actual events or
results may differ materially from such statements, views, projections or
forecasts. No representation is made or assurance given that such statements,
views, projections or forecasts are correct or that the objectives of the
Company will be achieved.
The Directors announce the unaudited statement of results for the period 20
July 2005 to 30 June 2006 as follows:
Income statement
(unaudited) for the period ended 30 June 2006
20 July 2005 to 30 June
2006 10 May 2005 to 19 July 2005
Revenue Capital Total Revenue Capital Total
�'000 �'000 �'000 �'000 �'000 �'000
Investments
Gains on investments - 2,839 2,839 - - -
Net investment result - 2,839 2,839 - - -
Income
Dividends and interest 2,357 - 2,357 - - -
Underwriting commission 2 - 2 - - -
Total income 2,359 - 2,359 - - -
Expenses
Investment management fee (inc. of VAT) 595 - 595 - - -
Other expenses 280 - 280 12 - 12
Total expenses 875 - 875 12 - 12
Net return before taxation 1,484 2,839 4,323 (12) - (12)
Taxation (274) - (274) - - -
Net return after taxation for the period 1,210 2,839 4,049 (12) - (12)
Earnings per Ordinary share pence pence pence pence pence pence
Basic and diluted 1.68 3.94 5.62 (1.21) 0.00 (1.21)
Weighted average number of shares in issue in the period 71,982,647 991,569
Earnings per Ordinary share are calculated based on the weighted average number
of Ordinary shares in issue throughout the period.
The total column of this statement is the income statement of the Company. The
supplementary revenue and capital return columns are both prepared under
guidance published by the Association of Investment Trust Companies.
All items in the above statement derive from continuing operations. No
operations were acquired or discontinued during the period.
These accounts are unaudited and are not the Company's statutory accounts.
Statement of changes in equity
(unaudited) for the period ended 30 June 2006
Share Capital Capital
Share premium Special reserve reserve Revenue
capital account reserve realised unrealised reserve Total
�'000 �'000 �'000 �'000 �'000 �'000 �'000
Period 20 July 2005
to 30 June 2006
20 July 2005 7,040 62,282 - - - (12) 69,310
Return for the period - - - 383 2,456 1,210 4,049
Transfer to special reserve1 - (62,282) 62,282 - - - -
Issue of share capital 222 2,042 - - - - 2,264
30 June 2006 7,262 2,042 62,282 383 2,456 1,198 75,623
Period 10 May 2005
to 19 July 2005
10 May 2005 - - - - - - -
Return for the period - - - - - (12) (12)
Issue of share capital (net of expenses) 7,040 62,282 - - - - 69,322
19 July 2005 7,040 62,282 - - - (12) 69,310
1 On 14 September 2005, the High Court approved the cancellation of the
Company's share premium account arising on the issue of the share's pursuant to
the original placing, with the balance being transferred to a special reserve.
Balance sheet
(unaudited) as at 30 June 2006
30 June 19 July
2006 2005
�'000 �'000
Non-current assets
Fair value through profit or loss investments
- Portfolio 55,022 -
55,022 -
Current assets
Trade and other receivables 989 70,400
Cash and cash equivalents 20,458 50
21,447 70,450
Total assets 76,469 70,450
Current liabilities
Other payables 846 1,140
846 1,140
Total assets less current liabilities 75,623 69,310
Net assets 75,623 69,310
Capital and reserves:
Share capital 7,262 7,040
Share premium account 2,042 62,282
Special reserve 62,282 -
Capital reserve - realised 383 -
Capital reserve - unrealised 2,456 -
Revenue reserve 1,198 (12)
Total shareholders' equity 75,623 69,310
Net asset value per share pence pence
Ordinary share 104.13 98.45
Ordinary shares in issue 72,626,000 70,400,000
Net asset value per share include s current period revenue for the unaudited
values at 30 June 2006.
Statement of cash flows
(unaudited) for the period ended 30 June 2006
Period Period
20 July 2005 10 May 2005
to 30 June 2006 to 19 July 2005
�'000 �'000
Operating activities
Net return before tax 4,323 (12)
Adjustment for gains on investments (2,839) -
Operating cashflows before movements in working capital 1,484 (12)
Increase in receivables (250) -
Increase in payables 245 12
Net cash inflow from operating activities 1,479 -
Investing activities
Purchases of investments (59,885) -
Sales of investments 7,250 -
Net cash outflow from investing activities (52,635) -
Financing activities
Proceeds of Redeemable share issue - 50
Proceeds of Ordinary share issue 71,564 -
Net cash inflow from financing activities 71,564 50
Increase in cash and cash equivalents for period 20,408 50
Cash and cash equivalents at start of period 50 -
Cash and cash equivalents at 30 June 2006 20,458 50
1 General information
The financial information contained in this announcement does not constitute
statutory financial statements as defined in Section 240 of the Companies Act
1985. The financial information is unaudited and has been prepared on the
basis of the accounting policies set out in the statutory financial statements
for the period ended 19 July 2005, which contained an unqualified auditors'
report and have been lodged with the Registrar of Companies and did not contain
a statement required under Section 237(2) or (3) of the Companies act 1985.
Statutory financial statements for the period ended 30 June 2006 have not yet
been approved, audited or filed and will be delivered to the Registrar of
Companies following the Annual General Meeting.
END
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