TIDMSEC
Strategic Equity Capital PLC
HALF YEARLY REPORT AND FINANCIAL STATEMENTS SIX MONTH PERIOD ended 31 DECEMBER
2019
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 by telephone on 0131 538 1400.
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
FINANCIAL SUMMARY
Six months
As at As at As at % change to
31 December 30 June 31 December 31 December
Capital Return 2019 2019 2018 2019
Net asset value ("NAV") per
Ordinary share 286.07p 265.12p 233.72p 7.9%
Ordinary share price 245.00p 229.50p 196.00p 6.8%
Discount of Ordinary share
price to NAV 14.4% 13.4% 16.1% -
Average discount of Ordinary
share price to NAV for the 14.7% 15.2% 14.8% -
period
Total assets (GBP'000) 181,584 172,443 152,510 5.3%
Equity Shareholders' funds 181,073 169,037 152,022 7.1%
(GBP'000)
Ordinary shares in issue
with voting rights 63,296,844 63,759,589 65,045,291 (0.7)%
Six month Six month
period to Year ended period to
31 December 30 June 31 December
Performance 2019 2019 2018
NAV total return for the 8.5% 2.2% (9.5)%
period
Ongoing charges - annualised 1.12% 1.10% 1.12%
Ongoing charges (including
performance fee) - 1.17% 1.39% 1.12%
annualised
Revenue return per Ordinary 1.25p 2.11p 0.80p
share
Dividend yield n/a 0.7% n/a
Proposed dividend for the n/a 1.50p n/a
period
Interim period's Highs/Lows High Low
NAV per Ordinary share 286.70p 253.73p
Ordinary share price 245.00p 212.00p
Investment objective
The investment objective of the Company is to achieve absolute returns (i.e.
growth in the value of investments) rather than relative returns (i.e.
attempting to outperform selected indices) over a medium-term period,
principally through capital growth.
Investment Manager's strategy
The strategy of GVQ Investment Management Limited ("GVQIM" or the "Investment
Manager") is to invest in publicly quoted companies that will increase their
value through strategic, operational or management change. GVQIM follows a
practice of constructive corporate engagement and aims to work with management
teams in order to enhance shareholder value.
A more detailed explanation can be found in the Investment Manager's Report
below.
CHAIRMAN'S STATEMENT
Introduction
Last November I commented that it was the Board's view that the UK stock
market, particularly for smaller companies, had begun a process of transition.
The previous momentum led market was becoming more value based. This was good
news as it fits well with our established investment process: that of
identifying companies trading at a discount to their intrinsic value while
avoiding those that do not.
Following the outcome of the UK general election in December, UK equity markets
raced ahead until late January 2020, when COVID-19, the disease caused by the
Coronavirus, took to the stage. Since then stock markets have suffered heavily
amid widespread economic disruption. There are so many variables at play here
that predicting what will happen with this pandemic seems futile. While the
fear factor is adversely affecting stock markets at present, future market
moves will depend on how far the disease spreads and how long it is around.
Performance
It is not surprising therefore that the Company's portfolio performed well over
the period under review but has suffered heavily since. During the six months
to 31 December 2019, the Company's share price rose from 229.5 pence to 245.0
pence, representing a total return (with the dividend reinvested) of 7.5%. The
NAV per share rose by 7.9% to 286.07 pence per share and the NAV total return
was 8.5%. Over the same period, the FTSE Small Cap (ex Investment Companies)
Index delivered a total return of 10.9%. The share price discount to NAV ended
the period at 14.4%. As at 25 March 2020, the date for which a NAV is most
recently available at the time of writing, the NAV had fallen to 206.07 pence
per share.
Returns, on both an absolute and relative basis, have been encouraging over the
short and medium term. Over the three years ending 31 December 2019, the NAV
total return was 28.2%, against the benchmark return of 17.3%. Over the 12
months ending 31 December 2019, the NAV total return was 23.0%, against the
benchmark return of 17.7%. However, despite encouraging returns the discount
has remained range bound between 12-19% during 2019 and has become a source of
frustration to the Board.
Furthermore, the environment for UK active asset managers has been challenging
in recent years. In a competitive environment, a strong sales and marketing
capability is vital in order to attract new investors to a specialist strategy.
The Board has therefore been mindful of the pressures on boutique asset
managers and the resource that is required to effectively implement and market
our investment strategy.
Given these circumstances, the Board has felt compelled to review its
investment management contract with its investment manager GVQ IM, the
consequences of which are explained below.
Development of the Company
During the period the Board reviewed alternative management options for the
Company and the potential for changes to improve the Company's prospects. This
review was conducted with the assistance of the Company's broker, Investec Bank
Plc. Following this review, and after extensive due diligence, we have today
announced that we have entered into heads of terms to appoint Gresham House
Asset Management Limited as the Company's new investment manager and
alternative investment fund manager with the intention thereafter for Aberdeen
Standard Gresham House Investment Management ("Aberdeen Standard Gresham
House"), the proposed joint venture between Gresham House plc and Aberdeen
Standard Investments, to assume these roles once in receipt of regulatory
approval and satisfaction of other conditions. We are delighted, however, that
our current portfolio managers, Jeff Harris and Adam Khanbai, have accepted an
offer to join the new manager as part of this transaction.
Aberdeen Standard Gresham House will combine the strategic public equity
capability of Gresham House with the marketing and distribution strength of
Aberdeen Standard Investments. Tony Dalwood, the CEO of Gresham House, has
known the Company for many years. In fact, he set up Strategic Equity Capital
in 2005, devised its investment strategy and managed it in its early years.
More recently he has transformed Gresham House into a leading investor in UK
smaller companies using private equity type techniques. Gresham House is a
public company, vibrant and growing strongly with a sound balance sheet. It has
a highly regarded name in the market, is well-resourced at all levels and
operates with an effective marketing team.
In addition, and of great attraction to us, is the support to the joint venture
from Aberdeen Standard Investments, Europe's fourth largest investment house.
Aberdeen Standard Investments selected Gresham House for this joint venture to
offer their customers access to the Gresham House Strategic Public Equity
strategy, a style comparable and complementary to our own. Aberdeen Standard
Investments will provide marketing and sales support to the joint venture in
respect of the Company going forward.
Gresham House has committed to investing significantly into the Company over
the medium term, and I look forward to welcoming them as shareholders.
Combining their efforts on marketing with Aberdeen Standard Investments, an
enhanced investment process, and the Gresham House direct investment, the Board
believes that the prospects for the Company are substantially improved as a
result of the change.
Further updates on the transition will be announced by the Company to the Stock
Exchange and I look forward to updating you on the impact of the changes when I
report at the end of this financial year.
Gearing and Cash Management
The Company operates without a debt or overdraft facility, a policy that is
periodically reviewed by the Board in conjunction with the Investment Manager.
The Board and the Investment Manager have a conservative approach to gearing as
a result of the concentrated nature of the Company's portfolio. No gearing has
been in place at any point during the period. Cash positions are generally
maintained to take advantage of suitable investment opportunities as they
arise.
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.
Discount and Discount Management
During the period, the Company's shares continued to trade at a discount to
NAV. In the six months to 31 December 2019, the discount to NAV averaged 14.7%
and ended the period at 14.4%. Over the period, the Company bought back 462,745
shares.
The Board has continued to monitor closely the discount to NAV at which the
Company's shares have traded. The appointment of Aberdeen Standard Gresham
House, as explained above, is intended to enhance the prospects of the Company
going forward.
Outlook
Our plan remains to follow rigorously and consistently our disciplined
investment process which has been in place since the Company was first
launched. We sense more than ever that investors are concentrating on
fundamental valuations, which in these volatile and uncertain times should
offer the best protection and prospects whatever the final legacy of COVID-19.
The impact of the pandemic will pass and we look forward to the Company
participating in the recovery. In the medium term, we are excited about the
changes announced today and we believe that the Company has a strong future as
London's leading quoted vehicle for smaller company investment, adopting
private equity investment techniques.
Richard Hills
Chairman
26 March 2020
INvestment Manager's report
Investment Strategy
Our strategy is to invest in publicly quoted companies that we believe will
increase in value through strategic, operational or management change. We
follow a practice of constructive corporate engagement and aim to work with
management teams in order to enhance shareholder value. We seek to build a
consensus with other stakeholders and prefer to work alongside like-minded
co-investors as leaders, followers or supporters. We try to avoid confrontation
with investee companies as we believe that there is strong evidence that
overtly hostile activism generally produces poor returns for investors.
We are long-term investors and typically aim to hold companies for the duration
of rolling three-year investment plans that include an entry and exit strategy
and a clearly identified route to value creation. The duration of these plans
can be shortened by transactional activity or lengthened by adverse economic
conditions. Before investing we undertake an extensive due diligence process,
assessing market conditions, management and stakeholders. Our investments are
underpinned by valuations which we derive using private equity-based
techniques. These include a focus on cash flows, the potential value of the
company to trade or financial buyers and potentially beneficial changes in
capital structure over the investment period.
The typical investee company, at the time of initial investment, is too small
to be considered for inclusion in the FTSE 250 Index. We believe that smaller
companies provide the greatest opportunity for our investment style as they are
relatively under-researched, often have more limited resources, and frequently
can be more attractively valued.
We believe that this approach, if properly executed, has the potential to
generate favourable risk-adjusted returns for shareholders over the long term.
Market Background
In the UK market, the second half of 2019 was dominated by the anticipated
General Election and share prices responded favourably to the outcome. From a
low valuation base, the market was led by domestic cyclical stocks. The indices
of smaller companies lagged the more domestically focused mid cap market, with
the FTSE Small Cap Index and the FTSE AIM All-Share Index increasing by 10.9%
and 5.0% respectively.
We estimate that the smaller company index re-rated by around 30% in aggregate,
given the more favourable backdrop compared to the same point a year ago.
However, the earnings outlook remains uncertain for various companies and
sectors given continuing challenging external conditions.
Performance Review
Although the Company has no exposure to retailers, banks and housebuilders;
sectors which benefited most from the improvement in sentiment, the majority of
holdings in the portfolio saw good share price appreciation. This was held back
by larger holdings including Tribal, Clinigen and Equiniti which are discussed
further below.
Top 5 Contributors to Performance
Valuation Period
at period end attribution
Company GBP'000 (basis
points)
Wilmington 14,596 202
Ergomed 9,482 160
Medica 10,897 147
4imprint 6,172 122
Alliance Pharma 9,870 98
Wilmington re-rated following more recent results showing a return to organic
growth under new management. Ergomed shares were strong with upgrades at its
interim results and a significant strengthening of its management team and
board of directors. Medica saw its share price increase following strong
interim results and a new CEO joining. 4imprint saw expectations upgraded and a
re-rating in the period and Alliance Pharma delivered above market levels of
organic growth with very strong cash flow.
Bottom 5 Contributors to Performance
Valuation
at period Period
end attribution
Company GBP'000 (basis points)
Tribal 9,714
-113
Clinigen 14,410 -67
Equiniti 19,668 -64
EMIS 5,611 -52
Dialight - -32
Operational performance on the whole was good across the portfolio. Tribal
de-rated over the period. The company is undertaking investment in its next
generation cloud based product platform and at the same time its end markets
are in a lull ahead of this being delivered. Clinigen de-rated owing to the
company having a historically high level of gearing post recent acquisitions.
Equiniti's shares were weaker given uncertainty in the UK impacting higher
margin corporate actions and lower levels of share dealing. Furthermore, the
market is waiting for improved cash generation to bring gearing levels down.
After a strong run, EMIS shares were slightly weaker, although the company was
awarded a place on the framework for the NHS GP Futures procurement contract.
Our holding in Dialight was exited following the company warning on profits and
changing its CEO.
Dealing activity
There were full exits in IFG Group following its takeover by Epiris in August
and in Dialight. Positions in 4imprint, EMIS and Oxford Metrics were reduced on
valuation grounds. We sold half of the cost of our investment in Ergomed at a
significant profit, retaining a mid-weight position in the portfolio.
New investments were undertaken in XPS Pensions Group, the professional
services business. The company suffered a material de-rating following its full
year results which provided a liquidity opportunity and a rebasing of
forecasts. The shares have partially recovered since. A new investment was made
in Huntsworth, the healthcare marketing services business. The shares heavily
de-rated owing to a tempering of growth expectations. We consider the long term
structural growth opportunity and cash characteristics as attractive at a
discounted valuation. The company was bid for by Clayton, Dubilier & Rice
private equity at a significant premium post the period end. There were further
liquidity opportunities in Hostelworld and Benchmark Holdings. Hostelworld, the
niche hostel booking platform, has suffered a severe de-rating as it invests in
its technological capabilities which has impacted the growth rate. At the same
time, churn in the register has put pressure on the share price. Benchmark, the
leading aquaculture business, has seen a wholesale change in management
following poor capital allocation and an ill-defined strategy. The company has
also seen a significant churn in its shareholder base. New management have a
significant self-help opportunity for an asset with strong market positions and
intellectual property.
Portfolio Review
At the end of the financial period, the portfolio remained highly focused, with
a total of 23 holdings and the top 10 holdings accounting for 66.9% of the NAV.
Apart from the approximately GBP30k invested in Vintage, the portfolio is wholly
invested in quoted companies with a 4.4% cash balance at the end of the period.
Portfolio as at 31 December 2019
Company Sector Date of Cost GBP % of % of
Classification first '000 % of invested net
Investment invested portfolio assets
Valuation portfolio at 30
GBP'000 at 31 June 2019
December
2019
Equiniti Support Mar 2016 18,581 19,668 11.3% 13.3% 10.9%
Services
Wilmington Media Oct 2010 11,942 14,596 8.4% 7.0% 8.1%
Clinigen Healthcare Jul 2014 10,027 14,410 8.3% 7.1% 8.0%
Tyman Industrials Apr 2007 11,115 13,111 7.6% 7.2% 7.2%
Medica Healthcare Mar 2017 9,673 10,897 6.3% 5.4% 6.0%
Brooks Financials Jun 2016 8,139 9,973 5.7% 5.0% 5.5%
Macdonald
Alliance Pharma Healthcare May 2017 6,768 9,870 5.7% 4.9% 5.4%
Tribal Technology Dec 2014 11,643 9,714 5.6% 7.1% 5.4%
Ergomed Healthcare Apr 2018 4,515 9,482 5.5% 6.1% 5.2%
XPS Pensions Support Jul 2019 7,908 9,351 5.4% - 5.2%
Services
Harworth Property Jul 2016 3,798 6,450 3.7% 3.6% 3.6%
Hostelworld Technology Oct 2019 6,256 6,440 3.7% - 3.5%
4imprint Support Feb 2006 1,044 6,172 3.6% 6.9% 3.4%
Services
EMIS Technology Mar 2014 3,982 5,611 3.2% 5.5% 3.1%
Benchmark Healthcare Jun 2019 5,021 4,833 2.8% 1.1% 2.7%
JTC Support Jun 2019 3,447 3,854 2.2% 0.9% 2.1%
Services
Huntsworth Media Sep 2019 4,139 3,786 2.2% - 2.1%
Oxford Metrics Technology Dec 2014 1,399 3,626 2.1% 3.5% 2.0%
Strix Industrials May 2019 2,569 3,224 1.9% 1.7% 1.8%
Numis Financials Oct 2017 3,100 3,053 1.8% 2.1% 1.7%
Proactis Technology Nov 2017 9,308 2,808 1.6% 1.2% 1.5%
Eckoh Technology Mar 2019 1,922 2,499 1.4% 1.0% 1.4%
Vintage 1 Unquoted Mar 2017 5 32 0.0% 0.4% 0.0%
Total investments 173,460 95.8%
Cash 7,886 4.4%
Net current liabilities (273) (0.2%)
Total shareholders' funds 181,073 100.0%
Sector split by industry %
Healthcare 27.3
Support Services 21.6
Technology 16.9
Media 10.2
Industrials 9.0
Financials 7.2
Property 3.6
Net cash 4.2
Unquoted 0.0
Size split by market %
capitalisation
Greater than GBP500m 32.5
GBP300m - GBP500m 22.2
GBP100m - GBP300m 39.5
Less than GBP100m 1.6
Net cash 4.2
Unquoted 0.0
Portfolio Characteristics
Consensus Median portfolio Strategic Equity FTSE Small Cap
characteristics Capital ex Investment
Trusts
Price/Earnings ratio (FY1) 14.0x 12.8x
Dividend yield 2.8% 3.3%
Price/Sales ratio 2.1x 0.7x
GVQIM Cashflow yield* 9.8% n/a
Forecast earnings growth (FY1) 11.5% 10.0%
Forecast net debt to EBITDA 0.5x 3.1x
Source: Factset Portfolio Analysis System, Bloomberg. Portfolio excludes
Vintage and Harworth Group
* GVQIM cashflow yield: (12 month forward Cash EBITDA minus maintenance capex)/
(market capitalisation plus 12 month forward net debt).
Unlisted Investments
Over the period, the Company received a total of GBP545k from Vintage I. As no
further draw downs have been made since initial investment in 2005, the adviser
has communicated that it does not expect to make any further net draw downs.
Outlook
Whilst concerns persist over the future relationship between the UK and the EU
and beyond that, the USA's relations with China and activities in the Middle
East, UK equities stand to benefit from any reversal of the 'structural
underweight' allocation of the past three years.
Despite the strong growth in the Company's NAV, the valuations of portfolio
companies remain attractive in our view. When looking at a traditional P/E
ratio compared to historical levels, all but one of the top ten companies are
rated at below their five year mid point. On our preferred valuation metric,
the GVQ cash yield, the weighted average portfolio valuation corroborates this
positive outlook.
Furthermore, irrespective of whether markets remain supportive, portfolio
companies have specific opportunities to grow profitability and cash flow and
improve their business models. For example; leveraging investment recently
undertaken, improving capital allocation, reducing balance sheet leverage
through cash generation, more efficient operations and improving communications
and investor perceptions are all means to grow their value. We continue to
engage with investee companies on these areas.
Whilst smaller companies remain at a discounted rating to medium sized and
larger companies owing to poor liquidity and risk aversion, the opportunity for
an actively managed small cap investment trust is acute. This is particularly
so given the weight of money in private equity funds alongside the
generationally cheap levels of financing.
Jeff Harris / Adam Khanbhai
GVQ Investment Management Limited
26 March 2020
Top 10 Investee Company Review (as at 31 December 2019)
Alliance Pharma is an international healthcare business specialising in the
sale of over 90 pharmaceutical and consumer healthcare products in over 100
countries. The business model is capital-lite with limited investment in
research and development allowing it to generate prodigious cash flow. The
company has a history of creating value through a sensible buy and build model
enhancing the product portfolio and territorial footprint. The company has
ambitions to continue this growth leveraging its existing infrastructure and
utilising its cash flow. Funds managed by the Investment Manager hold c.4% of
the company's equity.
Brooks Macdonald is a UK based wealth management firm providing investment
services to professional advisors, high net worth individuals and institutions.
Founded in 1991, the company now has over GBP13 billion in discretionary funds
under management. We believe the company is well positioned in a structurally
growing market as the requirements for self-investment solutions increases.
Following a period of investment under new management, we believe the company
is well positioned to grow its operating profits and continue its strong cash
generation. Funds managed by the Investment Manager hold c.3% of the company's
equity.
Clinigen is a speciality pharmaceutical and services company. It has three
business units -Clinical Trial Services, Unlicensed Medicines and Commercial
Medicines. Activities undertaken by these businesses include: acquiring,
licencing and revitalising hospital-only critical care medicines; and providing
patient access to its own or other pharmaceutical companies' products, whether
to meet unmet medical needs or for use in clinical trials. The company has
grown rapidly since its IPO in 2012, both organically and through targeted
acquisitions. We believe the cash flow characteristics are underappreciated and
the company has a leading position in a multi-year growth market. Funds managed
by the Investment Manager hold c. 3% of the company's equity.
Equiniti is a business services company providing administration, processing
payments services and technology products typically to FTSE 350 companies and
large public sector organisations. It is one of the three main share registrars
for UK quoted companies. It administers company benefits schemes and share
savings schemes. It also provides software and services to help manage the
administration of company and public sector pension funds. We believe the
business has a strong combination of stable, long-term repeatable
non-discretionary corporate services alongside offering technology based
solutions to growing regulatory requirements. The business was founded with the
buyout of Lloyds TSB Share Registrars by private equity house Advent
International in 2007. Following the buyout the company added to its product
and service capability through a number of targeted acquisitions. The company
IPO'd in October 2015 and undertook a strategic entry into North America in
2017. With moderate organic growth we believe that the company has the
potential to deliver high single digit/low double digit earnings growth, which
should not be significantly impacted by the broad market cycle. Despite its
quality, the company trades at a moderate rating. Funds managed by the
Investment Manager currently hold c.6% of the company's equity.
Ergomed is a pharmaceutical services company providing pharmacovigilance and
clinical research services to healthcare clients. Following a change in
strategy away from product development, the company now specialises in
providing services to a growing market for outsourcing. Growth rates have
historically been high and are forecast to continue based on market growth and
Ergomed taking share. The company has significantly strengthened its management
team and Board of Directors to aid with its next phase of growth. Fund managed
by the Investment Manager currently hold c. 5% of the company's equity.
Medica is the leading provider of teleradiology services in the UK. The company
provides outsourced interpretation and reporting of MRI, CT and plain film
X-ray images. This is delivered through three primary services to UK hospital
radiology departments: Nighthawk out-of-hours service; Routine cross-sectional
reporting on MRI and CT scans; and Routine plain film reporting on x-ray
images. Teleradiology as a service aims to improve patient care through faster
response and overcoming the challenge hospitals face in the increasing volume
in scanning activity. Medica was previously owned by Close Brothers Private
Equity following a 2013 buyout. The company IPO'd in March 2017 on the LSE and
admitted to the FTSE Small Cap index in June 2017. Funds managed by the
Investment Manager currently hold c.10% of the company's equity.
Tribal is a global provider of products and services to the international
education, training and learning markets. Today, the company focuses its
activities on student records and administration systems and quality review
inspection services. It has a high market share in a number of product niches
and geographies. We believe that the company has the potential to grow through
increasing its international sales, as well as updating and upselling to its
existing UK customer base. Since November 2015 the company's board has been
substantially refreshed, a non-core subsidiary sold and equity raised to
strengthen the balance sheet. The company has effectively reduced its overhead
and is developing its next generation software platform. Funds managed by the
Investment Manager currently hold 8% of the company's equity.
Tyman is a leading international supplier of engineered components to the door
and window industry in the new build and repair and maintenance (RMI) markets.
Historically, the company has undertaken M&A in Europe and North America to
complement organic growth from increasing building activity. Whilst more
recently, operational issues have hindered the company's progress, under the
new management team, the company is well placed to continue growing the
business organically whilst generating strong cash flow. Tyman has many of the
characteristics we believe are attractive to private equity. Funds managed by
the Investment Manager currently hold c.6% of the company's equity.
Wilmington Group provides business information and training services to
professional business customers in the financial services, medical and
white-collar professional service sectors. More than 80% of revenues in the
main publishing and information divisions are delivered digitally, typically on
a subscription basis, and with high levels of client retention. A new high
quality management team is well placed to accelerate the growth of the business
following recent investment in systems and to provide a coherent strategy and
capital allocation framework. Funds managed by the Investment Manager currently
hold c.10% of the company's equity.
XPS Pensions Group is a pensions administration and advisory business. Formed
following the merger between Xafinity and Punter Southall, XPS is a leader for
mid-market pension schemes with an opportunity to take share from the 'Big 3'
pensions consultants. The company has predictable revenue streams bolstered by
project work driven by an increasingly complex changing pensions landscape.
Owing to its capital-lite model, the company generates strong cash flow
utilised for bolt-on acquisitions and the payment of a healthy dividend. Funds
managed by the Investment Manager currently hold c. 4% of the company's equity.
GVQ Investment Management Limited
26 March 2020
The unconstrained, long-term philosophy and concentrated portfolios resulting
from the Investment Manager's investment style can lead to periods of
significant short-term variances of performance relative to comparative
indices. The Investment Manager believes that evaluating performance over
rolling periods of no less than three years, as well as assessing risk taken to
generate these returns, is most appropriate given the investment style and
horizon. Properly executed, the Investment Manager believes that this
investment style can generate attractive long-term risk adjusted returns.
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 the Investment Manager's own assessment
and interpretation of information available to it 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.
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 International Accounting
Standard ("IAS") 34, 'Interim Financial Reporting' issued by the
International Accounting Standards Board ("IASB") as adopted by the EU, and
gives a true and fair view of the assets, liabilities, financial position
and profit of the Company as required by Disclosure Guidance and
Transparency Rule ("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 26 March 2020
and the above responsibility statement was signed on its behalf by Richard
Hills, Chairman.
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
For the Company, the overriding risks and uncertainties to an investor relate
to the markets on which the Company's shares trade, and the shares of the
companies in which it invests trade, may move outside the control of the Board.
The principal risks and uncertainties are set out on pages 16 and 17 of the
Annual Report for the year ended 30 June 2019, which is available at
www.strategicequitycapital.com.
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 31 December 2019
Six month period ended Year ended Six month period to
31 December 2019 30 June 2019 31 December 2018
unaudited audited unaudited
Note Revenue Capital Total Revenue Capital Total Revenue Capital Total
return return GBP'000 return return GBP'000 return return GBP'000
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Investments
Gains/(losses) on 6 - 13,265 13,265 - 1,448 1,448 - (17,968) (17,968)
investments held at
fair value through
profit or loss
Currency gains - 3 3 - 1 1 - 2 2
- 13,268 13,268 - 1,449 1,449 - (17,966) (17,966)
Income
Dividends 2 1,697 - 1,697 3,116 - 3,116 1,434 - 1,434
Interest 2 33 - 33 73 - 73 32 - 32
Total income 1,730 - 1,730 3,189 - 3,189 1,466 - 1,466
Expenses
Investment 8 (635) - (635) (1,235) - (1,235) (631) - (631)
Manager's fee
Investment 9 - (45) (45) - (484) (484) - - -
Manager's
performance fee
Other expenses 3 (303) - (303) (576) - (576) (304) - (304)
Total expenses (938) (45) (983) (1,811) (484) (2,295) (935) - (935)
Net return before 792 13,223 14,015 1,378 965 2,343 531 (17,966) (17,435)
taxation
Taxation - - - - - - - - -
Net return and 792 13,223 14,015 1,378 965 2,343 531 (17,966) (17,435)
total comprehensive
income for the
period
Return per Ordinary pence pence pence pence pence pence pence pence pence
share
Basic 5 1.25 20.85 22.10 2.11 1.48 3.59 0.80 (27.17) (26.37)
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.
Statement of Changes in Equity
for the six month period to 31 December 2019
Note Share Share Special Capital Capital Revenue Total
capital premium reserve reserve redemption reserve GBP'000
GBP'000 account GBP'000 GBP'000 reserve GBP'000
GBP'000 GBP'000
For the six month period
to 31 December 2019
unaudited
1 July 2019 6,986 31,737 25,595 99,910 2,264 2,545 169,037
Net return and total - - - 13,223 - 792 14,015
comprehensive income for
the period
Dividend paid 4 - - - - - (951) (951)
Shares buy-backs - - (1,028) - - - (1,028)
31 December 2019 6,986 31,737 24,567 113,133 2,264 2,386 181,073
For the year to 30 June
2019 audited
1 July 2018 6,986 31,737 32,521 98,945 2,264 1,828 174,281
Net return and total - - - 965 - 1,378 2,343
comprehensive income for
the year
Dividend paid 4 - - - - - (661) (661)
Share buy-backs - - (6,926) - - - (6,926)
30 June 2019 6,986 31,737 25,595 99,910 2,264 2,545 169,037
For the six month period
to 31 December 2018
unaudited
1 July 2018 6,986 31,737 32,521 98,945 2,264 1,828 174,281
Net return and total - - - (17,966) - 531 (17,435)
comprehensive income for
the period
Dividend paid 4 - - - - - (661) (661)
Shares buy-backs - - (4,163) - - - (4,163)
31 December 2018 6,986 31,737 28,358 80,979 2,264 1,698 152,022
The notes form an integral part of these Half-Yearly financial statements.
Balance Sheet
as at 31 December 2019
As at As at As at
31 December 30 June 31 December
2019 2019 2018
unaudited audited unaudited
GBP'000 GBP'000 GBP'000
Note
Non-current assets
Investments held at fair 6 173,460 154,888 141,698
value through
profit or loss
Current assets
Trade and other receivables 238 1,244 413
Cash and cash equivalents 7,886 16,311 10,399
8,124 17,555 10,812
Total assets 181,584 172,443 152,510
Current liabilities
Trade and other payables (511) (3,406) (488)
Net assets 181,073 169,037 152,022
Capital and reserves:
Share capital 7 6,986 6,986 6,986
Share premium account 31,737 31,737 31,737
Special reserve 24,567 25,595 28,358
Capital reserve 113,133 99,910 80,979
Capital redemption reserve 2,264 2,264 2,264
Revenue reserve 2,386 2,545 1,698
Total shareholders' equity 181,073 169,037 152,022
pence pence pence
Net asset value per share 286.07 265.12 233.72
number number number
Ordinary shares in issue 7 63,296,844 63,759,589 65,045,291
The notes form an integral part of these Half-Yearly financial statements.
Statement of Cash Flows
for the six month period to 31 December 2019
Six month Year ended Six month
period to 30 June period to
31 December 2019 31 December
2019 audited 2018
unaudited GBP'000 unaudited
GBP'000 GBP'000
Operating activities
Net return before taxation 14,015 2,343 (17,435)
Adjustment for (gains)/losses on (13,265) (1,448) 17,968
investments
Currency gains (3) (1) (2)
Operating cash flows before 747 894 531
movements in working capital
Increase in receivables (106) (57) (338)
(Decrease)/increase in payables (401) 433 (40)
Purchases of portfolio investments (34,437) (26,508) (11,088)
Sales of portfolio investments 27,891 34,953 12,117
Net cash flow from operating (6,306) 9,715 1,182
activities
Financing activities
Equity dividend paid (951) (661) (661)
Shares bought back in the period (1,171) (6,838) (4,218)
Net cash flow from financing (2,122) (7,499) (4,879)
activities
(Decrease)/increase in cash and cash (8,428) 2,216 (3,697)
equivalents for period
Cash and cash equivalents at start 16,311 14,094 14,094
of period
Revaluation of foreign currency 3 1 2
balances
Cash and cash equivalents at 7,886 16,311 10,399
end of the period
The notes form an integral part of these Half-Yearly financial statements.
Notes to the Financial Statements
for the six month period to 31 December 2019
1.1 Corporate information
Strategic Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom, registered in England and Wales under the
Companies Act 2006 whose shares are publicly traded. The Company is an
investment company as defined by Section 833 of the Companies Act 2006.
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 interim financial statements of the Company have been prepared on
a going concern basis and in accordance with IAS 34, 'Interim financial
reporting' issued by the International Accounting Standards Board (as adopted
by the EU). 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 30 June 2019, which have
been prepared in accordance with IFRS as adopted by the EU. Where
presentational guidance set out in the Statement of Recommended Practice
("SORP") for investment trust companies and venture capital trusts issued by
the AIC is consistent with the requirements of IFRS, the Directors have sought
to prepare financial statements on a basis compliant with the recommendations
of the SORP.
The condensed interim 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 31 December 2019 and 31 December 2018
have not been either audited or reviewed by the Company's Auditor. Information
for the year ended 30 June 2019 has been extracted from the latest published
Annual Report and financial statements, which have been filed with the
Registrar of Companies. The report of the Auditor on those financial statements
was unqualified, did not contain an emphasis of matter paragraph and did not
contain any statement under Section 498 of the Companies Act 2006.
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 30 June 2019.
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 30 June 2019, had no
significant effect on the accounting or reporting of the Company.
2. Income
Six month period to Year ended 30 June 2019 Six month period to
31 December 2019 (audited) 31 December 2018
(unaudited (unaudited)
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Income from
investments
UK dividend 1,697 - 1,697 3,116 - 3,116 1,434 - 1,434
income
Other
operating
income
Liquidity 33 - 33 73 - 73 32 - 32
interest
Total 1,730 - 1,730 3,189 - 3,189 1,466 - 1,466
income
3. Other expenses
Six month period to Year ended 30 June 2019 Six month period to
31 December 2019 (audited) 31 December 2018
(unaudited) (unaudited)
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000 GBP'000
Secretarial 74 - 74 117 - 117 57 - 57
services
Auditors'
remuneration
for:
Audit 18 - 18 24 - 24 12 - 12
services
Directors' 71 - 71 131 - 131 67 - 67
remuneration
Other 140 - 140 304 - 304 168 - 168
expenses
303 - 303 576 - 576 304 - 304
4. Dividend
The Company paid a final dividend of 1.50p in respect of the year ended 30 June
2019 (30 June 2018: 1.00p) per Ordinary share on 63,396,844 (30 June 2018:
66,135,700) shares, amounting to GBP950,953 (30 June 2018: GBP661,357). The
dividend was paid on 13 November 2019 to Shareholders on the register at 11
October 2019. In line with previous years, the Board does not intend to propose
an interim dividend.
5. Return per Ordinary share
Six month period to Year ended Six month period to
31 December 2019 30 June 2019 31 December 2018
Revenue Capital Revenue Capital Revenue Capital
return return Total return return Total return return Total
pence pence pence pence pence pence pence pence Pence
Return per 1.25 20.85 22.10 2.11 1.48 3.59 0.80 (27.17) (26.37)
Ordinary
share
Returns per Ordinary share are calculated based on 63,428,216 (30 June 2019:
65,305,594 and 31 December 2018: 66,120,529) being the weighted average number
of Ordinary shares, excluding shares held in treasury, in issue throughout the
period.
6. Investments
31 December 2019
GBP'000
Investment portfolio summary:
Listed investments at fair value through 173,428
profit or loss
Unlisted investments at fair value through 32
profit or loss
173,460
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 International Private
Equity and Venture Capital ("IPEV") Valuation Guidelines.
The underlying funds primarily invest in private companies which are recorded
at cost or Fair Value derived from private equity valuation models and
techniques. The main inputs into the valuation models of the underlying funds
include industry performance, company performance, quality of management, the
price of the most recent financing round or prospects for the next financing
round, exit opportunities which are available, liquidity preference and net
present value analysis.
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 31 December
2019
Level 1 Level Level 3 Total
GBP'000 2 GBP'000 GBP'000
GBP'000
Equity investments and limited 173,428 - 32 173,460
partnership interests
Liquidity funds - 6,352 - 6,352
Total 173,428 6,352 32 179,812
The below table presents the movement in level 3 instruments for the period
ended 31 December 2019.
GBP'000
Opening balance at 30 June 2019 628
Proceeds from disposals during the period (545)
Gains on disposals during the period 519
Decrease in unrealised profit for the (570)
period included in the Statement of
Comprehensive Income
Closing balance at 31 December 2019 32
Investments in unquoted investment funds are generally held at the valuations
provided by the managers of those funds. The valuation for Vintage I is as at
31 December 2019.
There were no transfers between levels for the period ended 31 December 2019.
A list of the portfolio holdings by their aggregate market values is given in
the Investment Manager's report above.
31 December 2019
Total
Analysis of capital gains:
Gains on sale of investments 6,385
Movement in investment holding gains 6,880
13,265
7. Share capital
31 December
2019
Number GBP'000
Allotted, called up and fully paid Ordinary
shares of 10p each:
At 30 June 2019 69,858,891 6,986
Ordinary shares of 10p each held in treasury (6,099,302) (610)
Ordinary shares in circulation at 30 June 63,759,589 6,376
2019
Share buy-backs during the period to be held (462,745) (46)
in treasury
Ordinary shares in issue per Balance Sheet 63,296,844 6,330
Shares held in treasury 6,562,047 656
Ordinary shares in circulation at 31 69,858,891 6,986
December 2019
During the period to 31 December 2019 462,745 Ordinary shares were bought back
by the Company and held in treasury.
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 GBP45,000 has been accrued in respect of the six months
ended 31 December 2019 (30 June 2019: GBP484,000; 31 December 2018: GBPnil).
10. Taxation
The tax charge for the half year is GBPnil (30 June 2019: GBPnil; 31 December 2018:
GBPnil). The estimated effective corporation tax rate for the year ended 30 June
2020 is 0%. This is because investment gains are exempt from tax owing to the
Company's status as an investment company and there is expected to be an excess
of management expenses over taxable income.
11. Capital commitments and contingent liabilities
The Company has a commitment to invest EURnil in Vintage I (30 June 2019: EUR
1,560,000; 31 December 2018: EUR1,560,000).
12. Related party transactions and transactions with the Investment Manager
The Investment Manager is regarded as a related party of the Company.
The amounts payable to the Investment Manager, in respect of management fees,
during the period to 31 December 2019 was GBP635,000 (30 June 2019: GBP1,235,000;
31 December 2018: GBP631,000), of which GBP322,000 (30 June 2019: GBP318,000; 31
December 2018: GBP302,500) was outstanding at 31 December 2019. The amount due to
the Investment Manager for performance fees at 31 December 2019 was GBP45,000 (30
June 2019: GBP484,000; 31 December 2018: GBPnil).
Directors and Advisors
Directors
Richard Hills (Chairman)
Richard Locke (Deputy Chairman)
William Barlow
Josephine Dixon
David Morrison
Auditor
KPMG LLP
Saltire Court
20 Castle Terrace
Edinburgh EH1 2EG
Broker
Investec Bank plc
30 Gresham Street
London EC2V 7QP
Custodian
J.P. Morgan Chase Bank N.A.
25 Bank Street
Canary Wharf
London E14 5JP
Depositary
J.P. Morgan Europe Limited
25 Bank Street
Canary Wharf
London E14 5JP
Investment Manager
GVQ Investment Management Limited
16 Berkeley Street
London W1J 8DZ
Tel: 020 3907 4190
Registrar
Computershare Investor Services plc
The Pavilions
Bridgwater Road
Bristol BS99 6ZY
Tel: 0370 707 1285
Website: www.computershare.com
Solicitor
Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
Company Secretary and Administrator
PATAC Limited
21 Walker Street
Edinburgh EH3 7HX
Tel: 0131 538 6610
Registered Office
c/o Stephenson Harwood LLP
1 Finsbury Circus
London EC2M 7SH
Shareholder Information
Financial calendar
Company's year-end 30 June
Annual results announced October
Annual General Meeting November
Company's half-year 31 December
Half-yearly results announced February
Share price
The Company's Ordinary shares are premium listed on the main market of the
London Stock Exchange plc (the "London Stock Exchange"). The share price is
quoted daily in the Financial Times under 'Investment Companies'.
Share dealing
Shares can be traded through your usual stockbroker.
Share register enquiries
The register for the Ordinary shares is maintained by Computershare Investor
Services plc ("Registrar"). In the event of queries regarding your holding,
please contact the Registrar, on 0370 707 1285. Changes of name and/or address
must be notified in writing to the Registrar, whose address is shown above.
NAV
The Company's NAV is announced daily to the London Stock Exchange.
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 ENGLAND AND WALES No 5448627
A member of the Association of Investment Companies
The Half Yearly Financial 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 ("NSM") and will be available for inspection at the NSM,
which is situated at: http://www.morningstar.co.uk/uk/nsm
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.
END
(END) Dow Jones Newswires
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