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A 360 view of the latest results from ESCT, AUSC, LWDB, SSON, BSIF, HEIT
“…it is what you do differently to others that makes you perform differently…” – wise words from Law Debenture’s Investment Managers’ Review. You’ll find plenty more wise words in part one of this week’s round-up of investment company results and broker commentary…

By
Frank Buhagiar

Owing to a flurry of results, Doceo’s Weekly 360 comes in two parts this week.

Part 1.

Inversion of the week
“Curiously, we have seen an inversion of the economic narrative on the continent, with peripheral countries such as Portugal, Ireland and Greece delivering strong performances, while core economies such as Germany and France have struggled, even as gas prices have stabilised.” European Smaller Companies (ESCT) Chairman statement.

A derivative of global growth
Half-year Report from European Smaller Companies (ESCT). As Chairman Christopher Casey reports: “NAV total return performance for the six months to 31 December 2023 was 4.7%, behind our benchmark of 7.1%. This was driven by our higher exposure to smaller capitalised companies in comparison to our immediate competitors, a cyclical bias in the portfolio and some poor stock selection. The share price total return, however, was considerably stronger than NAV growth with an increase of 8.6%, against the AIC European Smaller Companies sector of 5.2%.”

In his outlook statement, the Chairman points out that “European smaller companies have rarely traded as cheaply as they currently do. Investors have shunned the space as concerns about an impending recession, that has yet to materialise, have dominated…However, the Board is confident that the growing optimism will reach the smaller companies sector in due course. Whilst energy prices remain elevated in Europe, falling interest rates and increasing consumer optimism should help drive stock markets. We remain of the view that we are unlikely to go back to the negative/zero interest rate era that we left after the pandemic, but we do see scope for interest rates to drop meaningfully. European smaller companies are first and foremost a derivative of global growth…”

Winterflood writes: “Share price TR +8.6%, as discount narrowed from 16.4% to 13.6%; 546k shares repurchased over the period. Revenue per share 1.19p (H1 2022: 1.45p). 1.45p interim dividend, flat YoY. Gearing 13.1% (13.1% as at 30 June 2023). Underperformance driven by higher exposure to smaller-cap companies, a cyclical bias in the portfolio and bottom-up stock selection.”

Stat of the week
“…around two UK quoted companies a week are being acquired either by private equity business or other corporates, as merger and acquisition (‘M&A’) activity has increased.” abrdn UK Smaller Companies Growth (AUSC) Investment Manager’s Review.

The recessionary question mark
abrdn UK Smaller Companies Growth (AUSC) outperformed over the half year. Chair Liz Airey has the numbers: “…NAV…total return was 7.3% while the share price delivered a total return of 12.9%…The Company outperformed the total return of its reference index, the Deutsche Numis Smaller Companies plus AIM (ex-investment companies) Index…which was 5.5%…Encouragingly, on a relative basis, the NAV outperformed the reference index in four out of the six months.” The investment managers add: “Whilst across the portfolio we have not been totally immune to macro headwinds or earnings downgrades, we have been very pleased at the earnings resilience of the Company’s investments, particularly the larger holdings. At the time of writing, in the current top 10 holdings, eight had upgrades to earnings expectations when they last reported, with the other two expectations remaining unchanged.”

Staying with the investment managers: “The recessionary question mark in many geographies still looms as we move through 2024…Whilst interest rates look to have peaked, the trading environment for companies is likely to continue to be difficult given lacklustre economic growth projections.” Because of this “This is the time in the cycle to stick to ‘quality’ companies. They are more likely to be successful in navigating the more difficult macro environments and can defend earnings…looking into 2024, we hope company fundamentals return to becoming the more important drivers of returns…” Meanwhile, “The outlook for smaller companies investing remains strong, particularly given the current valuation of the market, and the interest rate and inflation environment suggest a more benign investment background in prospect.”

Winterflood notes: “Net gearing 1.9% at 31 December (2.5% as at 30 June 2023). Fund bought back 7.1m shares (8.1% of issued share capital) at average discount of 13.2%, leading to NAV per share accretion of +1.1%.”

Difference of the week
“…it is what you do differently to others that makes you perform differently.” Law Debenture (LWDB) Investment Managers’ Review.

A more flexible Portfolio
Law Debenture Corporation (LWDB), another outperformer, this time over the full year. Over to Chair Robert Hingley: “…the combination of our diversified Portfolio and another good IPS performance has enabled Law Debenture to continue to deliver on its commitment to produce capital growth over the longer term and steadily increasing dividend income. Law Debenture’s long-term record of benchmark outperformance remains strong, with share price outperformance of the FTSE Actuaries All-Share Index over the last five years of c.48%.” As for the latest full year: “Our benchmark, the FTSE Actuaries All-Share Index, delivered a 7.9% total return in 2023. The Company’s share price total return marginally outperformed this with a total return of 8.1% for 2023. The Net Assets Value (‘NAV’) with debt and the independent professional services (‘IPS’) business at fair value delivered a return of 9.4%.”

And speaking of IPS, the Chair adds: “We believe our professional services business has been a crucial differentiator in driving consistent long-term outperformance compared to other UK income funds and, the Board believes, is well positioned to continue this, with a strong platform built in recent years from which to grow further. Although accounting for only c.20% of our NAV…the IPS business has funded around a third of our dividends in the last 10 years and has now delivered a compound annual growth in profit before tax of 8.7% over the last five years. Through its strong cashflow and consistent mid-to high single digit growth rates, IPS enables our investment managers to build a more flexible Portfolio that includes both income and growth-focused stocks, rather than having to ‘chase yield’…The majority of the Portfolio is invested in UK equities…” That’s because “Companies with robust business models and supportive long-term trends are now frequently overlooked by investors who cannot see past a gloomy UK economic environment. Law Debenture is well positioned with a long-term focus and a clear emphasis on the value provided by the companies we invest in.”

Numis is a fan: “We believe Law Debenture is an attractive fund, and one of the few ICs left with a value-biased investment style. In addition, we believe the IPS business provides significant support to the dividend and has the potential to deliver further growth. The IPS business has demonstrated its resilience by delivering a strong growth in revenue, 11.8%, and earnings, 10.5%, against an uncertain macro backdrop. The valuation has increased c.4%, which we expected to add 0.9% to today’s NAV. James Henderson and Laura Foll have a clearly defined value approach and we expect a higher interest rate may be a more attractive environment of active stock-picking, as winners and losers should become apparent more quickly.”

JPMorgan is neutral: “LWDB is a unique combination in the investment trust universe, but one that works well, in our view…Overall, group costs are below average in a peer group that already has some of the lowest ongoing charges ratios…But, if we look at LWDB as a package, 80% is the listed equity portfolio managed by James Henderson and Laura Foll who are also the portfolio managers of other investment trusts, Lowland and Henderson Opportunities Trust, both of which trade at double-digit discounts to NAV…Overall, while we think IPS is a great business that has a strong management team led by Denis Jackson, it is difficult to make the case for LWDB as a whole vs the other trusts that offer access to the talents of James Henderson and Laura Foll when the discounts on those are so much wider. Therefore we remain Neutral.”

Morbidity of the week
“Our lifetime is finite. This is known by all but accepted by few, outside of possibly those who have received a terminal medical diagnosis. I don’t wish to be morbid but only to emphasise the point that what you do with your time in any given moment is an active choice to exclude every other option, as you will never have time to do everything. It is the same for constructing a concentrated portfolio. As there are only a certain number of companies we can hold at any given moment we have to exclude the tens of thousands of other companies we could own.” Smithson Investment Trust (SSON) Investment Manager’s Review.

Return to form
Smithson Investment Trust (SSON) makes it a hat trick or outperformers, at least in NAV per share terms. In her statement, Chair Diana Dyer Bartlett first talks about the five-year track record before moving on to the latest full-year period: “This is our fifth Annual Report since the inception of the Company in October 2018, and as five years is probably the minimum period one could regard as being ‘long term’, it is appropriate to comment on the Company’s performance over this period…NAV…per share has increased by 59.8%, an annualised rate of 9.4%. This represents an outperformance compared with the Company’s reference index, the MSCI World SMID Index, which has returned 47.2% over the same period, an annualised rate of 7.7%…this is the best performance of any investment trust included within the AIC Global Smaller Companies sector.” As for 2023: “…NAV per share increased by 13.3% in the year, outperforming the MSCI World SMID Index by 4.2 percentage points…This is a pleasing ‘return to form’ after the underperformance in 2022 – which is the only calendar year in which the Company has underperformed the Index…”

Looking ahead, the investment manager is sounding confident: “We end this year with significant optimism for the future. Not only is portfolio positioning the best we believe it has ever been, but the subject of much of my commentary over the last couple of years, the interest rate cycle, is almost certainly at its peak. The upward movement in interest rates has been the strongest negative force against the relative performance of small and mid-cap equities and it is perhaps worth observing that over the two years since rates started increasing, the MSCI World Small and Mid-cap index has underperformed the MSCI World Large cap index by over 10%. We wait to see what effect falling rates might have.”

Numis writes: “…it is disappointing to us to see the Board deciding not to put forward a continuation vote at the AGM, which the directors are required to consider offering if the discount is wider than 10% in a year. We believe it is best practice to put forward the vote if the condition is triggered…We continue to believe…Smithson, is potentially an attractive investment opportunity, despite an own goal by the board on the continuation vote, which raises some concerns. We added it to our Equity ICs Recommended List in mid-February. Style rotation and poor sentiment towards small cap companies has challenged the fund’s track record, while it was caught holding several stocks with high valuations, as well as some stocks with small operational issues that should have acted as red flags. We believe that positive lessons have been learnt by the manager, whilst maintaining the core of the investment process…We believe that the portfolio has sound fundamentals that place it in a strong position to outperform over the long run…”

Focus of the week
“The Board is pleased that our portfolio manager and his team remain focused on the things they can control…” Smithson Investment Trust (SSON) Chair Statement.

Robust
That’s how Chairman John Scott describes Bluefield Solar Income’s (BSIF) Interim Results for the six to end of Dec: “I am pleased to present another robust set of results which reflect continued operational progress across the Company’s portfolio. I reiterate our full-year guidance of dividend distributions for the financial year of not less than 8.8pps (2022/23: 8.6pps), which we expect to be covered approximately two times by earnings, net of debt amortisation and the EGL. Based on yesterday’s closing share price, this provides shareholders with a yield of over 8.5%. The position of the Company today is further enhanced by its high levels of regulated indexed revenues, complemented by high fixed power sales contracts, a large development pipeline, a defensive capital structure and a robust NAV.” That’s not all “…the Company is delighted to have formed a Strategic Partnership with GLIL, providing a partner with whom we can co-invest for the long term, spreading our capital resources over a greater range of investors.”

And yet, as the Chairman explains: “Despite these compelling attributes, it has been disappointing to note the Company’s share price discount to NAV widen, at times exceeding 25%. Meanwhile ample transactional evidence adds further weight to the credibility of the Company’s valuation, which is in stark contrast to the share price. We remain entirely confident that Bluefield Solar is well placed to perform the task it has executed so well for over a decade, playing a significant role in the continuing development programme that is so clearly required to expand the UK’s supplies of indigenously produced green electricity, while creating compelling growth and income for shareholders, with a total return of 110.14% since IPO.”

Numis sounds positive: “The NAV total return was 0.5% in the six months, including dividends paid of 4.4p. Revenue generated by the portfolio totalled £92m over the six months ending 31 December 2023, an increase of 15.9% compared with the same period in 2022…The solid earnings performance reflects the impact of favourable power sales contracts struck at a time of elevated UK wholesale power prices. Management continues to point to dividend cover of c.2.0x for the full year ending 30 June 2024, supporting an attractive dividend yield of 8.6%. The robust income outlook and optimised debt book, superior long-term earnings and NAV total return delivery, combined with optionality from the significant pipeline and GLIL partnership deal remain key reasons to own BSIF. Many shareholders will also welcome the recently announced £20m share buyback programme as part of a balanced approach to capital allocation.”

JPMorgan is underweight though: “It is positive to see that BSIF is focused on thinking about capital allocation and in our view it is right to prioritise paying down the RCF. BSIF also see significant value potential in its development assets and it has a significant potential development pipeline. But with the shares trading at a significant discount to NAV, the hurdle rate for new investments is high and it may be the case that the return from share buybacks makes a higher contribution future NAV returns per share than incremental investments. BSIF has committed £20m to share buybacks which is welcome and it should have additional cash available when the planned sale of the 100MW of solar assets completes. We are Underweight.”

Working hard to find solutions
Harmony Energy Income (HEIT) reported a 4.5% decrease in adjusted NAV per Ordinary Share for the full year. Chair Norman Crighton had this to say: “Our focus for this year has been on the delivery of the Company’s portfolio through construction and ramping up of operations. The Board is pleased with the progress achieved in this regard. The Company’s Pillswood site has been one of the best performing BESS (Battery Energy Storage Systems) sites in Great Britain during 2023 and the now energised 198 MWh/ 99MW Bumpers project is the joint-largest in Europe (by MWh), resulting in the portfolio moving from 0% to 70% operational within the 12 months since 31 October 2022.”

The Chair then goes on to address the elephant in the room: “It has been widely publicised that the GB BESS market, particularly post-Period end, has deteriorated. Despite this recent performance, independent market experts expect trading conditions to improve over the course of 2024. HEIT’s longer-duration 2-hour batteries have continued to outperform shorter-duration BESS. The Board and its advisers are working hard to find solutions to the challenges we, and the sector, currently face. Our key objectives looking forward are finishing construction of our outstanding projects, addressing the discount to the NAV, and maximising the Company’s income. In doing so, we will continue to prove the value of BESS as an asset class and attractive investment opportunity, as well as demonstrating why HEIT is the best vehicle to access such opportunity.”

Jefferies writes: “HEIT had pre-announced a NAV per share of 115.4p as at 31/10/23, resulting in a 2.2% NAV total return for the quarter, and -1.1% for the year. Alongside the finals today, HEIT has also announced a 31/01/24 NAV of 104.5p, resulting in a NAV total return of -8.1% for the quarter. Rolling forward the discount rate and deducting costs, our estimated NAV becomes 104.4p, to which the shares currently trade on a 61.9% discount. The absolute level of the January NAV was at £236.4m, cognisant that the fund will trigger a continuation vote if the NAV continues to be below £250m by the end of the calendar year.”

Liberum is a buyer: “We remain buyers of the fund, given the current 62% discount to NAV, though continue to prefer GSF over HEIT, owing to the geographic diversification. The near-term challenge for HEIT is the leverage and concerns have been raised over the company’s liquidity. Whilst we do not foresee any immediate concerns, particularly owing to the recent debt restructuring, it does limit HEIT’s options in terms of what it can do to improve sentiment towards the shares…On the positive side, the re-launch of the Balancing Mechanism in January and the provisional results announced yesterday for the Capacity Market T-4 Auction clearing at £65.00/kW/year should both provide a boost to the sector.”

While Numis points out: “The portfolio’s three remaining under-construction assets are due to be energised before the end of H1 2024 which will help free cash flow generation, although this will be subject to a much greater extent to an improvement in the revenue environment, principally from wider intraday spreads in the wholesale market. The Board has reiterated guidance that it is actively exploring the sale of one or more assets, which would potentially provide an interesting datapoint for the value of operational projects, given the majority of recent transactions in the wider market involve development or shovel ready assets. Harmony Energy Income’s shares are trading at a c.60% discount to NAV, which reflects the significant uncertainty over valuations and revenue generation.”