Rockwood Strategic (RKW)
19/11/2024
Results analysis from Kepler Trust
Intelligence
Once again, Rockwood
Strategic (RKW) has delivered an index-beating performance in the
half-year period ending 30/09/2024, with a NAV and share price
total return of 22.9% and 21.7% respectively, compared to a decline
in the FTSE AIM All-Share Index of -0.4% and an increase in the
FTSE Small Cap (ex-ITs) Index of 13.2%.
The last three years have
been challenging for UK small-caps, with poor investor sentiment
and a difficult macroeconomic environment weighing on valuations.
Against a decline of 40.5% and 5.8% respectively in the FTSE AIM
All-Share and FTSE Small Cap (ex-ITs) indices, Rockwood has
achieved a commendable NAV and shareholder total return of 48.5%
and 68.0% respectively in the three-year period ending
30/09/2024.
Strong contributors to
outperformance included business loan platform Funding Circle,
communications specialist Filtronic and education market services
provider RM Group.
Chair Noel Lamb commented:
"The portfolio continues to well exceed our target 15% Internal
Rate of Return (IRR) over three to five years. However, the primary
driver for profit growth in our usual investment time horizon is
self-help and better operational execution, leading to
substantially improved profit margins and free cash flow
generation."
Kepler
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Rockwood Strategic (RKW)
takes a differentiated approach to the UK small-cap sector by
investing at the sub-£250m end of the market cap spectrum, which is
relatively untapped by other small-cap funds due to size and
liquidity constraints. Manager Richard Staveley holds a high
conviction portfolio of around 20 companies, looking for
undervalued and overlooked companies with the potential to deliver
a 15% IRR over three to five years.
Funding Circle, an
SME-focused lending platform, has been a stand-out performer for
the trust, with Rockwood buying an initial stake in January at 34
pence per share when the market cap of the company was below its
unrestricted net cash position. Rockwood's engagement with the
management team led to the instigation of a share buyback
programme, sale of its loss-making US business and a UK cost-saving
program with the company's share price rising to just under 140
pence by the period end.
Another success story for
Rockwood is Filtronic, a provider of specialist communications
equipment, with the trust first purchasing a stake in May 2023. The
company announced a multi-year strategic partnership with SpaceX
earlier this year accompanied by significant upgrades to earnings
forecasts. As a result, Filtronic's share price has increased more
than five-fold from 12 pence at the time of investment to 68 pence
(as at 30/09/2024).
Both of these examples are
testament to Richard's stock-picking expertise and the potential
alpha generation from his active engagement with the company which
is akin to a private equity approach. Rockwood's focus on
'self-help' change programmes to drive earnings growth, rather than
relying on macro factors, has provided the foundation for the
trust's impressive returns over the last five years despite the
challenging backdrop for UK small-caps.
Looking ahead, the outlook
for UK equities looks more promising given the improving
macroeconomic backdrop and clear signs of a revival in investor
appetite. While stock-specific factors will continue to be the
primary driver of returns, Rockwood's high-conviction portfolio is
well-placed to capitalise on a broader sector recovery but should,
as the last few years have shown, be able to continue to produce
attractive returns even if the current conditions
persist.
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