Strategic Equity Capital plc (‘SEC’)
Annual Report and Financial Statements for the year ended
30 June 2024
The Board
of Strategic Equity Capital plc, the specialist alternative equity
investment trust investing in high-quality, dynamic, UK smaller
companies, is pleased to announce the Company’s Annual Results for
the year ended 30 June
2024.
Highlights
for the year ended 30 June 2024
include:
-
Net Asset
Value (NAV) per ordinary share up +15.9% to 396.87p (30 June 2023: 342.47p)
-
NAV Total
Return increase +16.6% (30 June 2023:
+9.2%)
-
Share
Price Total Return growth of +19.2% (30 June
2023:
+11.2%)
-
Highly
focused portfolio with 16 holdings and top 10 accounting for c.84%
of NAV and c. 5% of NAV held in cash at period end
Encouraging
progress has been made to continue addressing the share price
discount to NAV and implementation of the marketing strategy to
broaden the shareholder base:
-
Average
discount to NAV of the Company’s shares during the period was
steady at 7.6% vs 7.4% for the year to 30
June 2023.
-
Ongoing
measures include the following:
- A share
buy-back policy aimed at returning up to 50% of proceeds from
profitable realisations, conducted at a discount of more than 5% on
a continuing basis in each financial year. For the year ending
30 June 2024, 1,839,261 shares were
repurchased and held in Treasury at a cost of £5.8
million.
-
A standing
commitment from the investment manager to reinvest 50% of its
quarterly management fee in Company shares, if the shares trade at
an average discount of greater than 5% for the quarter. Gresham
House currently holds approximately 10% of the Company.
-
The
deferral of an annual continuation vote in favour of offering
shareholders a 100% realisation opportunity in November 2025.
-
Successful
sale by the Company’s largest shareholder of 10% of the Company,
which was placed with various UK wealth managers, increasing the
diversification of the shareholder register which should help to
improve the liquidity of the Company in addition to reducing the
discount over time.
-
Differentiation
is being communicated through a range of marketing activities
including a retail-focused advertising campaign, an extensive PR
campaign, content creation throughout the period, plus regular
commentaries and webinars to keep shareholders and prospective
investors up to date with portfolio developments and
performance.
Top
performance contributors during the period
were:
-
XPS
Pensions Group, which saw successive analyst upgrades throughout
the period and accounted for 22.9% of the Company’s NAV at year
end;
-
Fintel, a
regulatory technology service provider, which completed a number of
strategic acquisitions expected to significantly increase the
capabilities, scale and IP of the organisation;
-
The
Property Franchise Group, a lettings-focused franchised estate
agency business, which completed two transformational acquisitions
in the period augmented by strong organic growth;
-
Wilmington,
a professional media provider, which demonstrated strong operating
fundamentals and forecast upgrades whilst successfully refocusing
the business on a digital first strategy in the governance, risk
and compliance market was exited in full during the year;
and
-
Tribal
Group, a provider of technology products and services to the
education, learning and training markets, which amicably settled an
ongoing contractual dispute (at a significant discount to the
counterparty’s claimed damages) following strong full-year results,
and the announcement (albeit the transaction eventually lapsed
post-shareholder vote) of a Recommended Cash Offer in early October
at a 42% spot premium.
William Barlow, SEC’s Chairman,
commented:
“Against a
challenging volatile market backdrop, the Board are pleased to
report that the Company achieved a 16.6% increase in net asset
value (NAV) per share on a total return basis for the year ending
30 June 2024. This is modestly behind
the 18.5% rise in the FTSE Small Cap (ex Investment Trusts) Total
Return Index. The underperformance experienced by the Company
relative to the index reflects the Manager’s strategy of
avoiding more
cyclical sectors which outperformed during the period. The
Company’s share price delivered a total return of 19.2%,
outperforming its NAV per share growth, which reflects the efforts
undertaken by the Company to reduce the Company’s discount to
NAV.
Over the
past three years, the NAV per share has grown by 15.6%,
significantly outpacing the FTSE Small Cap
(ex
Investment Trusts) Total Return Index’s 0.8% growth.
Looking
forward, our differentiated investment strategy continues to
deliver results for our shareholders. Under the leadership of our
Fund Manager, Ken Wotton, we’ve
built a portfolio designed to deliver attractive long-term real
returns. There is strong M&A interest in UK equities, with
notable takeover approaches for portfolio companies such as Ten
Entertainment Group and Alpha Financial Markets Consulting during
the period. Importantly, our top-performing stocks also included
those that were not the recipients of takeover approaches,
highlighting our ability to generate shareholder returns through
careful stock selection that becomes recognised by the market over
time. We remain optimistic about the opportunities ahead for
sustained value creation.”
Ken Wotton, Managing Director of Public Equity at Gresham
House and SEC’s Fund Manager, said:
“The year
to 30 June 2024 brought its fair
share of challenges, with volatility driven by shifting
macroeconomic conditions both in the UK and abroad. In the UK,
inflation fell sharply, and despite a brief recession, the economy
began to show tentative signs of growth towards the end of the
period. Internationally, concerns over persistent US inflation and
rising geopolitical tensions weighed on the markets.
Despite
the uncertain backdrop our portfolio has performed robustly,
supported by strong fundamentals and a focus on sectors with
long-term growth potential. Many of our holdings outperformed
expectations, reaffirming their resilience and our confidence in
their ability to deliver consistent returns.
We believe
that our focus on business fundamentals will continue to deliver
long-term outperformance. We see many opportunities to back
high-quality growth companies at attractive valuations, especially
in smaller, nimble businesses with strong management teams that can
gain market share and build sustainable value over time.
Looking
ahead, we remain optimistic. With attractive valuations and solid
growth drivers, our portfolio is well placed to navigate ongoing
market challenges and deliver strong returns. We remain focused on
building a high-conviction portfolio of less cyclical, high-quality
businesses that can thrive regardless of broader economic
conditions.”
FINANCIAL SUMMARY
Capital
Return
|
As
at
30
June
2024
|
As
at
30
June
2023
|
%
change
|
Net asset
value (“NAV”) per Ordinary share+
|
396.87p
|
342.47p
|
15.9%
|
Ordinary
share price
|
365.50p
|
309.00p
|
18.3%
|
Comparative
index++
|
5,687.19
|
4,970.43
|
14.4%
|
Discount
of Ordinary share price to NAV1
|
(7.9)%
|
(9.8)%
|
|
Average
discount of Ordinary share price to NAV for the
year1
|
(7.6)%
|
(7.4)%
|
|
Total
assets (£’000)
|
191,683
|
170,784
|
12.2%
|
Equity
shareholders’ funds (£’000)
|
189,965
|
170,223
|
11.6%
|
Ordinary
shares in issue with voting rights
|
47,865,450
|
49,704,711
|
|
Performance
|
Year
ended
30
June
2024
|
Year
ended
30
June
2023
|
NAV
total return for the year1
|
16.6%
|
9.2%
|
Share
price total return for the year1
|
19.2%
|
11.2%
|
Comparative
index++
total
return for the year
|
18.5%
|
(0.4)%
|
Ongoing
charges1
|
1.20%
|
1.22%
|
Ongoing
charges (including performance fee)1
|
2.03%
|
1.22%
|
Revenue
return per Ordinary share
|
4.15p
|
3.53p
|
Dividend
yield1
|
0.96%
|
0.81%
|
Proposed
final dividend for the year
|
3.50p
|
2.50p
|
Year’s
Highs/Lows
|
High
|
Low
|
NAV per
Ordinary share
|
396.98p
|
317.93p
|
Ordinary
share price
|
370.00p
|
290.00p
|
+Net asset
value or NAV, the value of total assets less current liabilities.
The net asset value divided by the number of shares in issue
produces the net asset value per share.
++ FTSE Small
Cap (ex Investment Trusts) Index.
1 Alternative
Performance Measures. Please refer to pages 75 and 76 of the 2024
Annual Report.
The full
Annual Report and Financial Statements can be accessed via the
Company’s website at:
www.strategicequitycapital.com or by
contacting the Company Secretary as below.
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
For further information, please
contact:
Strategic
Equity Capital plc
William
Barlow (Chairman)
|
(via
Juniper Partners)
+44 (0)131
378 0500
|
Liberum
Capital Limited (Corporate Broker)
Chris
Clarke
Darren
Vickers
Owen
Matthews
|
+44 (0)20
3100 2000
|
Juniper
Partners Limited (Company Secretary)
Steven
Davidson
|
+44 (0)131
378 0500
|
KL
Communications (PR Adviser)
Charles
Gorman
Adam
Westall
Charlotte
Francis
|
gh@kl-communications.com
+44 (0)203 882 6644
|
Chairman’s
Statement
I am
pleased to report that, despite challenging and volatile market
conditions, the Company’s NAV per share (on a total return basis)
increased by 16.6% during the 12 months to 30 June 2024. The FTSE Small Cap (ex Investment
Trusts) Total Return Index (“FTSE Small Cap Index”), against which
the Company’s performance can be compared, rose by 18.5%. Over the
same period, the Company’s share price delivered a total return of
19.2%. The underperformance relative to the reference index was
primarily due to the Company’s decision to avoid investing in
cyclical sectors within the index which performed well during the
period.
Nevertheless,
the NAV performance for the period was encouraging, with the
majority of portfolio investments delivering positive returns. This
reflects the Manager’s continued focus on higher quality companies
that are positioned in areas of structural growth and/or have
self-help levers to drive value creation. The Board remains
confident that prioritising companies with resilient business
fundamentals and strong balance sheets will enable the Company to
continue to outperform over the medium to long term.
The
Company’s NAV per share (on a total return basis) over the three
years to 30 June 2024 was 15.6%,
compared to just 0.8% for the FTSE Small Cap Index.
An
overview of the reporting period, performance, and portfolio is
discussed in detail in the Investment Manager’s Report
below.
As a
direct result of our deliberate and distinctive investment process,
the Company provides notable benefits for investors:
Performance
The
performance of Strategic Equity Capital (“SEC”) has been strong
relative to its peers and, this has been driven by the distinctive
nature of the Company’s returns. This success reflects the skills
of our Investment Manager, Ken
Wotton, and his team, as well as the advantages of applying
a private equity approach to public markets. The portfolio has been
carefully constructed with the objective of delivering real
returns. There continues to be clear and significant M&A
interest in UK equities due to attractive valuations, with several
portfolio companies attracting takeover interest during the period.
Most notably, the acquisitions of Ten Entertainment Group and Alpha
Financial Markets Consulting by private equity bidders were
completed and announced during this period. However, it is worth
noting that none of the Company’s top five performance contributors
during the period were companies that received takeover bids. This
highlights that, while takeover activity can enhance portfolio
performance, significant organic shareholder returns can also be
achieved through diligent stock selection and a focus on
high-quality businesses.
Performance
Fee
The
Company’s performance is assessed over rolling three-year periods
ending on 30 June each year, with the NAV total return per share
compared to the total return performance of the FTSE SmallCap (ex
Investment Companies) Index. Given the strong three year
performance, a capped performance fee of £1,409,000 has been earned
by the Investment Manager in the period under review. Specifically,
the NAV total return per share, prior to any performance fee
accrual, surpassed both the Target NAV per share (which includes
the FTSE SmallCap Index return plus an additional 2.0% per annum)
and the high watermark – the highest NAV per Share for which a
performance fee has previously been paid. As a result, the
Investment Manager is entitled to 10% of the outperformance above
the higher of these two benchmarks. Any performance fee is capped
at 1.4% per annum of the Company’s NAV at the end of the relevant
financial period. Further details of the performance fee
arrangements are detailed on page 33 of the 2024 Annual
Report.
Risk
Management
For
investors looking for high quality small cap UK equity exposure,
SEC offers low correlations and a low beta to the broader market.
When combined with valuation discipline and a fundamentals based
approach to stock selection, this provides a strong margin of
safety to underpin the long-term upside potential of the
portfolio.
Valuation
SEC
currently offers investors an attractive discount at four different
levels:
-
UK
equities stand at a substantial discount to global markets,
currently at levels previously seen in the 1990s;
-
Within the
UK market, smaller capitalisation stocks trade at a notable
discount to large caps;
-
The SEC
portfolio of companies are both lower valued and higher quality
than UK small cap indices; and
-
Investors
are today able to purchase SEC shares at a discount to
NAV.
Discount
and Discount Management
The
average discount to NAV of the Company’s shares during the period
was 7.6%, compared to the equivalent 7.4% figure from the prior
year. The discount range was 2.9% to 11.6%.
Encouraging
progress continues to be made to address the persistent share price
discount to NAV experienced by the Company. Following on from the
measures implemented in 2022 the discount has narrowed, in the
current period from 9.8% at the beginning to 7.9% at the end. For
comparison, over the same period the average UK Smaller Company
Investment Trust discount decreased from 11.5% to 10.2%.
Some of
these measures remain ongoing. These include: a buy back policy to
return up to 50 per cent. of proceeds from profitable realisations,
at greater than a 5 per cent. discount on an ongoing basis, in each
financial year; an ongoing commitment by Gresham House Asset
Management to reinvest 50 per cent. of its management fee per
quarter in shares if the Company’s shares trade at an average
discount of greater than 5 per cent. for the quarter; and the
deferral of an annual continuation resolution in favour of the
implementation of a 100 per cent. realisation opportunity for
shareholders in November
2025.
Marketing
The Board
continues to oversee the implementation of the marketing plan and
strategy to broaden the shareholder base by increasing awareness of
the Company, and to ensure a clear investment proposition is
presented to the market.
During the
year the Board oversaw the sale by the Company’s largest
shareholder of 10% of the Company, which was placed with various UK
wealth managers.
Increased
diversification of the shareholder register should help to improve
the liquidity of the Company in addition to reducing the discount
over time.
Communicating
differentiation through a range of marketing activities has
included a retail-focused advertising campaign, an extensive PR
campaign and content creation throughout the period. There have
also been regular commentaries and webinars to keep shareholders
and prospective investors up to date with portfolio developments
and performance. The Investment Manager has also spoken at retail
investor events to raise the profile of the Company.
All these
activities have provided the opportunity to highlight the
Investment Manager’s distinctive and highly disciplined private
equity approach to public markets, coupled with constructive,
active corporate engagement.
This
messaging is reflected in all communications
including on
the Company’s webpage (www.strategicequitycapital.com).
The Board
values the importance of Marketing and Distribution more broadly,
to build the profile and positioning of the Company over
time.
Gearing
and Cash Management
The
Company has maintained its policy of operating without a banking
loan facility. This policy is periodically reviewed by the Board in
conjunction with the Investment Manager and remains under
review.
Dividend
For the
year ended 30 June 2024 the basic
revenue return per share was 4.15p (2023: 3.53p). Although the
Company is predominantly focused on delivering long-term capital
growth, due to the strongly cash generative nature of the majority
of the portfolio companies and low capital intensity, many pay an
attractive dividend. Accordingly, the Board is proposing a final
dividend of 3.50p per share for the year ending 30 June 2024 (2023: 2.50p per share), payable on
13 November
2024 to shareholders on the register as at
11 October
2024.
Realisation
Opportunity
As
announced by the Company on 9 February
2022 and reiterated in subsequent publications, shareholders
will be provided with a 100% realisation opportunity in 2025 (the
“2025 Realisation Opportunity”). The structure and timing of the
2025 Realisation Opportunity will be communicated by the Board in
due course, having given careful consideration to the various
options available to maximise shareholder value.
Board
Composition
In
addition, the timing of the 2025 Realisation Opportunity will take
in to consideration the Board’s long-term succession planning, so
as to allow shareholders to make an informed decision with
certainty over the ongoing Board composition. In the first instance
Richard Locke, Non-Executive Deputy
Chairman, is expected to announce his retirement from the Board
during 2025, having been appointed as a Non-Executive Director in
February 2015. Similarly, I expect to
announce my retirement from the Board during 2026, having been
appointed as a Non Executive Director in February 2016, and subsequently as Non-Executive
Chairman in November 2022.
Outlook
The global
macroeconomic and geopolitical environment continues to demonstrate
volatility. Domestically, the UK economy has delivered a series of
encouraging metrics in recent months, with inflation having
returned towards the Bank of England’s target range, real wage
growth returning, and GDP growth recovering from what was feared
early in 2024 to be the beginning of a prolonged
recession.
Across the
portfolio, the Investment Manager has been encouraged by the
positive news flow, with the majority of the portfolio showing
solid performance. Valuations remain attractive when compared to
historical levels, large-cap UK equities, overseas equities, and
recent M&A transaction multiples. The strong performance during
the period was primarily driven by organic returns to equity, with
additional upside from takeover premia. Furthermore, the Investment
Manager is confident in the significant growth potential across the
remaining portfolio, believing that the resilient positioning of
the Company’s holdings should enable it to outperform in the medium
to long term.
In
addition, the enhanced marketing programme and ongoing share
buybacks are expected to support the Company’s ability to maintain
a structurally narrower share price discount to NAV over the coming
year, building on the positive momentum since the appointment of
the current Investment Manager in 2020.
With the
Labour government now in office, the Investment Manager is mindful
of the potential impact of their reforms. While these reforms may
present both challenges and opportunities, particularly in sectors
such as infrastructure, energy, and public services, the
portfolio’s focus on companies with strong fundamentals and
exposure to structural growth themes positions it well to navigate
these changes. The Investment Manager believes this adaptability
will enable the Company to continue delivering value to
shareholders in the evolving political and economic
landscape.
The Board,
once again, thanks you for your continued support.
William Barlow
Chairman
25 September 2024
Investment
Manager’s Report for the year ended 30 June
2024
1)
Overview
The period
from 1 July 2023 to 30 June 2024 has been characterised by notable
volatility and evolving macroeconomic conditions both domestically
and internationally.
In the UK
steady progress was made on taming inflation, with the headline CPI
falling from 7.9% in June 2023 to
2.0% in June 2024, which culminated
in a 25bps Base Rate cut post-period end (returning to the 5% level
that marked the start of the period). The first six months of the
period saw the UK slip into technical recession, the first time
since 2020, but it quickly recovered to deliver promising GDP
growth particularly in the final quarter of the period.
Internationally,
newsflow has been dominated by escalating geopolitical tensions,
fears over US inflation persistence and implications for yields,
and continued weakness in European industrial activity. Alongside
this, political volatility has been a recurring theme following a
number of major election cycles.
Despite
this volatility, our portfolio has continued to demonstrate
considerable resilience, anchored by strong fundamental
characteristics that we seek in our bottom-up investment approach.
Many of our holdings are strategically positioned within structural
growth trends or have significant self-help opportunities, enabling
them to perform robustly despite broader economic uncertainties. We
have deliberately avoided sectors more sensitive to economic cycles
and exogenous variables, such as banks, oil & gas, and mining
companies.
News flow
over the period from our portfolio companies has been largely
positive, with a number of companies delivering one or more
earnings upgrades versus market expectations, reinforcing our
confidence in the quality and growth potential of the portfolio.
Despite this strong fundamental performance, UK equities,
particularly in the small-cap segment, have continued to trade at
discounted valuations relative to international peers and to
private M&A transactions for comparable businesses. Continued
net outflows from UK equities have placed relentless selling
pressure on the sector, with June
2024 marking the 37th consecutive month of net outflows
(source: Calastone).
Attractive
valuations of UK equities have prompted a significant acceleration
in takeover activity. After a robust calendar year in 2023, which
witnessed 39 bids, H1 2024 has already seen 32 bids announced, with
an overwhelming bias towards smaller cap companies. Interestingly,
whilst private equity bidders accounted for the majority of
transactions in 2023, corporate bidders have been
disproportionately active in the first six months of 2024,
accounting for 72% of offers announced (source: Peel Hunt, “UK
M&A – Further acceleration”, 2 July
2024).
We
continue to focus on bottom-up stock selection and on opportunities
where structural growth themes and/or self-help levers dilute the
impact of broader economic and market fluctuations. Our consistent
investment philosophy, strong relationships with company management
teams, and extensive specialist network continue to underpin our
confidence in the portfolio. We remain committed to high-quality
businesses with clear value creation strategies, long-term demand
drivers, and durable competitive advantages.
2)
Detailed Performance Overview
The net
asset value (“NAV”) increased 16.6%, on a total return basis, over
the twelve months to the end of June, closing at 396.87p per share.
This increase in NAV reflected the positive returns delivered by
the majority of portfolio companies throughout the period, despite
volatile equity market conditions as geopolitical and macroeconomic
concerns weighed on investor sentiment.
Despite a
strong absolute performance the Company underperformed its
comparator during the period, as the FTSE Smaller Companies (ex
Investment Trusts) Index grew by 18.5%. The underperformance
against the index was primarily due to the decision to avoid
investing in cyclical sectors within the index.
Despite
the market volatility experienced over the year, we remain
confident about the resilient underlying fundamentals of the
portfolio companies and their ability to withstand the
macroeconomic headwinds that look set to persist through the
current financial year.
Top
Five Absolute Contributors to Performance
Security
|
Valuation
30
June
2024
£’000
|
Period
Contribution
to
return
(basis
points)
|
XPS
Pensions Group
|
43,477
|
1,251
|
Fintel
|
17,373
|
541
|
The
Property Franchise Group
|
12,481
|
175+
|
Wilmington
|
-
|
171
|
Tribal
Group
|
9,026
|
158
|
+ All-share
merger with Belvoir Group plc during the period; Belvoir pre-merged
contributed 40bps of performance to the Company such that the
aggregate contribution with The Property Franchise Group plc was
215bps
XPS
Pensions Group, a
pensions consulting, advisory and administration services provider,
which delivered results in excess of market expectations, saw
successive analyst upgrades throughout the period, and which
divested a non-core business at a significantly accretive valuation
multiple to the wider group. XPS Pensions Group accounted for 22.9%
of the Company’s Net Asset Value at the end of the year. Following
the period end this was reduced by an amount equivalent to 11.1% of
Net Asset Value; Fintel,
a provider of tech-enabled regulatory services, following a number
of strategic acquisitions which will significantly increase the
capabilities, scale and IP of the organisation; The
Property Franchise Group, a
lettings-focused franchised estate agency business, which completed
two transformational acquisitions in the period augmented by strong
organic growth; Wilmington,
a professional media provider, which demonstrated strong operating
fundamentals and forecast upgrades whilst successfully refocusing
the business on a digital first strategy in the governance, risk
and compliance market exited in full during the year;
Tribal
Group, a
provider of technology products and services to the education,
learning and training markets, following strong full year results,
the amicable settlement of an ongoing contractual dispute (at a
significant discount to the counterparty’s claimed damages), and
the announcement (albeit the transaction eventually lapsed
post-shareholder vote) of a Recommended Cash Offer in early October
at a 42% spot premium.
Bottom
Five Absolute Contributors to Performance
Security
|
Valuation
30
June
2024
£’000
|
Period
Contribution
to
return
(basis
points)
|
R&Q
Insurance Holdings
|
5
|
(505)
|
Iomart
Group
|
18,246
|
(240)
|
Inspired
|
7,420
|
(192)
|
Ricardo
|
14,584
|
(111)
|
Carr’s
Group
|
-
|
(38)
|
The
largest performance detractor in the period was R&Q
Insurance Holdings, a global
non-life specialty insurance company, following a prolonged process
to separate its two businesses (“Accredited” and “Legacy”), a
convertible equity raise (to bolster capital adequacy), and weaker
than expected trading.
Our
investment thesis was predicated on the significant latent value
potential in R&Q, particularly on a sum of the parts basis, as
the business transformed from a capital intensive specialist
insurance business to a faster growth and more cash generative
services business model. This value potential was corroborated
somewhat by the all-cash takeover approach received (but later
withdrawn) in 2022 that valued the company at £482m. Whilst the
company made positive steps to realise this value by separating its
two businesses and announcing the sale of its Accredited division
to Onex Partners, the Legacy division began to experience
unforeseen balance sheet stress. Due to a prolonged transaction
timetable for the Accredited sale, combined with lower than
expected net cash proceeds (which were expected to alleviate the
Legacy division’s balance sheet challenges), the company
unfortunately entered into a provisional liquidation process which
led to no recovery for equity holders.
Whilst the
Investment Manager was able to mitigate some downside through
selling shares ahead of this process, having exhausted attempts to
rectify the situation in collaboration with other shareholders and
the Board, the conclusion has been a loss of principal for the
remaining holding following the liquidation process, and a 505bps
negative performance contribution in the 12 months to 30 June 2024.
The
Investment Manager acknowledges that, notwithstanding the
portfolio’s strong aggregate performance over the period, this
investment led to a deeply disappointing outcome for the Company.
Whilst the Investment Manager follows a bottom-up investment
approach that places great focus on business fundamentals and
downside protection, in this instance we underestimated the extent
to which balance sheet complexity in this business could have led
to financial stress in a downside scenario. Going forwards, even
greater scrutiny on balance sheet simplicity will be adopted by the
Investment Manager.
The next
three largest detractors, by contrast, suffered from share price
weakness in response to short term developments that, we believe,
do not fundamentally change the long term values of the
holdings.
These
detractors included Iomart
Group, a hybrid
cloud managed services provider, which despite delivering in-line
full year results experienced some small consensus downgrades
reflecting organic growth expectations and the ability to
pass-through cost increases from VMWare. The Investment Manager is
encouraged by the orderly change of leadership that took place in
the period, with the appointments of a high quality CEO and
experienced plc chair with a track record of value creation in the
IT services space; Inspired,
despite positive newsflow throughout the period. Inspired’s FY23
results came in ahead of expectations, with 20% EBITDA growth at a
group level, double digit revenue growth in two divisions and
>100% growth in its ESG division. In addition the group
disclosed a series of new KPIs evidencing the good progress made in
its cross-selling strategy; and Ricardo,
a global strategic, environmental, and engineering consultancy,
which reported encouraging half-year results with particularly
strong growth in its Energy & Environment and Rail divisions,
mitigated by some softness in its non-core businesses as customers
delayed orders.
Finally
the fifth largest detractor, Carr’s
Group, was an
investment that was fully exited during the period. Carr’s Group
was a new investment for the Company in the latter half of the
prior reporting period, which shortly following our investment
experienced a significant share price rally up to 30 June 2023 (the end of the previous reporting
period). Following a subsequent deterioration in performance and
unexpected change of management announced in August 2023, the shares retreated from their
previous gains and we took the opportunity to exit our position in
full following a re-assessment of the risk/reward potential.
Despite the
-38bps
performance contribution in the year ended 30 June 2024 the Company made a positive total
return on its investment in Carr’s Group, which equated to 16.8%
IRR on an annualised basis.
3)
Portfolio Overview
The
portfolio remained highly focused with a total of
16 holdings
and the top 10 accounted for around 84% of the NAV at the end of
the period, with c.5% of NAV held in cash at the period
end.
The
Investment Manager made a number of new investments during the
period, including into Alpha
Financial Markets Consulting, a
financial services-focused consultancy which received a Recommended
Cash Offer from Bridgepoint shortly after our investment, at a 50%
premium to the undisturbed share price; Costain
Group, a
leading UK infrastructure engineering and consultancy services
provider which is positioned to benefit from UK infrastructure
expenditure and which the Investment Manager believes trades at a
significant discount to intrinsic value; Halfords
Group, the
provider of B2C automotive and cycling parts and services, and B2B
fleet management services. Halfords has faced some recent headwinds
in its B2C offering as bicycle sales mean-revert from an elevated
COVID comparator period (exacerbated by sector-discounting as a
large cycling competitor entered into Administration) and as some
consumers delayed car tyre replacement. However, the Investment
Manager believes that these transitory issues have weighed
disproportionately on Halfords’ valuation, and Halfords’ B2B
business continues to trade strongly, following good progress by
the management team in repositioning the group towards B2B
services; Team
17 Group, an
independent video game developer and publisher which is well known
to the Investment Manager. Following an unexpected profit warning
in November 2023 and subsequent
review, the Investment Manager believes that the long-term
fundamentals of the business remain strong and that the reduced
share price offered an attractive opportunity to establish a
position in the Company; The
Property Franchise Group and
Belvoir
Group, two
leading UK residential franchised estate agencies which completed
an all-share merger post-investment by the Company. The combined
businesses are capital light, highly cash generative and
predominantly exposed to the resilient and structurally growing UK
residential lettings market, and are well known to the Investment
Manager; Trufin,
a provider of financing and payment services as well as working
capital finance and technology solutions to SMEs, which the
Investment Manager believes to be significantly undervalued on a
sum of the parts basis; and Pinewood
Technologies, a
critical SaaS provider to the automotive dealership sector, which
was formerly part of Pendragon Group. The Investment Manager was
attracted to significant recurring revenue (90%) and margin profile
(c.25% EBIT margin and double digit expected growth). Following a
rapid value uplift the Company profitably exited its investment in
Pinewood Technologies in full during the period after concluding
there was insufficient value opportunity available from building a
larger equity stake in order to build a proactive engagement
strategy for the holding.
In
addition to new investments, the Company also made a number of
follow-on investments into existing holdings where the Investment
Manager sought to capitalise on attractive valuation opportunities
and/or greater levels of conviction in the returns potential. These
included
Brooks Macdonald,
Fintel,
Iomart
Group,
Netcall
and
Ricardo.
Over the
period, positions in Pinewood
Technologies (IRR of
98%1),
Belvoir
Group (IRR of
73%1,2),
Ten
Entertainment (IRR of
25%), Carr’s
Group (IRR of
17%1),
Medica
Group (IRR of
25%3),
Hostelworld
Group (IRR of
35%4),
Wilmington
(IRR of
43%5)
and LSL
Property Services (IRR of
-13%) were exited in full.
1 Annualised
IRR based on a <12 month holding period
2 “Exited”
in an all-share merger with The Property Franchise Group plc
(“TPFG”), another holding of the Company, such that the Company’s
shares in Belvoir Group were exchanged for additional shares in
TPFG
3 12%
reflects the IRR from the Company’s initial investment in Medica
Group in 2017. 25% reflects the IRR since Ken Wotton became Investment Manager of the
Company in September 2020, and
actively decided to upweight the Company’s holding in Medica
Group
4 9%
reflects the IRR from the Company’s initial investment in
Hostelworld in 2019. 35% reflects the IRR since Ken Wotton became Investment Manager of the
Company in September
2020
5 8%
reflects the IRR from the Company’s initial investment in
Hostelworld in 2019. 43% reflects the IRR since Ken Wotton became Investment Manager of the
Company in September
2020
The
Company currently has a number of key holdings that the Investment
Manager believes trade at material valuation discounts to
comparable private market transaction values, which provides a
strong margin of safety underpinning the long term upside potential
of the portfolio.
Changes in
sector weightings have seen exposure to Healthcare decrease from
21.6% to 0%, which reflects the exit of Medica Group (the Company’s
sole Healthcare investment in the prior period) pursuant to its
Recommended Cash Offer from IK Partners. The next largest change in
sector weighting was the exposure to Business Services rising from
27.1% to 44.5%, which was driven by a combination of strong
stock-specific performance (including the Company’s three strongest
performers by attribution) and new investment activity. Whilst the
Business Services sector is broad and diversified with a range of
stock-specific qualities and nuances, the Investment Manager is
attracted to the types of capital light, operationally geared and
cash generative B2B services businesses that can occasionally be
found in the sector. Similarly, the Company’s exposure to
Technology companies has increased from 15.6% to 25.1% during the
period as the Investment Manager has sought to capitalise on
depressed valuations to invest in businesses with attractive
financial characteristics, through a combination of new investments
(e.g. Trufin) and follow-on investments into existing holdings
(e.g. Iomart Group, Netcall).
4)
Where We Engaged
Iomart
Group
Engagement
case study: Governance
/ Chair Recruitment
Engagement
focus: Governance
/ Chair Recruitment
How
we engaged: Meetings
with executive management and significant shareholder, introduction
to potential chair candidate
Who
we collaborated with: Significant
shareholder
One of our
investee companies required a new chair following a change in Board
roles. Based on our knowledge of the sector and our network we
identified a credible chair candidate with a blend of sector, plc
and value creation experience.
We
introduced the candidate to the board and to the company’s
significant shareholder, and that candidate was put forward for
consideration as part of the board’s formal search
programme.
Outcome:
Following
the board’s search programme our preferred candidate was selected
to be appointed as chair
5)
Outlook – Year Ahead
We saw
green shoots of economic improvement towards the end of the period
and are cautiously optimistic that positive trends can continue
into the next period. UK CPI is now tracking the target inflation
level, the Bank of England has
(post-period) delivered one interest rate cut with markets pricing
in further rate cuts over the next twelve months, which should be
supportive of demand for our investee companies’ services.
Similarly, UK consumer confidence is at its highest level in almost
three years, albeit consumption remains subdued as shown by recent
household saving data. However, with real wages growing, the
short-term prospect of unwinding mortgage costs, and the relatively
‘de-leveraged’ UK household compared to 2008/09, the economic
environment looks more supportive of rising consumption than at any
point over the last couple of years.
However,
the Investment Manager is mindful of the recent change in UK
Government and the potential economic ramifications thereof. Whilst
material further clarity is unlikely to be received until the
publication of the Autumn Budget in October
2024, the Investment Manager acknowledges the possibility of
more cautious fiscal policy and/or changes in public spending
priorities in the short to medium term. In addition to the
potential impact on the investment portfolio in aggregate, it is
possible that different investee companies will face their own
combinations of opportunities and challenges under the new economic
regime, with portfolio construction implications
thereafter.
Turning to
UK equity markets and interest rates, the prospect of falling bond
yields and price appreciation going forwards may create a
favourable ‘denominator effect’ for UK equity fund flows, whereby
asset allocators re-weight portfolios towards equities to meet
their target asset class exposures. The ensuing liquidity injection
into UK funds, and UK smaller companies, could alleviate the
downward share price pressure of the last two years caused by
‘forced selling’. UK smaller company valuations may then bridge the
wide arbitrage versus their larger UK and international peers, as
well as precedent M&A transactions. We see these conditions as
supportive of a re-rating of UK smaller companies.
On a
similarly positive note, the Investment Manager has seen a growing
number of ‘early look’ and formal pre-IPO meetings during the last
calendar quarter, which marks a welcome change from the previous
theme of de-equitisation and lack of investor appetite for quoted
equity issuance. While equity capital market activity during 2024
has primarily focused on existing listed businesses, notable larger
UK IPOs of Raspberry Pi and Aoti took place during Q2, along with a
smaller IPO of AI-focused IntelliAM in early July. Together with
the prospect of improving economic conditions and the possibility
of rising UK stock-market valuations, investor and corporate
confidence will have grown by observing strengthening post-deal
share prices in each instance. We therefore expect further IPO
activity to present new opportunities into H2 2024.
6)
Final Thoughts
Despite
positive recent macroeconomic green shoots, the Investment
Manager’s core planning assumption is that continued geopolitical
and macroeconomic uncertainty will drive market volatility in the
next year. It is likely that increasing focus on company
fundamentals and valuation discipline will be required to
outperform in this environment, which plays to the strengths of the
Company’s investment strategy and the Investment Manager’s
approach.
Elevated
levels of takeover activity within the UK equity market are likely
to continue if current trends prevail, with a number of further
bids announced post-period end following an active last twelve
months. The Investment Manager’s investment process and private
equity lens across public markets enables the identification of
investment opportunities with potential strategic value that could
be attractive acquisitions for both corporate and financial buyers,
which is reflected in the frequency of portfolio exits as part of
takeover processes (including in this period).
We
continue to believe that our fundamentals-focused investment style
has the potential to continue outperforming over the long term. We
see significant opportunities for long-term investors to back
quality growth companies at attractive valuations in an environment
where agile smaller businesses with strong management teams can
take market share and build strong long-term franchises. We will
maintain our focus on building a high-conviction portfolio of less
cyclical, high-quality, strategically valuable businesses, which we
believe can deliver strong returns through the market cycle
regardless of the performance of the wider economy.
Top
10 Investee Company Review
(as
at 30 June 2024)
Company
|
Investment
Thesis
|
Developments
|
XPS
Pensions Group
22.9% of
NAV
Business
Services
|
-
Highly
defensive – high degree of revenue visibility and largely
non-discretionary, regulation driven client activity
-
Significant
inflation pass-through ability
-
Highly
fragmented sector with recent M&A activity, providing
opportunity to XPS as a consolidator and potential
target
|
-
Delivered
FY24 results ahead of market expectations with >20% revenue,
EBITDA and EPS growth and further forecast upgrades, in addition to
gaining FTSE 250 inclusion from 24 June 2024
-
An amount
equivalent to 11.1% of SEC’s year-end Net Asset Value was divested
post period-end generating a positive return of 268.3%, relative to
cost and an IRR of 29.9%
|
Brooks
Macdonald
9.9% of
NAV
Financial
Services
|
-
Opportunity
to leverage operational investments to grow margin and continue
strong cash flow generation
-
A
consolidating market; opportunity for Brooks as both consolidator
and potential target with recent takeover interest for sector
peers
|
-
Reported
Q4 2023 fund flows which comprised a sequential increase in gross
inflows and decrease in gross outflows, such that year-end funds
under management had increased 7% year-on-year despite the
challenging macro environment
-
Also
announced the retirement of CEO Andrew Shepherd to be replaced by
current CFO (and former CRO of Aviva) Andrea Montague, effective
October 2024 following an orderly handover
|
Iomart
Group
9.6% of
NAV
Technology
|
-
Provides
both self-managed infrastructure and cloud-managed services, with
the latter being a key strategic focus area
-
Highly
cash generative with significant recurring revenue
-
Structural
growth opportunity from hybrid cloud adoption
|
-
Delivered
in-line results but experienced some small consensus downgrades
reflecting organic growth expectations and the ability to
pass-through cost increases from VMWare
|
Fintel
9.1% of
NAV
Business
Services
|
-
Strategically
valuable technology platform with opportunity to drive material
growth in revenues and margins through supporting customers’
digitisation journeys
|
-
Reported
strong full year results which demonstrated 240bps of margin
expansion, and announced two further strategic bolt-ons that
broaden the capabilities that Fintel can provide to
intermediaries
|
Ricardo
7.8% of
NAV
Industrial
Goods & Services
|
-
Ongoing
strategic transformation to refocus and prioritise the business
towards higher growth, higher margin and less capital intensive
activities
-
Strong
market position underpinned by significant sector
expertise
|
-
Announced
a full year trading update which illustrated strong H2 2023
performance following some weakness earlier in the year, with
particularly encouraging performance in its strategically core
divisions (Energy & Environment, and Rail)
|
The
Property Franchise Group
6.6% of
NAV
Business
Services
|
-
Structurally
growing UK residential lettings market
-
Exceptional
quality of earnings due to franchisees’ bias towards lettings
revenues, and TPFG’s franchise fee revenue model
-
Capital
light and cash generative
|
-
Announced
a strategic acquisition (The Guild of Property Professionals and
Fine & Country) in addition to providing a trading update with
lettings revenues up 9% YTD and sales revenues up 20%
YTD
|
Team
17 Group
5.7%
Technology
|
-
Leading
independent video game publisher and developer
-
Earnings
significantly underpinned by back-book franchises
-
Significant
founder ownership and experienced management team
|
-
Announced
H1’24 trading in line with expectations, with good progress being
made on previously announced cost actions following the temporary
deterioration in trading in the prior period. Positive new release
performance from H1’24 launches, with a number of releases planned
for H2
|
Tribal
Group
4.8%
Technology
|
-
Strong
defensive characteristics with high visibility of
earnings
-
Transition
to cloud-based platform has potential to drive growth, margins and
rating
-
Low
valuation relative to software sector averages and sector
transaction multiples
|
-
Announced
a Recommended Cash Offer from Ellucian (strategic bidder backed by
Blackstone and Vista Equity Partners) at a 41% spot premium, which
did not receive sufficient shareholder support
-
Later
announced the successful settlement of an outstanding customer
dispute which had previously been provided for
|
Alpha
Financial Markets Consultancy
4.1%
Financial
Services
|
-
N/A –
exited post-period via takeover
|
-
Announced
a Recommended Cash Offer from Bridgepoint private equity at a 50%
premium to the undisturbed share price
|
Inspired
3.9%
Business
Services
|
-
Leading
player in a fragmented industry; significant opportunity to gain
market share through client wins, proposition extension and
M&A
-
Valued at
a substantial discount to comparable private market transaction
multiples
|
-
Reported
full year results which demonstrated 20% EBITDA growth, with
revenue growth across all divisions. Subsequently announced that
all deferred consideration will be cash settled in 2024
|
Portfolio
as at 30 June
2024
|
% of
invested portfolio at
|
% of
invested portfolio at
|
|
|
|
Date of
first
|
Cost
|
Valuation
|
30
June
|
30
June
|
% of
net
|
Company
|
Sector
Classification
|
Investment
|
£’000
|
£’000
|
2024
|
2023
|
assets
|
XPS
Pensions Group
|
Business
Services
|
Jul
2019
|
16,851
|
43,477
|
23.8%
|
15.0%
|
22.9%
|
Brooks
Macdonald
|
Financial
Services
|
Jun
2016
|
18,115
|
18,796
|
10.3%
|
7.0%
|
9.9%
|
Iomart
Group
|
Technology
|
Mar
2022
|
21,941
|
18,246
|
10.0%
|
5.4%
|
9.6%
|
Fintel
|
Business
Services
|
Oct
2020
|
10,400
|
17,373
|
9.5%
|
6.4%
|
9.1%
|
Ricardo
|
Industrial
Goods & Services
|
Sep
2021
|
14,585
|
14,864
|
8.2%
|
6.8%
|
7.8%
|
The
Property Franchise Group
|
Business
Services
|
Oct
2023
|
9,125
|
12,481
|
6.8%
|
-
|
6.6%
|
Team 17
Group
|
Technology
|
Dec
2023
|
8,648
|
10,879
|
6.0%
|
-
|
5.7%
|
Tribal
Group
|
Technology
|
Dec
2014
|
11,742
|
9,026
|
4.9%
|
3.9%
|
4.8%
|
Alpha
FMC
|
Financial
Services
|
Mar
2024
|
5,471
|
7,846
|
4.3%
|
-
|
4.1%
|
Inspired
|
Business
Services
|
Jul
2020
|
13,754
|
7,420
|
4.1%
|
6.1%
|
3.9%
|
Benchmark
|
Industrial
Goods & Services
|
Jun
2019
|
6,734
|
6,893
|
3.8%
|
3.6%
|
3.6%
|
Trufin
|
Technology
|
Jul
2023
|
4,111
|
5,422
|
3.0%
|
-
|
2.9%
|
Netcall
|
Technology
|
Mar
2023
|
4,367
|
3,979
|
2.2%
|
1.8%
|
2.1%
|
Costain
Group
|
Business
Services
|
Jun
2024
|
3,846
|
3,834
|
2.1%
|
-
|
2.0%
|
Halfords
Group
|
Consumer
|
Jun
2024
|
1,899
|
1,823
|
1.0%
|
-
|
1.0%
|
R&Q
Insurance Holdings
|
Financial
Services
|
Jun
2022
|
6,817
|
5
|
0.0%
|
4.3%
|
0.0%
|
Total
investments
|
|
|
|
182,364
|
|
|
96.0%
|
Cash
|
|
|
|
9,153
|
|
|
4.8%
|
Net
current liabilities
|
|
|
|
(1,552)
|
|
|
(0.8%)
|
Total
shareholders’ funds
189,965
100.0%
Ken Wotton
Gresham
House Asset Management
25 September 2024
Statement
of Comprehensive Income
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
Investments
|
|
|
|
Gains on
investments held at fair value
through
profit or loss
|
-
|
24,099
|
24,099
|
|
-
|
24,099
|
24,099
|
|
|
|
|
Income
|
|
|
|
Dividends
|
3,997
|
2,111
|
6,108
|
Interest
|
55
|
-
|
55
|
Total
income
|
4,052
|
2,111
|
6,163
|
|
|
|
|
Expenses
Investment
Manager’s base fee
|
(1,270)
|
-
|
(1,270)
|
Investment
Manager’s performance fee
|
-
|
(1,409)
|
(1,409)
|
Other
expenses
|
(756)
|
-
|
(756)
|
Total
expenses
|
(2,026)
|
(1,409)
|
(3,435)
|
|
|
|
|
Net
return before taxation
|
2,026
|
24,801
|
26,827
|
|
|
|
|
Taxation
|
-
|
-
|
-
|
Net
return and total comprehensive income for the
year
|
2,026
|
24,801
|
26,827
|
|
pence
|
pence
|
pence
|
Return
per Ordinary share
|
4.15
|
50.84
|
54.99
|
The total
column of this statement represents the Statement of Comprehensive
Income prepared in accordance with IFRS. The supplementary revenue
and capital return 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
during the year.
Statement
of Comprehensive Income
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
Investments
|
|
|
|
Gains on
investments held at fair value
through
profit or loss
|
-
|
10,602
|
10,602
|
|
-
|
10,602
|
10,602
|
|
|
|
|
Income
|
|
|
|
Dividends
|
3,782
|
-
|
3,782
|
Interest
|
78
|
-
|
78
|
Total
income
|
3,860
|
-
|
3,860
|
|
|
|
|
Expenses
Investment
Manager’s base fee
|
(1,228)
|
-
|
(1,228)
|
Other
expenses
|
(803)
|
-
|
(803)
|
Total
expenses
|
(2,031)
|
-
|
(2,031)
|
|
|
|
|
Net
return before taxation
|
1,829
|
10,602
|
12,431
|
|
|
|
|
Taxation
|
-
|
-
|
-
|
Net
return and total comprehensive income for the
year
|
1,829
|
10,602
|
12,431
|
|
|
|
|
Return
per Ordinary share
|
3.53p
|
20.44p
|
23.97p
|
Balance
Sheet
|
|
|
As
at
30
June 2024
|
|
|
As
at
30 June
2023
|
|
|
|
£'000
|
|
|
£'000
|
Non-current
assets
|
|
|
|
|
|
|
Investments
held at fair value though profit or loss
|
|
|
182,364
|
|
|
169,274
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Trade and
other receivables
|
|
|
166
|
|
|
268
|
Cash and
cash equivalents
|
|
|
9,153
|
|
|
1,242
|
|
|
|
9,319
|
|
|
1,510
|
Total
assets
|
|
|
191,683
|
|
|
170,784
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
Trade and
other payables
|
|
|
(1,718)
|
|
|
(561)
|
Net
assets
|
|
|
189,965
|
|
|
170,223
|
|
|
|
|
|
|
|
Capital
and reserves
|
|
|
|
|
|
|
Share
capital
|
|
|
6,353
|
|
|
6,353
|
Share
premium account
|
|
|
11,300
|
|
|
11,300
|
Special
reserve
|
|
|
-
|
|
|
3,590
|
Capital
reserve
|
|
|
165,489
|
|
|
142,952
|
Capital
redemption reserve
|
|
|
2,897
|
|
|
2,897
|
Revenue
reserve
|
|
|
3,926
|
|
|
3,131
|
Total
shareholders’ equity
|
|
|
189,965
|
|
|
170,223
|
|
|
|
|
|
|
|
|
|
|
pence
|
|
|
pence
|
Net
asset value per share
|
|
|
396.87
|
|
|
342.47
|
|
|
|
number
|
|
|
number
|
Ordinary
shares in issue
|
|
|
47,865,450
|
|
|
49,704,711
|
The
financial statements were approved by the Board of Directors of
Strategic Equity Capital on 25 September
2024.
They were
signed on its behalf by
William Barlow
Chairman
25 September 2024
Company
Number: 05448627
Statement
of Changes in Equity
For
the year ended
30
June 2024
|
Share
capital
|
Share
premium
account
|
Special
reserve
|
Capital
reserve
|
Capital
redemption reserve
|
Revenue
reserve
|
Total
|
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
|
|
|
|
|
|
|
1 July
2023
|
6,353
|
11,300
|
3,590
|
142,952
|
2,897
|
3,131
|
170,223
|
Net return
and total comprehensive income for the year
|
-
|
-
|
-
|
24,801
|
-
|
2,026
|
26,827
|
Dividends
paid
|
-
|
-
|
-
|
-
|
-
|
(1,231)
|
(1,231)
|
Share
buy-backs
|
-
|
-
|
(3,590)
|
(2,264)
|
-
|
-
|
(5,854)
|
30
June 2024
|
6,353
|
11,300
|
-
|
165,489
|
2,897
|
3,926
|
189,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the
year ended
30 June
2023
|
Share
capital
|
Share
premium
account
|
Special
reserve
|
Capital
reserve
|
Capital
redemption reserve
|
Revenue
reserve
|
Total
|
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
£’000
|
|
|
|
|
|
|
|
1 July
2022
|
6,353
|
11,300
|
19,767
|
132,350
|
2,897
|
2,363
|
175,030
|
Net return
and total comprehensive income for the year
|
-
|
-
|
-
|
10,602
|
-
|
1,829
|
12,431
|
Dividends
paid
|
-
|
-
|
-
|
-
|
-
|
(1,061)
|
(1,061)
|
Share
buy-backs
|
-
|
-
|
(16,177)
|
-
|
-
|
-
|
(16,177)
|
30 June
2023
|
6,353
|
11,300
|
3,590
|
142,952
|
2,897
|
3,131
|
170,223
|
|
|
|
|
|
|
|
|
All
profits are attributable to the equity owners of the Company and
there are no minority interests.
Statement
of Cash
Flows
|
Year
Ended 30 June
|
Year Ended
30 June
|
|
2024
|
2023
|
|
£’000
|
£’000
|
Operating
activities
|
|
|
Net return
before taxation
|
26,827
|
12,431
|
Adjustment
for gains on investments
|
(24,099)
|
(10,602)
|
Operating
cash flows before movements in working capital
|
2,728
|
1,829
|
Decrease
in receivables
|
102
|
374
|
Increase
in payables
|
1,134
|
22
|
Purchases
of portfolio investments
|
(67,433)
|
(30,473)
|
Sales of
portfolio investments
|
78,465
|
30,463
|
Net
cash flow from operating activities
|
14,996
|
2,215
|
|
|
|
Financing
activities
|
|
|
Equity
dividend paid
|
(1,231)
|
(1,061)
|
Shares
bought back in the year
|
(5,854)
|
(16,275)
|
Net
cash outflow from financing activities
|
(7,085)
|
(17,336)
|
|
|
|
Increase/(decrease)
in cash and cash equivalents for year
|
7,911
|
(15,121)
|
Cash and
cash equivalents at the start of the year
|
1,242
|
16,363
|
Cash
and cash equivalents at 30 June
|
9,153
|
1,242
|
|
|
|
|
|
|
Principal
and Emerging Risks
The Board
believes that the overriding risks to shareholders are events and
developments which can affect the general level of share prices,
including, for instance, inflation or deflation, economic
recessions and movements in interest rates and currencies which are
outside of the control of the Board.
The Board
believes that there is an emerging risk faced by the Company in
relation to the conflicts in the Middle
East and Ukraine which
continue to bring risk to economic growth and investors’ risk
appetites and consequently can impact the valuation of companies in
the portfolio.
The
Directors continue to work with the agents and advisers to the
Company to try and manage the risks, including emerging risks. The
central aims remain to preserve value in the Company’s portfolio
and liquidity in the Company’s shares. The Directors aim to ensure
that the Company maintains its investment strategy, has operational
resilience, meets its regulatory requirements as an investment
trust (and in particular in the provision of regular information to
the market) and tries to navigate the financial and economic
circumstances in these very uncertain times.
The
principal risks and uncertainties are set out on pages 22 to 24 of
the 2024 Annual Report.
Responsibility
statement of the Directors in respect of the Annual Financial
Report
We confirm
that to the best of our knowledge:
-
the
financial statements, prepared in accordance with the applicable
set of accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company; and
-
the
Strategic Report includes a fair review of the development and
performance of the business and the position of the issuer,
together with a description of the principal risks and
uncertainties that it faces.
We
consider the Annual Report and accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Company’s position and performance,
business model and strategy.
Going
Concern
In
assessing the Company’s ability to continue as a going concern the
Directors have also considered the Company’s investment objective,
detailed on the inside front cover of the 2024 Annual Report, risk
management policies, detailed on pages 22
to 24 of the 2024 Annual Report, capital management (see note 17 of
the 2024 Annual Report), the nature of its portfolio and
expenditure projections and believe that the Company has adequate
resources, an appropriate financial structure and suitable
management arrangements in place to continue in operational
existence for the foreseeable future and for at least 12 months
from the date of this Report. In addition,
the Board has had regard to the Company’s investment performance
(see page 3
of the 2024 Annual Report) and the price at which the Company’s
shares trade relative to their NAV (see page 3
of the 2024 Annual Report).
The
Directors performed an assessment of the Company’s ability to meet
its liabilities as they fall due. In performing this assessment,
the Directors took into consideration:
-
cash and
cash equivalents balances and, from a liquidity perspective, the
portfolio of readily realisable securities which can be used to
meet short-term funding commitments;
-
the
ability of the Company to meet all of its liabilities and ongoing
expenses from its assets;
-
revenue
and operating cost forecasts for the forthcoming year;
-
the
ability of third-party service providers to continue to provide
services;
-
potential
downside scenarios including stress testing the Company’s portfolio
for a 25% fall in the value of the investment portfolio; a 50% fall
in dividend income and a buy back of 5% of the Company’s ordinary
share capital, the impact of which would leave the Company with a
positive cash position; and
-
the 2025
100% realisation opportunity.
Based on
this assessment, the Directors are confident that the Company will
have sufficient funds to continue to meet its liabilities as they
fall due for at least 12 months from the date of approval of the
financial statements, and therefore have prepared the financial
statements on a going concern basis.
Related
Party Transactions and Transactions with the Investment
Manager
Fees paid
to Directors are disclosed in the Directors‘ Remuneration Report on
page 45
of the 2024 Annual Report. Full details of Directors‘ interests are
set out on page 45
of the 2024 Annual Report.
The
amounts payable to the Investment Manager, which is not considered
to be a related party, are disclosed in notes 3 and 4 on
page 62
of the 2024 Annual Report. The amount due to the Investment Manager
for management fees at 30 June
2024 was £116,000 (2023: £311,000). The amount due to the
Investment Manager for performance fees at 30 June
2024 was £1,409,000 (2023: £nil).
The
Investment Manager, directly and indirectly through its in-house
funds, has continued to purchase shares in the Company.
Notes
1.1
Corporate information
Strategic
Equity Capital plc is a public limited company incorporated and
domiciled in the United Kingdom
and 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 UK Corporation Tax Act
2010.
The
financial statements of Strategic Equity Capital plc for the year
ended 30 June
2024 were authorised for issue in accordance with a
resolution of the Directors on 25 September
2024.
1.2
Basis of preparation and statement of
compliance
The
financial statements of the Company have been prepared in
accordance with International Accounting Standards in conformity
with the requirements of UK-adopted international accounting
standards and with the requirements of the Companies Act 2006, as
applicable to companies reporting under those standards. Where
presentational guidance set out in the Statement of Recommended
Practice (“SORP”) for investment trusts issued by the AIC in
July 2022 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
financial statements of the Company have been prepared on a going
concern basis.
The
Directors performed an assessment of the Company’s ability to meet
its liabilities as they fall due. In performing this assessment,
the Directors took into consideration:
-
cash and
cash equivalents balances and the portfolio of readily realisable
securities which can be used to meet shortterm funding
commitments;
-
the
ability of the Company to meet all of its liabilities and ongoing
expenses from its assets;
-
revenue
and operating cost forecasts for the forthcoming year;
-
the
ability of third-party service providers to continue to provide
services;
-
potential
downside scenarios including stress testing the Company’s portfolio
for a 25% fall in the value of the investment portfolio; a 50% fall
in dividend income and a buy-back of 5% of the Company’s Ordinary
share capital, the impact of which would leave the Company with a
positive cash position; and
-
the
realisation opportunity in 2025.
Based on
this assessment, the Directors are confident that the Company will
have sufficient funds to continue to meet its liabilities as they
fall due for at least 12 months from the date of approval of the
financial statements, and therefore have prepared the financial
statements on a going concern basis.
2.
Income
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
Income
from investments
|
|
|
|
UK
dividend income
|
3,997
|
2,111
|
6,108
|
|
3,997
|
2,111
|
6,108
|
|
|
|
|
Other
operating income
|
|
|
|
Liquidity
interest
|
55
|
-
|
55
|
|
4,052
|
-
|
4,052
|
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
Income
from investments
|
|
|
|
UK
dividend income
|
3,782
|
-
|
3,782
|
|
3,782
|
-
|
3,782
|
|
|
|
|
Other
operating income
|
|
|
|
Liquidity
interest
|
78
|
-
|
78
|
|
3,860
|
-
|
3,860
|
|
|
|
|
3.
Investment Manager’s base fee
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Base
fee
|
1,270
|
-
|
1,270
|
|
1,270
|
-
|
1,270
|
|
|
|
|
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Base
fee
|
1,228
|
-
|
1,228
|
|
1,228
|
-
|
1,228
|
A basic
management fee was payable to the Investment Manager at an 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
given in the Report of the Directors on page 33
of the 2024 Annual Report.
4.
Investment Manager’s performance fee
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Performance
fee
|
-
|
1,409
|
1,409
|
|
-
|
1,409
|
1,409
|
|
|
|
|
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Performance
fee
|
-
|
-
|
-
|
|
-
|
-
|
-
|
Details of
the Performance fee calculation are noted in the Chairman’s
Statement on page 4 of the 2024Annual Report and in the Report of
the Directors on page 33 of the 2024 Annual Report.
5.
Other expenses
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Secretarial
services
|
181
|
-
|
181
|
Auditors’
remuneration for:
|
|
|
|
Audit
services*
|
39
|
-
|
39
|
Directors’
remuneration
|
175
|
-
|
175
|
Other
expenses
|
361
|
-
|
361
|
|
756
|
-
|
756
|
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Secretarial
services
|
171
|
-
|
171
|
Auditors’
remuneration for:
|
|
|
|
Audit
services*
|
65
|
-
|
65
|
Directors’
remuneration
|
161
|
-
|
161
|
Other
expenses
|
406
|
-
|
406
|
|
803
|
-
|
803
|
All
expenses include VAT where applicable, apart from audit services
which is shown net.
*No
non-audit fees were incurred during the year
6.
Taxation
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Corporation
tax at 25.00%
|
-
|
-
|
-
|
|
-
|
-
|
-
|
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
£'000
|
£'000
|
£'000
|
|
|
|
|
Corporation
tax at 20.50%
|
-
|
-
|
-
|
|
-
|
-
|
-
|
As at
30 June 2024 the total current
taxation charge in the Company’s revenue account is lower than the
standard rate of corporation tax in the UK.
7.
Dividends
Under the
requirements of Sections 1158/1159 of the Corporation Tax Act 2010
no more than 15% of total income may be retained by the Company.
These requirements are considered on the basis of dividends
declared in respect of the financial year as shown
below.
|
|
|
|
30
June
|
30
June
|
|
2024
|
2023
|
|
£'000
|
£'000
|
Final
dividend proposed of 3.50p (2023: 2.50p) per share
|
1,657
|
1,231
|
|
|
|
The
following dividends were declared and paid by the Company in the
financial year:
|
30
June
|
30
June
|
|
2024
|
2023
|
|
£'000
|
£'000
|
Final
dividend: 2.50p per share (2023: 2.00p)
|
1,231
|
1,061
|
Dividends
have been solely paid out of the Revenue reserve.
8.
Return per Ordinary share
|
Year
ended 30 June 2024
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
pence
|
pence
|
pence
|
|
|
|
|
Return per
Ordinary share
|
4.15
|
50.84
|
54.99
|
|
4.15
|
50.84
|
54.99
|
|
Year ended
30 June 2023
|
|
Revenue
|
Capital
|
|
|
return
|
return
|
Total
|
|
pence
|
pence
|
pence
|
|
|
|
|
Return per
Ordinary share
|
3.53
|
20.44
|
23.97
|
|
3.53
|
20.44
|
23.97
|
Returns
per Ordinary share are calculated based on 48,778,400 (30 June 2023: 51,853,838) being the weighted
average number of Ordinary shares, excluding shares held in
treasury, in issue throughout the year.
9.
Investments
|
30
June 2024
£’000
|
Investment
portfolio summary
|
|
Quoted
investments at fair value through profit or loss
|
182,364
|
|
182,364
|
|
|
|
30 June
2023
£’000
|
Investment
portfolio summary
|
|
Quoted
investments at fair value through profit or loss
|
169,274
|
|
169,274
|
Under IFRS
13, the Company is required to classify fair value measurements
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 quoted
equities.
The
definition of level 1 inputs refers to ‘active markets’, 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 IPEV Valuation
Guidelines.
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.
The
following table analyses within the fair value hierarchy the
Company’s financial assets and liabilities (by class) measured at
fair value at 30 June
2024.
Financial
instruments at fair value through profit or loss
30
June 2024
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Equity
investments
|
178,480
|
3,884
|
-
|
182,364
|
Liquidity
funds
|
-
|
1
|
-
|
1
|
Total
|
178,480
|
3,885
|
-
|
182,365
|
30 June
2023
|
Level
1
£’000
|
Level
2
£’000
|
Level
3
£’000
|
Total
£’000
|
Equity
investments
|
169,274
|
-
|
-
|
169,274
|
Liquidity
funds
|
-
|
1
|
-
|
1
|
Total
|
169,274
|
1
|
-
|
169,275
|
There were
no transfers between levels for the year ended
30 June
2024 (2023: none).
Listed
investments included in Level 2 are deemed to be illiquid. An
investment is categorised as illiquid when historic trading data
indicates it would take more than 250 days to liquidate. The fair
value of these investments has been determined by reference to
their quoted prices at the reporting date.
10.
Nominal Share capital
|
Number
|
£’000
|
Allotted,
called up and fully paid Ordinary shares
of 10p
each:
|
|
|
Ordinary
shares in circulation at 30 June 2023
|
63,529,206
|
6,353
|
Shares
held in Treasury at 30 June 2023
|
(13,824,495)
|
(1,382)
|
Ordinary
shares in issue per Balance Sheet at 30 June 2023
|
49,704,711
|
4,971
|
Shares
bought back during the year to be held in Treasury
|
(1,839,261)
|
(184)
|
Ordinary
shares in issue per Balance Sheet at 30 June 2024
|
47,865,450
|
4,787
|
Shares
held in Treasury at 30 June 2024
|
15,663,756
|
1,566
|
Ordinary
shares in circulation at 30 June 2024
|
63,529,206
|
6,353
|
These are
not statutory accounts in terms of Section 434 of the Companies Act
2006.
Full
audited accounts for the year to 30 June
2024 will be sent to shareholders in October 2024 and will be available for inspection
at 1 Finsbury Circus, London EC2M
7SH, the registered office of the Company. The full annual report
and accounts will be available on the Company’s website
www.strategicequitycapital.com
The
audited accounts for the year ended 30 June
2024 will be lodged with the Registrar of
Companies.