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RNS
Gresham House Strategic PLC   -  GHS   

Final Results

Released 16:23 27-Jun-2019

RNS Number : 7155D
Gresham House Strategic PLC
27 June 2019
 

The following amendment has been made to the 'Final Results' announcement released on 27/06/2019 at 07:00 under RNS No 5673D.

 

The dividend timetable has been amended as follows: "If approved, the dividend will be paid on 30 September 2019, to shareholders on the register of members on 6 September 2019, the ex-dividend date will be 5 September 2019."

 

All other details remain unchanged.

 

The full amended text is shown below.

 

Gresham House Strategic plc

 

Final results for the year ended 31 March 2019

 

Gresham House Strategic plc (GHS or the Company) is pleased to announce its final audited results for the year ended 31 March 2019.

 

The Company invests primarily in UK and European smaller public companies, applying private equity techniques and due diligence alongside a value investment philosophy to construct a focused portfolio, the majority of which is expected to be comprised of 10-15 companies.

 

HIGHLIGHTS

Investment highlights

§ One of the top-performing UK small-cap funds[1], delivering a market-leading NAV total return of 8.0% from 1 April 2018 to 31 March 2019, vs -3.1% total return for the FTSE Small Cap Index

§ NAV growth driven by the strong performance of several investments, including Augean, Tax Systems, IMImobile and Northbridge

§ Realisations of £16.4m generating net realised profits of £5.4m against cost; including IMImobile (£13.8m, £4.96m profit), and Miton group (£1.7m, £0.57m profit)

§ Significant positive engagement in investments experiencing performance difficulties; value recovery plans are underway or currently being prepared

§ Final dividend of 11.1p per share proposed, bringing total dividends for the year to 19.85p per share

 

Operational highlights

§ Total shareholder returns of 20.4% in the year as the GHS share price rose from 827p to 970p and dividends paid, £1.9m cash returned to GHS shareholders

§ Share price discount to NAV reduced from 30.0% at 31 March 2018 to 22.6% at 31 March 2019

§ Significant portfolio construction efforts to create a more balanced portfolio; IMImobile weighting reduced from 43% to c.20%, five smaller investments exited, new strategic investments built in Augean and Pressure Technologies

§ Exciting pipeline of strategic deals targeting completion in H1 FY 2020

§ The recently announced joint venture between Gresham House and Aberdeen Standard Investments relating to the Strategic Public Equity (SPE) strategy, is expected to deliver significant positive benefits for GHS over the longer term (see Chairman's Statement)

 

Post-period end:

§ Completion of sale of Tax Systems, generating £2.0m proceeds and £0.7m profit

§ Announcement of a £2.5m strategic investment into Pressure Technologies, an AIM-listed engineering business, investing alongside other Gresham House funds creating a combined holding in Pressure Technologies in excess of 19%

§ Completion in June of a pre-IPO £2.1m strategic investment into Lakes Distillery plc by means of a fixed return, secured Convertible Loan Note (CLN)

§ NAV Total Return performance has continued post period end, up a further 1.4% to 1335.3p in the eight weeks to 31 May 2019, again outperforming the FTSE Small Cap (-0.9%) and the All-Share (-2.2%) Indices

 

The Company has announced that a final dividend of 11.1p in respect of the year ended 31 March 2019 is proposed by the Board.  This will be put to shareholders at the AGM which is to be held at 10am on 19 September 2019 at the offices of Bracher Rawlins LLP, 77 Kingsway, London WC2B 6SR.

If approved, the dividend will be paid on 30 September 2019, to shareholders on the register of members on 6 September 2019, the ex-dividend date will be 5 September 2019.

 

The information communicated in this announcement is inside information for the purposes of Article 7 of Regulation 596/2014.

For further information please contact:

 

Gresham House Strategic plc                                      David Potter                                        07711 450 391

 

Gresham House Asset Management Limited

Investment Manager                                                     Graham Bird                                       0203 837 6270

 

finnCap Ltd                                                                        

Nominated Adviser and Broker                                 Matt Goode / William Marle              0207 220 0500

 

Attila Consultants                                                            Charles Cook / Nita Shah                  07710 910563​

 

 

                            Chairman's statement

 

Dear Shareholder,

 

I am glad to say that, for the second year running, it has been the best year's performance since we engaged Gresham House as the Manager. Given the volatility of markets and the high level of political uncertainty globally this is an excellent achievement. As you will see from the accounts, this performance has, for the first time, triggered the success-related incentive fee of £2.3m (inclusive of VAT). To remind shareholders, the incentive fee is set at 15% of the upside achieved subject to a hurdle rate of 7% p.a. and the usual high watermark provisions - this fee is accumulative for three years of above-hurdle performance.

 

I said last year that the Strategic Public Equity (SPE) strategy often necessitates a downward trip on the J curve before the actions the Manager takes start to have their effect. I think the results described in more detail in the Manager's Report supports this statement. They demonstrate the thesis that our investment approach can deliver superior returns over the longer term. After an initial investment period, the GHS NAV performance is now starting to reflect the longer-term 15-year track record of the Investment Team, which has outperformed the indices by on average 10.7% p.a. - this year the GHS NAV outperformed the FTSE Small Cap by 11.1%.

 

There are several other funds that, broadly speaking, follow the same investment philosophy and we are hopeful that through all our efforts SPE will become more recognised as a distinct strategy to which investors (individual and institutional) should have an allocation in their portfolio. We believe that the Joint Venture announced by Gresham House with Aberdeen Standard Investments will give this further momentum. Some of the benefits we hope to see for GHS include; increased breadth and depth of team, greater deal flow and increased investor awareness of GHS as the only listed vehicle offering the SPE strategy managed by the Gresham House team.

 

The headline rise in the share price over the year was 827p to 970p and the headline rise in NAV was 1175.1p to 1253.9p. The Board has also proposed to declare a final dividend of 11.1p per share which follows the interim dividend of 8.75p per share paid in December 2018, and brings the total dividends declared for the year to 19.85p (prior year 17.25p). The rise in NAV coupled with the increased dividend and the commitment to raise it by at least 15% in each of the next two years to 31 March 2021 has demonstrated two things. Firstly, that our strategies towards investee companies are delivering good returns and, secondly, the confidence of the Board that this trend will be maintained.

 

I have mentioned in all my recent reports that our discount to NAV is still too high. The reasons for this that I have identified in the past are being addressed continually. Our track record is getting longer, we have rebalanced the IMI holding within the portfolio, we are fully invested, we have used share buy backs and will continue to do so. We have not been able to address the issue of our small size, but we are hopeful that the combination of these factors plus the good performance will continue to help to reduce the discount. Over the last year it has fallen from 30.0% to 22.6% at the year-end. The Board's aim is to reduce the discount to the point where the Company can realistically consider raising fresh capital. Becoming larger is more than an end in itself, it will also enable the Company to reduce its cost ratio which, although it has declined again, is higher than the Board would like.

 

I am pleased to report that some existing wealth manager shareholders have increased their stakes and new ones have joined our register. We believe that the support of individual investors and their wealth managers is the key to growing our shareholder base and eventually to raising new capital.

 

I wrote last year about MIFID II and its negative implications. Those comments have turned out to be apposite. Although there is some recognition in regulatory circles that the new rules have many flaws I fear it will be some time before some of the more glaring ones (like KIDs) will be changed. Overall there remains every likelihood that the trend seen already of reduced research on smaller-cap companies will continue. Whilst this is bad news in general for companies and investors, it is very good news for our investment strategy and thus we are extremely confident that the pipeline of possible investments will continue to exist and grow.

 

The Manager's Report that follows will give you more detail on the performance, our larger holdings and the rationale behind them.

 

I would like to thank my colleagues on the Board for another busy year, our Managers and all their support staff.

We have had one change in our external support arrangements in that we now have an independent company secretarial service provided by Shakespeare Martineau with the renamed IQEQ (formally Augentius) providing all accounting and administrative service provision.

 

I would like to take this opportunity to thank shareholders for their continued support.

 

David Potter

Chairman

 

25 June 2019

 

 

INVESTMENT PORTFOLIO TOP 10 HOLDINGS AS AT 31 MARCH 2019

 

Company

Deal type

% of total portfolio

Value

% ownership of the company

 

IMImobile

Secondary - growth and re-rating; re-investment of cashflow

23.4%

£10.4m

5.4%

Augean Plc

Secondary - cash generation, performance recovery and re-rating

15.5%

£6.9m

7.0%

Northbridge

Primary recovery and growth capital - equity and CLN

13.9%

£6.2m

10.9%

Be Heard

Primary growth capital equity and CLN. Now focused on integration, cash generation and organic growth

7.3%

£3.3m

11.2%

MJ Hudson

Primary - pre-IPO growth capital - equity and CLN

5.6%

£2.5m

1.0%

Tax Systems

Secondary - operational initiative, de-gearing and re-rating and organic growth

4.5%

£2.0m

2.0%

Centaur Media

Secondary - strategic refocus, sum of the parts thesis

3.8%

£1.7m

2.1%

Private and Commercial Finance

Primary growth capital

2.8%

£1.2m

1.5%

Swallowfield

Secondary - strategic refocus and operational improvement

2.6%

£1.2m

3.8%

Universe Group Plc

Secondary - strategic refocus; stabilisation and re-rating

2.6%

£1.1m

10.2%

 

 

Investment Manager's report

 

Introduction

 

Following on from the Chairman's comments, I am pleased to be able to write to shareholders about a busy and, in some senses, transformational year for Gresham House Strategic on both operational and investment fronts. The Investment Team, supported by the Gresham House platform and wider resource, made a number of important investments and divestments and achieved a number of operational objectives in the year. We have also identified opportunities for further work and improvement for the financial year ahead.

 

Investment highlights

§ One of the top-performing UK small-cap funds[2], delivering market-leading NAV Total Return performance of 8.0% to 1,253.9p[3]/share vs FTSE Small Cap Index Total Return of -3.1% in the year from 1 April 2018 to 31 March 2019

§ Three-year anniversary of management by Gresham House marked in August 2018 with strong NAV Total Return of 31.4% from inception and operational milestones achieved 

§ NAV growth driven by the strong performance of a number of investments, including Augean, Tax Systems, IMImobile and Northbridge

§ Partial realisations of £16.4m generating net realised profits of £5.4m against cost; including IMImobile (£13.8m, £4.96m profit), and Miton group (£1.7m, £0.57m profit)

§ A total of £13.1m capital invested between the start of the financial year and the publication of the results

§ Significant positive engagement in investments where value recovery plans are underway or being prepared

§ GHS has generated a Sharpe Ratio of 1.54 since inception to the time of writing, significantly outperforming its peers[4] and indicative of an attractive risk / reward profile

§ Final dividend of 11.1p per share proposed, bringing total dividends for the year to 19.85p per share
 

Post-period end

§ Completion of sale of Tax Systems, generating £2.0m proceeds and £0.7m profit

§ Growth in NAV has continued post period end, up a further 1.4% since the year-end to 1335.3p in the eight weeks to 31 May 2019

§ Announcement in April of a £2.5m strategic investment into Pressure Technologies, an AIM-listed engineering business

§ Completion in June of a pre-IPO, £2.1m strategic investment into Lakes Distillery plc by means of a fixed return, secured CLN

 

Operational highlights

§ Total shareholder returns of 20.4% in the year as the GHS share price rose from 827p to 970p and FY 2018 dividend and FY 2019 interim dividend paid, this share price strength continued post period end, closing at 1150p as at 31 May 2019

§ £1.9m cash returned to GHS shareholders via a buy-back and dividend in the financial year

§ Share price discount to NAV reduced from 30.0% at 31 March 2018 to 22.6% at 31 March 2019

§ Significant portfolio construction efforts; IMImobile weighting reduced from 43% to <20%, five smaller investments exited, new strategic investments built in Augean, and Pressure Technologies creating a more balanced portfolio

§ Exciting pipeline of strategic deals targeting completion for H1 FY 2020

§ We expect the recently announced joint venture between Gresham House and Aberdeen Standard Investments, relating to the Strategic Public Equity (SPE) strategy, to deliver significant positive benefits for GHS over the longer term, as described in the Chairman's statement

 

Market commentary

 

It was a volatile twelve months for UK equity markets, which failed to break through their all-time highs. Weakness and volatility dominated in the middle of the reporting period, notably through the end of the calendar year, with more buoyant performance in Q2 2018 and Q1 2019. Markets flitted between the more positive global growth narrative and bearish political concerns, most notably President Trump's trade policies and Brexit negotiations (and their possible impact on global growth). The summer started strongly, largely off the back of a strong Q2 earnings season (especially in the US) and what looked like progress on Brexit. Frustratingly all this was relinquished between September and December as the Trump administration ramped up aggressive trade rhetoric, and uncertainty in Europe increased as Brexit negotiations soured and concerns about Italian sovereign debt re-emerged. The UK AIM and Small-Cap markets were punished particularly hard, as were technology stocks, and most equity indices entered into bear market territory at the end of 2018. The UK AIM and Small-Cap Indices ended 2018 at 22.4% and 13.9% respectively off their 52-week highs.

 

As is often the case, just when many thought the decade-long bull market had come to an end, the first three months of 2019 saw a sharp rebound in global equity markets. In our view, the drivers of this were threefold.

 

Firstly, the first few months of 2019 have seen a stabilisation of economic data which have started to soften (US) and show signs of recovery in other key regions (Europe and China). This has provided equity markets with a platform from which to rally, as a near-term global growth slowdown had been the key theme roiling markets at the back end of last year. As we have flagged to our investors over the past six months, we remain cautious of how lengthy the current cycle has become - and last year's concerns were by no means unwarranted. We remain cautious on a longer-term view, though in the short to medium term we are more positive on the global economy in the form of an eventual US-China trade deal and a bounce in Europe driven by Brexit clarity. We note, that on 1 April, Goldman Sachs raised their US Q1 GDP estimate from 0.8% to 1.2%.

 

Secondly, the market fear clearly caught the attention of Capitol Hill and Beijing, for just as equities formally entered bear markets at the back end of December, a flurry of political statements and monetary/fiscal policies emerged, clearly designed to support confidence. In the US, the Treasury Secretary sought to calm the nerves of banks and held out an olive branch in the trade negotiations with China. In Beijing, significant stimulus increases were announced. The Federal Reserve offered its own contribution with a halt to rate hike plans. These efforts clearly worked - global equity markets bottomed the day Steve Mnuchin held a conference call with the President's Working Group on Financial Markets.

 

Thirdly, the first two drivers discussed herein have meant that the c.20% declines across major equity indices in the US and Europe created an attractive buying point for investors who had been wary of valuations in 2018.

 

Perhaps more positively for our shareholders, in terms of investment style, there have been interesting changes in direction over the past twelve months. 'Growth' has been the real casualty of the Q4 market sell-off versus its performance at the start of the year (and for most of the past decade) and has been closely followed by 'momentum'. The best relative performer by some distance has been 'value', having previously been the laggard. This is encouraging for investors in GHS as we have a more 'value oriented' portfolio of investments, something that is core to our approach. More on this in portfolio review. We would argue that some of the stronger performance this year can be attributed to this emerging change in backdrop and we anticipate this trend extending into next year as a decade-long dominance of growth and momentum investing recedes.

 

Relative performance to 31 March 2018              

Start date

14-Aug-15

31-Mar-18

31-Mar-18

30-Sep-18

End date

31-Mar-19

31-Mar-19

30-Sep-18

31-Mar-19

 

Since inception

FY 2019

H1 2019

H2 2019

Share price total return

31.5%

20.4%

22.9%

-2.1%

NAV Total Return

31.4%

8.0%

8.1%

-0.1%

FTSE Small Cap Total Return

16.9%

-3.1%

4.8%

-7.5%

FTSE All Share Total Return

26.8%

6.3%

8.2%

-1.8%

 

Since inception

FY 2019

H1 2019

H2 2019

Relative Performance

 

 

 

 

NAV vs FTSE Small Cap

14.5%

11.1%

3.3%

7.5%

NAV vs FTSE All Share

4.6%

1.7%

-0.2%

1.7%

 

Source: Bloomberg Data as at 31 March 2019

Note: Inception August 2015

 

Despite the market volatility, it has been another pleasing twelve months for the GHS NAV, as we built on the improved performance of FY 2018 and accelerated it with the NAV growing 5.7% from 1186.3p to 1253.9p in a year where we were also able to deliver two dividends to our shareholders bringing the shareholder total return to 8.0%. This improving performance is in line with our 3-5-year investment horizon, with us entering the fourth year of management of the Company in August 2018.

 

The financial year started well with the NAV tracking ahead of the comparator indices into the summer, driven by IMImobile's share price strength in June and July and supported by consistent performance in Augean and Northbridge. This created an outperformance spread that was then maintained throughout the year (and then widened recently post-period end) and the NAV reached a high for the reporting period (and for GH management) of 1290.7p in early September.

 

Our 'value' approach was seemingly better insulated than the market from the volatility that set in shortly thereafter (late Q3 and Q4), as our performance softened to end the calendar year at 1188p but remained positive for the year and ahead of indices. The fall was driven by declines in most of our holdings, but the sharpest was in IMImobile. The impact was lessened, however, by the fact that we had reduced our holding by c.60% during August and September, locking in a significant profit and attractive return. It also meant we were holding a substantial cash balance as the market went into bear market territory, further insulating us from the market declines.

 

The NAV then almost fully recovered in Q1 2019 in line with equity markets in a broad-based rally across the portfolio, to end the reporting period at 1253.9p. The strong-relative and absolute performance for the year would have been more pronounced were it not for some setbacks at Be Heard, Quarto and SpaceandPeople, where we have put value recovery plans in place. More detail on these can be found later in the portfolio section of the commentary.

 

The NAV Total Return performance for the financial year-ended at +8.0% whilst the FTSE Small Cap (excluding Investment Trusts) Total Return Index delivered -3.1%. The key contributors and detractors to the positive performance are laid out in the performance attribution table below, and detail to these moves is given later in this portfolio review. After an initial investment period, the GHS NAV performance is now starting to reflect the longer-term 15-year track record of the Investment Team, which has outperformed the indices by 10.7% p.a. on average managing UK small-cap funds. This year the GHS NAV outperformed the FTSE Small Cap Index by 11.1%.

 

We are pleased to be able to report that this NAV performance has accelerated further post-period end, with the NAV growing +1.4% in the eight weeks to 31 May 2019, ending the month at 1335.3p, continuing to outperform equity markets. The positive drivers of NAV post-period end were more focussed than the broad strength of Q1 2019, strong share price performances in Augean, Northbridge and our new investment in Pressure Technologies supported the NAV during April and May and offset modest weakness across the rest of the portfolio.

 

This year of performance has helped generate a Sharpe Ratio of 1.54 since inception to the time of writing for the Company, significantly outperforming its peers.[5] We are pleased and proud to be able to produce this blend of high returns and low volatility for our shareholders - creating an attractive risk reward ratio.  For reference, the ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
 

NAV Performance Attribution

Top 5 Performers

£m contribution

% uplift

/share

IMImobile plc  

 £   4,2m

9.7%

117.9

Augean plc

 £   4,0m

9.3%

113.5

Northbridge Industrial Services plc

 £      0.9m

2.0%

24.2

Tax Systems plc

 £      0.6m

1.4%

17.1

Centaur Media plc

 £      0.2m

0.4%

5.5

 

 

 

 

Bottom 5 Performers

 

 

 

ProPhotonix Limited

(£      0.2m)

(0.5%)

(6.3)

SpaceandPeople

(£      0.6m)

(1.3%)

(16.0)

Be Heard Group plc

(£      0.7m)

(1.7%)

(20.4)

Quarto Group Inc.

(£      0.8m)

(1.8%)

(21.5)

Escape Hunt

(£      0.9m)

(2.1%)

(25.6)

 

Data as at 31 March 2019

 

Investment activity

It has been a busy year for the Investment Team as we brought the portfolio close to being 'fully invested', investing some of our cash balance tactically but also rotating some large existing positions to follow our investment theses.

 

We had total realisations of £18.8m, almost entirely from profitable investments in the period; including IMImobile (£13.8m), Miton group (£1.7m), and Tax Systems (£2.0m).

 

IMImobile was a partial sale based on portfolio construction and we trimmed our position by 57% to lock in some profits for our investors and reduce the growing exposure to the company. The IRR on these sales delivered returns of 28.2% IRR and 2.12x MM for the Company.

 

We also elected to exit the remainder of our Miton position given that our investment thesis had played out and our identified catalysts had been achieved, delivering a 1.6x MM and 26% IRR for our investors.

 

Tax Systems, on the other hand was acquired by Bowmark Capital LLP for 115p per share vs our average in price of 72p per share. Whilst we felt over the longer term there was potentially more value creation to be captured, the offer fairly reflected where the business had got to and we were pleased with a liquidity event that delivered a return of 26.4% IRR and 1.5x MM for our investors within two years.

 

We also sold out of toe-hold positions in Smartspace software and Stadium group as the investment case failed to materialise, other similar situations in the portfolio remain under review.

 

We put £8.3m of cash to work in the year to 31 March 2019, and an additional £4.1m post-period end. We invested the majority of this into new investments including CLN at Northbridge and Lakes Distillery and equity investments into Hydrodec, Pressure Technologies and Swallowfield. We also increased our existing investments in Augean, Universe Group, Be Heard, Centaur Media and Escape Hunt, building bigger stakes as we have seen evidence of progress towards milestones or taking advantage of pricing anomalies. We also made a modest further investment into IMImobile in Q1 2019 for the same reasons, as the market volatility of Q4 2018 created a higher than average number of such opportunities.

 

The majority of our investments and realisations are discussed in detail in the 'Investment Review' section of this report.

 

Investment review

After a year of strong relative performance and operational progress, there is plenty of good news to cover in the portfolio. We focused on making one or two selective new investments and supporting our investments per our investment strategy, which in a number of cases benefited from some traction in the mid-year and H2. However, we would like to start by reviewing some of the setbacks and what we are doing about them - as this is a key part of our strategy, but also where we think we are laying the foundations for value recovery and therefore additional returns in the coming months and years.

 

The five obvious ones were Quarto, Be Heard, Universe Group, SpaceandPeople and Escape Hunt. We covered our work on Quarto extensively in the interim results and our factsheets, so we will not repeat it here as the situation there has stabilised, with Andy Cumming as Chairman and C K Lau, the major shareholder, as Chief Executive. Initiatives at Universe Group and Be Heard all progressed materially in the year and have started to bear tangible results. We have also been closely engaged with SpaceandPeople and Escape Hunt - though these efforts are at an earlier stage.

 

Be Heard

After a few eventful quarters for Be Heard, peppered with operational hiccoughs and ultimately downgrades to forecasts and which reached a climax in early summer 2018 concluding a disappointing nine months for the business, we became increasingly engaged and active with the company. It had become evident in January that change was required to rectify some of the operational issues the business was facing. Initially changes were made in the finance area, with the well-regarded Simon Pyper joining in April, following the departure of Robin Price. Peter Scott then left his position as CEO in September, with Simon Pyper stepping up to the role. Ben Rudman joined the board as COO.

 

Simon and Ben have brought fresh perspective to the operational management of the business, with a greater focus on delivering benefits from the integration of Be Heard's divisional businesses and a new approach to cost and expenditure management, both of which we are highly supportive of. The 2018 results demonstrated the difference these changes have made; after some significant reorganisation work EBITDA leapt in H2 to £2.4m driving full year EBITDA up to £3.0m from £1.6m in the prior year and in line with the revised forecasts made in the summer. With trading on track (Q1 ahead of budget) based on a macro-aware budget we are encouraged at this early stage in the year. We continue to work closely with Chairman David Morrison, Simon and Ben on the future for the business and efforts to translate the improving operational performance into value recovery for our investment. We believe the outlook for Be Heard is now increasingly positive.

 

SpaceandPeople

We have started a period of similarly intense levels of engagement with SpaceandPeople, following the two profit warnings this year. The business is sub-scale and has met a clear inflection point in its story. Whilst this is a small investment and we are conscious of where we spend our time, we are lending our corporate expertise and knowledge to formulating and enacting a strategic plan for the next phase of the business' life.

 

Universe Group

At Universe Group our efforts have been more subtle but nonetheless supportive of the improving equity story after the difficulties the business faced following the collapse of Conviviality when the company lost a major future earnings prospect. Universe had signed them as a client a year or so before and the teething problems with the roll-out are now more easily explainable. After this setback, we looked to support Chairman Andrew Blayze and CEO Jeremy Lewis as they sought to refocus resources within the business, adjusting for the contract loss, but also positioning it for winning new business. Some evidence of the benefit is beginning to show, with progress announced post-period end including a strategic acquisition and improved forecasts.

 

Escape Hunt

Escape Hunt has, frustratingly, been the weakest performer in the portfolio in the reporting period as delays in site roll-outs have had a knock-on impact on the company's profitability profile and also cash consumption, which has weakened the P&L and balance sheet but also muddied the equity story. As our shareholders would expect we are now increasing our engagement with the company to rectify all the issues at hand and we expect to be able to provide our shareholders with much more information over the summer.

 

Whilst we have been busy stabilising and laying the foundations to recover value in the few investments that have breached our original investment thesis, there has been plenty of good news and positive engagement within the portfolio too as the performance this year suggests. Whilst we will not trawl through each and every one here (case studies are available on our website) some of the stand-out performers and events on which we will provide some more information include: Augean, IMImobile (major realisation and reinvestment), Tax Systems take-out and Northbridge. There were also two new investments into the portfolio - Pressure Technologies and Swallowfield - for which we will provide a summary of our investment case.

 

Augean

It has been a remarkable year for the turnaround strategy at Augean and our investment - first made in October 2017 and subsequently increased on growing conviction through 2018 - to become one of the largest positions in the portfolio. Having had the second half of 2017 to formulate a recovery strategy, 2018 was a year in which the executive team, led by Jim Meredith (Executive Chairman) and Mark Fryer (FD), began to enact the plan, starting with a rightsizing of the cost base to respond to the anticipated HMRC assessment to landfill tax and related penalties and fines (quantum as yet undecided, but final assessments have provided an expected cap) but also the significantly reduced size of the business. These early efforts set the platform for a pleasing summer for Augean as the company began to deliver on our investment thesis, with better than expected cash generation and margin growth.

 

In the Autumn, the company released a bullish trading update and a stronger than expected set of interims, citing 36% year-on-year pre-tax profit growth. Credit should go to the management team for their strategy and its delivery. Once it had become clear that the strategic changes were being implemented we added to our investment through the year. The first few months of 2019 brought further good news, with upgrades to forecasts announced. The company materially increased its guidance for FY 2019, FY 2020 and FY 2021 following strong performances from its businesses in Q1 and good continuing momentum built on broad-based progress. This also created a corresponding increase in net cash expectations to £50.5m by the end of 2021.[6]  The final assessments on the landfill tax issue would suggest the company's worst-case outcome would be a liability of approximately £35m (including interest). We still regard a significantly better outcome as a reasonably high probability, but nevertheless feel that the current valuation factors, in an outcome which the company itself believes, would be unfavourable. Later in 2019 we look forward to signs of further progress on the next key catalysts; further advancement on the HMRC assessment and additional earnings growth.

 

IMImobile

It was a year of significant progress for our major investment in IMImobile as well. As discussed in depth at the interims, we rebalanced the portfolio by reducing our IMImobile stake in August by 57%, generating a 28.2% IRR and 2.1x Money Multiple. Further detail on the realisation can be found in the interim results and the RNS made at the time of the sale, which we will not repeat here. However, post our disposals the shares significantly de-rated during the technology sell-off of Q4 2018, trading as low as 197p. As a team that knew the company in-depth, the valuation argument to reinvest became hard to ignore and, as a result, we re-evaluated the investment thesis and the company's operating performance, engaging management as well as desktop due diligence.

 

This work concluded a strong re-investment case and GHS purchased 420,000 shares at these lower levels in February 2019 (note the reinvestment size was materially smaller than the realisation as we remain conscious of portfolio construction). We were pleased to see the shares trade better as market volatility eased and the company then released a strong trading update showing that it continues to grow organically at double digit rates as well as winning clients, allowing the shares to end the year trading around the 300p level.

 

Tax Systems

We were also pleased to see an execution of our takeout thesis for Tax Systems, for a final offer price of 115p. This compares to our entry price of 72p two years ago, delivered an IRR of 26.4% and 1.5x money, and generated a profit of £0.7m for our investors, well ahead of our 15% IRR target. The shares were delisted shortly before our year-end and the sale completed in the first week of April.

 

Northbridge

In the case of Northbridge, over the past twelve months the sector recovery story that underpins our investment thesis has begun to accelerate from the early indicators evident at the end of 2017. This has started to translate into increased business activity, leading to an acceleration of capital expenditure to support new contracts. The traditional markets for load banks as well as newer, emerging areas, such as Data Centres and Energy Storage Systems, have provided resilience and growing opportunity and the joint venture in Malaysia has been tracking satisfactorily. 

 

We evidenced our growing conviction for the recovery story with a significant additional investment into the company in April last year. We played a leading role in a comprehensive financing package; initiating, structuring and completing in the form of a £4m CLN issue, of which GHS subscribed for c.£2m. The CLN pays an 8.0% p.a. coupon quarterly over a three-year term and has a conversion price of 125p. The issue was in conjunction with renewed banking facilities for the next three years.

 

As at the GHS year-end the Northbridge recovery story remains ongoing. Brokers were able to increase their profit before tax forecasts for 2020 and 2021 in October, driving the share price as high as 150p, double the price at which we made our initial investment in 2016 and leaving our CLN comfortably in the money (125p exercise price).

 

The company's strong results posted after the end of our financial year-end provided further evidence for our recovery thesis, led by the equipment rental unit in Australia, which was the earliest unit to suffer from the oil market turndown and which was the main contributor to a 44% rise in EBITDA in FY 2018, described as a "watershed" year. "Further good progress" for the oil and electrical tools group is expected for financial year 2019 and we look forward to updating shareholders in due course.

 

New investments post-period end

 

§ Pressure Technologies

‒   A £2.5m investment via a secondary block placing into Pressure Technologies, making Gresham House managed funds the largest shareholder

‒   The thesis on Pressure Technologies is one of recovery, organic growth and strategic refocus, backing a new management team to deliver a return of organic growth and simplification of the operational structure of the business

§ Lakes Distillery

‒    A pre-IPO investment of £2.1m via a secured, CLN that pays an 8% cash yield and an additional 12% PIK roll-up interest, combining to generate a 20% p.a. return - the loan notes convert to equity at the point of IPO

‒    This is to provide growth capital to the business to further develop production capacity and fund additional whisky production ahead of an anticipated IPO over the next 24-36 months 

 

Outlook

We enter the 2019/20 financial year invigorated from a year of significant activity and accelerating NAV performance. We are excited to be continuing to make progress in spite of some of the setbacks and to be capitalising on selective opportunities ahead of us, some of which we have discussed in this report. Other opportunities remain in our investment pipeline and we look forward to being able to discuss these with shareholders in due course via our factsheets.

 

While we continue to believe areas of equity markets are expensive compared to historic ranges, opportunities remain, and the UK is attractively positioned on a value basis relative to other economies and markets. We feel this creates opportunities for our existing holdings and new investment ideas in the medium term, especially given our 'value' orientation. Whilst wary of the stage in the cycle and some sector valuations relative to historic ranges, we remain cautiously optimistic in our outlook for the shorter term, especially when focusing on the UK. If a resolution to the Brexit uncertainty can be found, as we continue to believe it can (albeit after some additional dramatic posturing from both sides), then the case for UK equities is even stronger. In the event of a Brexit resolution we would expect to see an improvement in consumer confidence (helped by a likely stronger UK currency) as seen in the US over the past six months, and an element of catch up from withheld capital expenditure by businesses during the last two years of uncertainty. Whilst this may be offset by a reversal of the recent stock-building which has supported growth ahead of the Brexit deadline, we believe the overall impact would be positive. We are following developments closely and are engaged with our portfolio investments on their plans either way.

 

All of this considered, we are selectively assessing interesting, differentiated value opportunities, particularly those that offer defensive characteristics against a potential slowdown in global economic growth should trade wars escalate, and those that are not highly-rated momentum stocks, a number of which have been propelled to lofty valuations during the current bull market. The sell-off at the end of 2018 provided a helpful reminder of the risks of such valuations.

 

Strategic Public Equity investment strategy  

We use the philosophy, approach and techniques adopted by private equity investors to identify investment opportunities that we believe can generate a 15% annualised return over the medium to long-term - typically three to five years. Targeting UK and European smaller public companies, the strategy focuses on stocks with characteristics indicating that a company is intrinsically undervalued, such as low valuation multiples, high free cash return on capital characteristics and tangible asset cover. There is a strong focus on cash generation, improving return on capital, and - where we believe there are opportunities to - we look to create shareholder value through strategic, operational or management initiatives.

 

Our approach is differentiated from other public equity investment strategies in several ways. This includes the depth of due diligence and analysis undertaken, the level of interaction and constructive engagement with management teams and boards, the focused and concentrated portfolio, and the investment horizon in which we typically seek to support a three to five-year value creation plan with identified milestones and catalysts.

 

In addition to our financial return criteria, we apply a qualitative assessment matrix (Quality Score) to investment opportunities looking at:

 

§ Market characteristics and dynamics

§ The Company's competitive positioning within the market, including barriers to entry, ability to grow, pricing power, and client/customer quality

§ The strength, experience and alignment of management

§ The financial characteristics, focusing on areas such as customer concentration, sustainability of margins, capital intensity and cashflow characteristics, stability and predictability

§ The likely attractiveness to other buyers, whether institutional, trade or private equity

§ The intrinsic value in relation to the market value

§ Our ability to acquire a stake and assist in value creation and enhancement to bridge the value gap

We also make use of a network of seasoned executives from a range of professional and commercial backgrounds with whom we consult, including those who form part of the Investment Committee and Gresham House Advisory Group.

 

Gresham House believes this approach can lead to superior investment returns, exploiting inefficiencies in certain segments of the public markets. There are over 1,000 companies in the FTSE Small Cap index and on AIM. These companies typically suffer from a lack of research coverage and often have limited access to growth capital.

 

In addition to publicly quoted companies, we also have the flexibility to invest up to 30% of the portfolio in selected unquoted securities, including preference shares, convertible instruments and other forms of investments. This enables us to support pre-IPO and take private opportunities as well as being able to invest in different parts of the capital structure.

 

 

 

 

Statement of Comprehensive Income

for the year-ended 31 March 2019

 

 

 

Year-ended

Year-ended

 

 

31-Mar-19

31-Mar-18

 

Notes

£'000

£'000

 

 

 

 

Gains on Investments

 8

6,102

               5,562

 

 

 

 

Revenue

 

 

 

Bank Interest income

 

11

                       2

Loan note interest income

 

634

                  324

Portfolio dividend income

 

225

                  162

 

 

870

                  488

Administrative expenses

 

 

 

Salaries and other staff costs

 3

(129)

                 (138)

Performance fee

13

(2,333)

-

Other costs

 4

(1,257)

             (1,235)

Total administrative expenses

 

(3,719)

             (1,373)

 

 

 

 

Profit before taxation

 

3,253

               4,677

Taxation

 5

-

- 

Withholding tax expense

 

-

                     (8)

 Profit for the financial year

 

3,253

4,669

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

 

 - Equity shareholders of the Company

 

3,253

4,669

 

 

 

 

Basic and Diluted earnings per ordinary share for profit

 

 

6

 

91.06p

 

127.70p

from continuing operations and for profit for the year (pence)

 

 

 

 

 

 

 

                 

 

There are no components of other comprehensive income for the current year, (2018: None).

 

 

 

Statement of Financial Position

as at 31 March 2019

 

 

 

31-Mar-19

31-Mar-18 

 

Notes

 

 £'000

 £'000

Non-current assets

 

 

 

 

Investments at fair value through profit or loss

8

 

40,718

40,449

 

 

 

40,718

40,449

Current assets

 

 

 

 

Trade and other receivables

9

 

106

71

Cash and cash equivalents

 

 

6,728

3,044

 

 

 

6,834

3,115

Total assets

 

 

47,552

43,564

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

 

 

(473)

(209)

Performance fee payable

 

 

(2,333)

-

Total liabilities

10

 

(2,806)

(209)

Net current assets

 

 

4,028

2,906

 

 

 

 

 

Net assets

 

 

44,746

43,355

 

 

 

 

 

Equity

 

 

 

 

Issued capital

11

 

1,788

1,837

Share premium

 

 

13,050

13,060

Revenue reserve

 

 

19,071

17,670

Capital redemption reserve

 

 

10,837

10,788

Total equity

 

 

44,746

43,355

 

The NAV per share on 31 March 2019 is 1,258.6p (2018: 1,186.3p).

 

These financial statements were approved and authorised for issue by the Board of Directors on 25 June 2019. Signed on behalf of the Board of Directors.

 

 

 

 

 

David Potter                                                                                                                            Charles Berry

Chairman                                                                                                                                                Director

 

 

 

Statement of Cash Flows

for the year-ended 31 March 2019

 

 

 

Year to

Year to

 

 

31-Mar-19

31-Mar-18

 

Notes

£'000

£'000

Cash flow from operating activities

 

 

 

Cash flow from operations

a

(686)

          (928)

Net cash outflow from operating activities

 

(686)

          (928)

 

 

 

 

Cash flows from investing activities

 

 

 

Purchase of financial investments

 

(10,124)

    (12,539)

Sale of financial investments

8

16,356

        4,355

Net cash inflow / (outflow) from investing activities

 

6,232

      (8,184)

 

 

 

 

Cash flows from financing activities

 

 

 

Dividends paid

 

(924)

          (548)

Share buy backs

 

(938)

          (283)

Net cash outflow from financing activities

 

(1,862)

          (831)

 

 

 

 

Change in cash and cash equivalents

 

3,684

(9,943)

Opening cash and cash equivalents

 

3,044

12,987

Closing cash and cash equivalents

 

6,728

3,044

 

 

 

 

Note

 

 

 

a)  Reconciliation of profit for the year to net cash outflow from operations

 

 

 

 

 

 

 

£'000

 £'000

Profit for the year

 

3,253

4,669

Rolled up interest

 

(226)

-

Gains on investment

8

(6,102)

      (5,562)

Operating results

 

(3,075)

          (893)

 

 

 

 

Change in trade and other receivables

 

(35)

18

Change in trade and other payables

 

2,424

            (53)

Net cash outflow from operations

 

(686)

          (928)

 

 

 

 

 

Statement of Changes in Equity

for the year-ended 31 March 2019

 

 

D shares

Ordinary Share Capital

Share Premium

Revenue Reserve

Capital Redemption Reserve

Total Equity

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 March 2017

10

1,922

13,063

13,829

10,693

39,517

 

 

 

 

 

 

 

Profit and total comprehensive income for the year

-

-

-

4,669

-

4,669

Share buy back

-

(17)

(3)

(280)

17

(283)

Dividends paid

-

-

-

(548)

-

(548)

Treasury share cancellation

-

(78)

-

-

78

-

Balance at 31 March 2018

10

1,827

13,060

17,670

10,788

43,355

 

 

 

 

 

 

 

Profit and total comprehensive income for the year

-

-

-

3,253

-

3,253

Share buy back

-

(49)

(10)

(928)

49

(938)

Dividends paid

-

-

-

(924)

-

(924)

Balance at 31 March 2019

10

1,778

13,050

19,071

10,837

44,746

 

 

 

 

 

Notes to the Financial Statements

 

1 Basis of Preparation and Significant Accounting Policies

 

Gresham House Strategic plc (the Company) is a company incorporated in the UK and registered in England and Wales (registration number: 3813450).  The accounting policies applied are consistent with the prior year.

 

Basis of Preparation

The financial statements for the year-ended 31 March 2019 have been prepared in accordance with International Financial Reporting Standards (IFRS) approved by the International Accounting Standards Board ('IASB'), as adopted by the European Union and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

 

The financial statements are prepared on a historical cost basis except for the revaluation of certain financial instruments stated at fair value. Standards and interpretations applied for the first time have had no material impact on these financial statements.

 

New standards effective in the year

IFRS 9 "Financial instruments" became effective for accounting periods beginning on or after 1 January 2018.  The new standard requires the Directors to evaluate the classification, measurement and recognition of financial assets and financial liabilities. 

 

The Company has adopted IFRS 9 for the financial year-ended 31 March 2019, which has the following impact:

 

§  No effect on the classification and measurement of its investment portfolio, as these are held at fair value through profit or loss and will continue to be measured on the same basis under IFRS 9.  After application of the business model test, the investments met the criteria to be held at fair value through profit and loss under IFRS 9; and

§  No impact on the accounting of financial liabilities, as the new requirements only affect the accounting of financial liabilities that are designated at fair value through profit or loss. The Company has no such financial liabilities.

 

IFRS 15 "Revenue from contracts with customers" became effective for accounting periods beginning on or after 1 January 2018.

 

The core principle of the new standard is for entities to recognise revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the Company expects to be entitled in exchange for those goods or services.

 

The Company is not exposed to IFRS 15 given its business model and therefore this has no impact on the Company.

 

New standards and interpretations not yet applied

 

IFRS 16 "Leases" will not become effective until accounting periods beginning on or after 1 January 2019.

 

The adoption of the above standard does not have an impact on the Company's reported assets.

 

Basis of preparation

The Company's business activities, together with the factors likely to affect its future development, performance and position are set out in the Directors' Report and Investment Manager's Report. The key risks facing the business and management's policy and practices to manage these are further discussed in note 12. In assessing the Company as a going concern, the Directors have considered the forecasts which reflect the Directors' proposed strategy for portfolio investments and the current economic outlook. The Company's forecasts and projections, taking into account reasonably possible changes in performance, show that the Company is able to operate within its available working capital and continue to settle all liabilities as they fall due for the foreseeable future.

 

The Directors have considered the use of the going concern basis for the preparation of these financial statements within the context of the Company's stated investment strategy. The strategy targets superior long-term returns through a policy of constructive, active engagement with investee companies, adopting private equity techniques to manage risk. The Investment Manager (Gresham House Asset Management Limited or GHAM) targets smaller, predominantly quoted UK companies which it believes can benefit from strategic, operational or management initiatives and applies structured investment appraisal, due diligence and risk management on these companies. Accordingly, the Directors remain of the view that the going concern basis of preparation is appropriate.

 

Financial instruments:

Trade debtors and creditors

Trade debtors and creditors are accounted for at transaction value when asset or liability is incurred. The fair value equals the carrying amount as these are short term in nature.

 

Cash and cash equivalents

Cash and cash equivalents include cash in hand and deposits held at call with banks and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

 

Financial investments

Investments are included at valuation on the following basis:

 

(a) Quoted investments are recognised on trading date and valued at the closing bid price at the year-end.

(b)  Investments considered to be mature are valued according to the Directors' best estimate of the Company's share of that investment's value.

This value is calculated in accordance with International Private Equity Valuation (IPEV) guidelines and industry norms and includes calculations based on appropriate earnings or sales multiples.

The Company has chosen not to early adopt the IPEV guidelines which are effective for reporting periods beginning on or after 1 January 2019.

 

The core principles of the new guidelines are:

 

(a)   Price of a recent investment removed as a valuation technique; and

 

(b)   Valuing debt investment is expanded.

 

The Company is still in the process of assessing the full impact of the IPEV guidelines and will adopt the amendment when it becomes effective.

 

The Directors consider that a substantial measure of the performance of the Company is assessed through the capital gains and losses arising from the investment activity of the Company.

 

Consequently, for measurement purposes, financial investments, including equity, loan and similar instruments, are designated at fair value through profit and loss, and are valued in compliance with IFRS 9 'Financial Instruments', IFRS 13 'Fair Value Measurement' and the International Private Equity and Venture Capital Valuation Guidelines as recommended by the British Venture Capital Association.

 

Gains and losses on the realisation of financial investments are recognised in the statement of comprehensive income for the year and taken to retained earnings. The difference between the market value of financial investments and book value to the Company is shown as a gain or loss for the year and taken to the statement of comprehensive income.

 

Revenue

Dividends receivable on unquoted equity shares are brought into account when the Company's right to receive payment is established and there is no reasonable doubt that payment will be received. Interest accruing on debt assets measured at fair value through profit or loss, calculated using the effective interest rate method on the principal amount, is recognised in loan interest income.  Other movements in the fair value of these instruments are recognised in gains on investments Dividends receivable on quoted equity shares are brought into account when the right to receive payment is established and the amount of the dividend can be measured reliably.

 

Taxation

The tax expense included in the statement of comprehensive income comprises current and deferred tax. Current tax is the expected tax payable based on the taxable profit for the year, using tax rates that have been enacted or substantially enacted by the reporting date. Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the accounts and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the statement of financial position liability method.

 

Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in the statement of comprehensive income, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity.

 

Foreign exchange

Transactions denominated in foreign currencies are translated into the functional currency at the rate ruling at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated at the rates ruling at that date. These translation differences are dealt with in the statement of comprehensive income.

 

Critical accounting judgements and key sources of estimation uncertainty

The preparation of financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Although these estimates are based on management's best knowledge of the amount, event or actions, actual results ultimately may differ from those estimates. Management believes that the underlying assumptions are appropriate and that the Company's financial statements are fairly presented. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 12. Within Gresham House Strategic plc this relates to the unquoted investments.

 

Segmental analysis

Segmental analysis is not applicable as there is only one operating segment of the business - investment activities. The performance measure of investment activities is considered by the Board to be profitability and is disclosed on the face of the statement of comprehensive income.

 

2 Statement of Comprehensive Income

 

The Company's profit for the year was £3.253m (2018: profit of £4.669m).

 

The Company has recognised gains on investment through the statement of comprehensive income of £6.102m (2018: £5.562m).

 

3 Information regarding Directors and employees

 

 

The Company has no other employees other than the Directors listed above.

 

 

Year-ended

Year-ended

 

31 March

31 March

 

2019

2018

 

No.

No.

Average number of persons employed (including Directors)

 

 

Investment and related administration

                    4

                   4

 

                     4

                   4

 

4 Other costs

 

Profit for the year has been derived after taking the following items into account:

 

 

5 Taxation

 

 

Year-ended

Year-ended

 

31 March

31 March

 

2019

2018

 

£'000

£'000

UK corporation tax

 

 

Corporation tax liability at 19% (2018: 19%)

-

-

 

 

 

Current tax

-

-

Deferred tax

-

-

Tax on profit from ordinary activities

-

-

 

Factors affecting the tax charge for the current period

 

The differences are explained below:

 

 

Deferred tax

There remains an unrecognised deferred tax asset in respect of tax losses and other temporary differences. The unrecognised deferred tax asset is £26m (2018: £27m) for the Company. The decrease in the balance for unrecognised deferred tax is due to the combination of an increase to management expenses carried forward available for deduction against future income and a decrease in the capital losses available. The assessed loss on which no deferred tax has been recognised amounts to £153m (2018: £159m). 

 

 

The movement in the year is taken to the statement of comprehensive income.

 

 

6 Earnings per share

 

Basic earnings per share is calculated by dividing the profit/loss attributable to ordinary shareholders by the weighted average number of Ordinary Shares during the year. Diluted earnings per share is calculated by dividing the profit/loss attributable to shareholders by the adjusted weighted average number of Ordinary Shares in issue. The adjustment made is to add to the total number of 'in the money' share options in issue to the weighted average number of Ordinary Shares in issue for basic EPS.

 

6 Earnings per share (continued)

 

 

Year-ended

Year-ended

 

31 March 2019

31 March 2018

 

£'000

£'000

Earnings

 

 

Profit for the year

3,253

4,669

 

 

 

Number of shares ('000)

 

 

Weighted average number of Ordinary Shares in issue for basic EPS

                  3,573

                  3,656

Weighted average number of Ordinary Shares in issue for diluted EPS

                 3,573

                 3,656

 

 

 

Earnings per share

 

 

Basic EPS

91.06p

127.70p

Diluted EPS

91.06p

127.70p

 

As at 31 March 2019, the total number of shares in issue was 3,555,330 (2018: 3,654,504).  During the year, the Company cancelled nil Treasury shares (2018: 155,771).  In June 2018, 99,174 shares were bought back (2018: 33,000). There are no share options outstanding at the end of the year.

 

7 Dividends

 

The Company paid £924,387 in dividends to shareholders in the year-ended 31 March 2019 (2018: £548,175).

 

8 Investments at fair value through profit or loss

 

 

 

 

 

Value at

 

Year-ended 31 March 2019

 

Value at

 

 

 

 

31 March 2018

Additions

Disposal Proceeds

Gain on Disposals

Revaluation

Transfer between Levels

31 March 2019

 

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Investments in quoted companies

 

 

 

36,283

8,248

(16,256)

2,783

2,785

 

(1,994)

31,849

Other unquoted investments

 

 

 

4,166

2,275

(100)

-

534

 

1,994

8,869

Total investments at fair value through profit or loss

 

      40,449

10,523

(16,356)   

2,783

3,319

 

-

40,718    

                       

 

Investments in quoted companies have been valued according to the quoted share price as at 31 March 2019.

 

Investments in Other unquoted investments represent the following:

§  MJH Convertible Bond that was issued on 4 November 2016, further investments in MJH Convertible Bond on 9 August 2017 and 30 September 2017, which is valued at fair value which approximates to cost plus rolled up premium interest.  There has been no change in the circumstances of MJH that would indicate a material change in value since the investment was made;

§  MJH Equity that was purchased on 8 August 2017 with a recent revaluation on December 2018 in respect to BVCA guidelines in the valuation of unlisted shares at the most recent fund raising involving third parties.  There has been no change in circumstances of MJH since this fund raising that would indicate a material change in the value of the equity;

§  Hanover Equity Partners II LP that was purchased on 11 July 2017, which is valued based on the NAV of the fund which is a proxy for fair value as its underlying investments are held at fair value;

§  Be Heard Group plc Bond that was purchased on 28 November 2017, which is valued at fair value which approximates cost.  There has been no change in the circumstances of Be Heard Group plc that would indicate a material change in value since the investment was made;

§  Northbridge Convertible Bond that was purchased on 10 April 2018 and 3 July 2018, which is valued at fair value which approximates cost plus the "in the money" value of the conversion right, which has been valued using a Black Scholes valuation model; and

§ Tax Systems Plc ceased trading on AIM due to a takeover immediately prior to the year-end.  The security is valued based on the cash paid by the acquiring company to the shareholders of the company. 

The revaluations and gains on disposals above are included in the statement of comprehensive income as gains on investments.

 

 

Value at

Value at

 

31 March

31 March

 

2019

2018

 

£'000

£'000

 

 

 

Opening valuation

           40,449

27,003

Acquisitions

10,523

            12,079

Unrealised and realised gains on investment

6,102

5,562

Disposal proceeds

(16,356)

(4,195)

Closing valuation

            40,718

          40,449

 

 

The following table analyses investment carried at fair value at the end of the year, by the level in the fair value hierarchy into which the fair value measurement is categorised.  The different levels are defined as follows:

 

(i)            level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities;

 

(ii)           level two measurements are valuation techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices); and

 

(iii)          level three measurements are valuations not based on solely observable market data (that is, the measurement requires significant unobservable inputs).

 

The Company's investments are summarised as follows:

 

 

 

31 March

 

 

 

2019

2018

 

 

 

£'000

£'000

Level 1

 

 

31,849

36,283

Level 2

 

 

-

-

Level 3

 

 

8,869

4,166

 

 

 

40,718

40,449

 

During the year, there was a transfer from Level 1 to Level 3 for Tax Systems plc which amounted to £1,994,168 (2018: no movements between levels).

 

9 Trade and other receivables

 

 

 

 

 

 

 

 

 

 

 

31 March

31 March

 

 

 

 

2019

2018

 

 

 

 

£'000

£'000

Other debtors

 

 

 

                 101

63

Prepayments

 

 

 

                  5

                  8

 

 

 

 

                 106

                 71

 

 

10 Trade and other payables

 

 

 

 

 

 

 

 

 

 

 

31 March

31 March

 

 

 

 

2019

2018

 

 

 

 

£'000

£'000

Performance fees payable

 

 

 

2,333

-

Other creditors

 

 

 

212                

             40

Trade creditors

 

 

 

                176

83

Accrued expenses

 

 

 

79

                   80

Social security and other taxes

 

 

 

                    6

                    6

 

 

 

 

                2,806

209

 

Included in other creditors is £0.21m that relates to the acquisition of further equities in Northbridge Industrial Services, Be Heard plc and Swallowfield plc, all are existing investments, in March 2019. This was settled in April 2019 (2018: £0.04m that relates to the acquisition of further equity in Centaur Media plc). The performance fees are stated inclusive of VAT. Further detail on the performance fees is provided in note 13.

 

11 Issued capital

 

 

 

 

 

 

 

 

 

31 March

31 March

 

 

 

2019

2018

 

 

 

£'000

£'000

Called up, allotted and fully paid

 

 

 

 

3,555,330 (2018: 3,654,504) Ordinary Shares of 50p (2018: 50p)

 

 

1,778

1,827

10,000 (2018: 10,000) D shares of 100p (2018: 100p)

 

 

10

10

 

 

 

1,788

1,837

 

As at 31 March 2019, the total number of shares in issue were 3,555,330 (2018: 3,654,504).  During the year the Company bought back 99,174 shares (2018: 33,000).

 

The average share price of Gresham House Strategic plc quoted Ordinary Shares in the year-ended 31 March 2019 was 934.9p. In the year the share price reached a maximum of 1,040.0pand a minimum of 827.5p. The closing share price on 29 March 2019 was 970.0p.

 

The Company's shares are listed on London's AIM market under reference GHS.

 

12 Financial instruments and financial risk management

 

The Company invests in quoted companies in accordance with the investment policy and Strategic Private Equity investment strategy. In addition to investments in smaller listed companies in the UK, the Company maintains liquidity balances in the form of cash held for follow-on financing and debtors and creditors that arise directly from its operations. As at 31 March 2019, £31.8m of the Company's net assets were invested in quoted investments, £8.9m in unquoted investments and £6.7m in liquid balances (31 March 2018: £36.3m in quoted investments, £4.2 in unquoted investments and £3.0m in liquidity).

 

In pursuing its investment policy, the Company is exposed to risks that could result in a reduction in the value of net assets and consequently funds available for distribution by way of dividend or for re-investment.

 

The main risks arising from the Company's financial instruments are due to fluctuations in market prices (market price risk), currency risk and cash flow interest rate risk, although credit risk and liquidity risk are also discussed below. The Board regularly reviews and agrees policies for managing each of these risks and they are summarised below. These have been in place throughout the current and preceding years.

 

All financial assets with the exception of investments, which are held at fair value through profit or loss, are categorised as loans and receivables and all financial liabilities are categorised as amortised cost.

 

a)      Market risk

 

i)       Price risk

Market price risk arises from uncertainty about the future valuations of financial instruments held in accordance with the Company's investment objectives. These future valuations are determined by many factors but include the operational and financial performance of the underlying investee companies, as well as market perceptions of the future of the economy and its impact upon the economic environment in which these companies operate. This risk represents the potential loss that the Company might suffer through holding its investment portfolio in the face of market movements, which was a maximum of £40.7m (2018: £40.5m).

 

The investments in equity and fixed interest stocks of unquoted companies that the Company holds are not traded and as such the prices are more uncertain than those of more widely traded securities.

 

The Board's strategy in managing the market price risk is determined by the requirement to meet the Company's investment objective. Risk is mitigated to a limited extent by the fact that the Company holds investments in several companies. At 31 March 2019, the Company held interests in 15 companies (2018: 16 companies). The Directors monitor compliance with the investment policy, review and agree policies for managing this risk and monitor the overall level of risk on the investment portfolio on a regular basis.

 

Market price risk sensitivity

 

The Board considers that the value of investments in equity instruments is ultimately sensitive to changes in quoted share prices, as such changes eventually affect the enterprise value of unquoted companies. The table below shows the impact on the return and net assets if there were to be a 20% (2018: 20%) movement in overall share prices.

 

 

 

 

 

2019

2018

 

 

 

 

£'000s

£'000s

 

 

 

 

Profit and

Profit and

 

 

 

 

net assets

net assets

Decrease if overall share prices fell by 20% (2018: 20%), with all other variables held constant

(6,370)

(7,257)

Decrease in earnings, and NAV per Ordinary share (in pence)

(179.16)p

(198.52)p

 

 

 

 

 

 

Increase if overall share prices rose by 20% (2018: 20%), with all other variables held constant

6,370

7,257

Increase in earnings, and NAV per Ordinary share (in pence)

179.16p

198.52p

 

The impact of a change of 20% (2018: 20%) has been selected as this is considered reasonable given the current level of volatility, observed both on a historical basis, and market expectations for future movement.

 

ii)     Currency risk

The Company does not hold any significant assets or liabilities denominated in a currency other than sterling, the functional currency. The transactions in foreign currency for the Company are highly minimal. Therefore, currency risk sensitivity analysis was not performed as the results would not be significantly affected by movements in the value of foreign exchange rates.

 

iii)    Cash flow interest rate risk

As the Company has no borrowings, it only has limited interest rate risk. The impact is on income and operating cash flow and arises from changes in market interest rates. Some of the Company's cash resources are placed on interest paying current accounts to take advantage of preferential rates and are subject to interest rate risk to that extent.

 

b)    Credit risk

Credit risk is the risk that a counterparty will fail to discharge an obligation or commitment that it has entered into with the Company.

 

The Company's maximum exposure to credit risk is:

 

 

 

 

 

31 March

31 March

 

 

 

 

2019

2018

 

 

 

 

£'000s

£'000s

Loan stock investments

 

 

 

6,156

                   3,625

Cash and cash equivalents

 

 

 

6,728

           3,044

Trade and other debtors

 

 

 

106

71

 

 

 

 

12,990

            6,740

 

Credit risk relating to loan stock investments in unquoted companies is considered to be part of market risk.

 

The Company's cash balances are maintained by major UK clearing banks.

 

 

c)      Liquidity risk

The Directors consider that there is no significant liquidity risk faced by the Company. The Company maintains sufficient investments in cash to pay accounts payable and accrued expenses. All liabilities are current and repayable upon demand.

 

Fair values of financial assets and financial liabilities

 

Financial assets and liabilities are carried in the statement of financial position at either their fair value (investments), or the statement of financial position amount is a reasonable approximation of the fair value (dividends receivable, accrued income, accruals, and cash at bank).

 

As at 31 March 2019, all investments, except for the investment in MJH Group Holdings Limited loan notes and MJH Group Holdings Limited equity, Be Heard Group Holdings Limited loan notes, HAEP II LP investment and Northbridge Industrial Plc convertible bond (Level 3), fall into the category 'Level 1' under the IFRS 7 fair value hierarchy (2018: all investments, except for the investment MJH Group Holdings Limited loan notes and MJH Group Holdings equity, Be Heard Group Holdings Limited loan notes and HAEP II LP investment (Level 3)). A reconciliation of fair value measurements in Level 1 is set out in note 8 to these financial statements.

 

A summary of the Level 3 investments are as follows:

 

 

31 March 2019

 31 March 2018

 

Material investments included

£'000s

Material investments included

£'000s

Cost (reviewed for impairment)

MJH Group Holdings (Bond)

2,063

MJH Group Holdings (Bond)

1,837   

 

MJH Group Holdings (Equity)

475

MJH Group Holdings (Equity)

389

 

Be Heard Group Holdings

1,788

Be Heard Group Holdings

1,788

 

HAEP II LP

230

HAEP II LP

152

 

Northbridge Industrial Services Plc convertible bonds

2,319

 

-

 

Tax Systems Plc

1,994

 

 

Contracted sales proceeds in post balance sheet period

None

         -

None

        -

 

 

8,869  

 

4,166

 

 

Level 3 unquoted equity and loan stock investments are valued in accordance with International Private Equity and Venture Capital Guidelines as disclosed in note 8. 

 

Valuation policy: Every six months, the Investment Manager within Gresham House Asset Management Limited is asked to revalue the investments that he looks after and submit his valuation recommendation to the Investment Committee and the Finance Team. The Investment Committee considers the recommendation made, and assuming the Finance Team confirm that the investment valuation calculations are correct, submits its valuation recommendations to the Board of the Company to consider. The final valuation decision taken by the Board is made after taking into account the recommendation of the Manager and after taking into account the views of the Company's auditors.

 

The valuation policy for the holding in Hanover Equity Partners II Limited is based on the NAV of the fund.

 

The quoted investments have been valued by multiplying the number of shares held with the closing bid price as at 31 March 2019. As such, there are no unobservable inputs that have been used in valuing investments.

 

 

Capital disclosures

The Company's objective has been to maximise shareholder value from all assets, which in recent years has been to realise its portfolio at the most advantageous time and return the proceeds to shareholders.

 

The capital subscribed to the Company has been managed in accordance with the Company's objectives. The available capital at 31 March 2019 is £44.7m (31 March 2018: £43.4m) as shown in the statement of financial position, which includes the Company's share capital and reserves.

 

The Company has no borrowings and there are no externally imposed capital requirements other than the minimum statutory share capital requirements for public limited companies.

 

13 Related party transactions

 

 

The related parties of Gresham House Strategic plc are its Directors, persons connected with its Directors and its Investment Manager.

 

Details of related party transactions between the Company and of non-salary related transactions involving Directors are detailed below.

 

During the year to 31 March 2019, Gresham House Strategic plc was charged management fees of £795k including VAT (2018: £741k) by Gresham House Asset Management Limited (GHAM).

 

GHAM is also due a Performance fee of £2,333k (inclusive of VAT) in accordance with the Investment Management Agreement based on the Company's NAV as at 31 March 2019 (2018: Nil).  The amount of Performance Fee payable to GHAM as at 31 March 2019 is £2,333k, which includes VAT (2018: Nil). The Performance Fee is calculated as 15 per cent of the amount (if any) by which the NAV Total Return per share exceeds the High Watermark, multiplied by the time-weighted average number of shares in issue during the Performance Fee Period and is subject to a 7% p.a. performance Hurdle. The Performance Fee payable in the current year covers the period from 7 August 2015 to 31 March 2019.  No Performance fee has previously been paid to GHAM and as a result, the High Watermark for the current Performance Fee Period was the adjusted NAV per share on 7 August 2015, being 968.8p.  The NAV Total Return per share as at 31 March 2019 was 1324.2p per share and the time-weighted average number of shares in issue during the period was 3,647,428.  Following the payment of the Performance Fee, the High Watermark for the purposes of the next Performance Fee Period will be 1258.6p per share subject to adjustments for any future dividends or returns of capital.

 

As at 31 March 2019, the total amount owing to GHAM is £2,465k (2018: £64k).

 

As at 31 March 2019, the following shareholders of the Company, that are related to GHAM, had the following interests in the issued shares of the Company as follows:

                                                                             

A L Dalwood                                                                            33,381     Ordinary Shares     

G Bird                                                                                      22,651     Ordinary Shares

Gresham House Holdings Ltd                                                                812,913   Ordinary Shares

 

The Company has signed a co-investment agreement with Gresham House Strategic Public Equity Fund LP ("SPE Fund LP"), a sister fund to the Company launched by Gresham House Asset Management Ltd ("GHAM") on 15 August 2016. Under the agreement, the Company undertook to co-invest £7.5m with the SPE Fund LP.

 

There are no other related party transactions of which we are aware in the year-ended 31 March 2019.

 

14 Subsequent events note

 

There were no other material events after the statement of financial position that have a bearing on the understanding of the financial statements.

 

 

 

[1] Data compiled by FE Trustnet and Morningstar for the year to 31 December 2018, shows that Gresham House Strategic plc outperformed all open-ended UK smaller companies funds and UK smaller companies closed-ended funds, achieving total NAV Total Returns of 8.9%. Since inception in August 2015, GHS has outperformed its benchmark by 13.3%

[2] Data compiled by FE Trustnet and Morningstar for the year to 31 December 2018, shows that Gresham House Strategic plc outperformed all open-ended UK smaller companies funds and UK smaller companies closed-ended funds, achieving total NAV total returns of 8.9%. Since inception in August 2015, GHS has outperformed its benchmark by 13.3%]

[3] The unaudited NAV per share includes valuations of the Company's unlisted investments as at 31 December 2018. The valuation of all unlisted investments, which comprise approximately 15% of the NAV the majority of which are CLNs, will be reviewed for the purposes of the audited financial statements for the year ended 31 March 2019

[4] Data compiled and peer group defined by finnCap as at 21 June 2019

[5] Data compiled and peer group defined by finnCap as at 21 June 2019

[6] N+1 Singer Forecast as at April 2019


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