# Gresham House Strategic PLC Q&A: Latest Interim Results (LON:GHS)

- Link: https://www.directorstalkinterviews.com/gresham-house-strategic-plc-qa-latest-interim-results-longhs/412741182
- Published: 2017-11-30T12:06:59+00:00
- Author: Amilia Stone

**Gresham House Strategic PLC** ([LON:GHS](https://www.directorstalkinterviews.com/company/gresham-house-strategic-plc/ghs.l))
Managing Director Graham Bird caught up with DirectorsTalk for an exclusive interview
to discuss their latest interim results, the main drivers & detractors for the performance
and the outlook for the fund in 2018

 

**Q1: Last week we saw the announcement of Gresham House Strategic’s interim results
for the six months to the end of September, how has the portfolio performed over
that period?**

**A1**: The period we’re talking about here is 31st March through to the end of 
September and I think I would characterise it in three areas.

From a NAV perspective, actually the NAV was relatively flat in the period and that
masks some underlying good performance which I’ll come back to in a second. We had
a very strong first quarter with the NAV was up 7.5% in the 3 months to the end 
of June and we saw some of that good performance reverse in the second quarter, 
notwithstanding strong operational performances in some of the underlying businesses.

We’ve been quite busy during the period as well, we’ve invested £7.3 million of 
that cash that we had so quite a busy period in terms of investment activity. Coming
back to the operational performances of the business, we’ve had very strong operating
statements coming out from IMImobile PLC (LON:IMO) with their results in late June,
coming into July. Their share price has actually weakened in the second quarter,
really driven by overhang on the shares as the largest shareholder Tosca has been
selling some shares so we remain very confident that IMImobile will drive performance
as we move forward from here. So, that had impact on the NAV in the second quarter
and we saw that coming back to end up pretty flat in the period.

Likewise, Be Heard Group PLC (LON:BHRD) came out with very strong interim results
at the back end of August, early September, strong revenue performance and good 
growth coming through in the underlying business. The share price has been quite
weak, again really driven by some retail selling and I think possibly some concern
about the media sector with some of the bigger players, WPP and some of the bigger
advertising agencies, announcing weaker or challenging conditions. However, we think
strong rotation into digital marketing and allocation of marketing budgets to these
sorts of things that Be Heard are doing but the share price didn’t affect the underlying
performance, we are very confident that that business is performing very well.

Overall, reasonably pleased with most of the businesses performing to plan. I think
the one exception that I think I should call out was Quarto and it had a difficult
first half of the year and we’ve seen forecasts come down quite materially and they’ve
had a negative impact on the performance.

Since the end of the period, that’s since 30th September, we did see a recovery 
in one or two share prices, notably in IMImobile which pushed the NAV back up, but
we are in an interesting place in the market, I think, so we’ll see where see how
that goes from here.

 

**Q2: I think you’ve touched on this really but what have been the main drivers 
and detractors for the performance?**

**A2**: If you look at what actually pushed the attribution, I think the ones I 
would call out, I mentioned IMImobile, they had a strong Q1, we saw a little bit
of share price weakness in the Q2 but nonetheless, contributed 2.6% to attribution
in the period so that was a good contributor.

Northbridge Industrial Services Plc ([LON:NBI](https://www.directorstalkinterviews.com/company/crestchic/load.l)),
share price has been a bit stronger during the period, so we saw that contribute
a reasonable 1.6% to the attribution. I think Northbridge is very well positioned
to recover as we are seeing a slightly stronger oil price, I think activity in the
oil and gas services sector should start to pick up and Northbridge is very well
positioned for that. However, it has been a more protracted period of slow activity
in that sector so it’s undoubtedly that Northbridge, the business, has been pushed
out a bit but looking pretty positive from here.

We also saw strong position in Revolution Ba[rs Group PLC](https://www.directorstalkinterviews.com/ftse-company/rs-group/rs1.l)(
LON:RBG), we bought into that company in Q1 following a profits warning or a downgrade
expectation, but we felt that the market had hugely overdone that, that was borne
out when a few weeks later it was bid for by Stonegate Pubs, backed by their private
equity owners. So, that was a strong performer and in fact, we sold two thirds of
our position in Revolution Bars when it looked like there was a contested bid going
on and the share price was actually above what the offer price had been made by 
Stonegate so that contributed another 1.3% to the attribution.

SpaceandPeople Plc (LON:SAL), which is a relatively small holding, that was a good
contributor in the period. In May, they announced that the turnaround activity that
they have undertaken in the business was really starting to be bare fruit, taking
significant cost out of the business, and activity in the UK market, notably in 
promotional business has really picked up. So, they were able to reiterate their
guidance for the full year which saw a significant turnaround and return to profitability
and on the back they’re able to say that they’re confident that as we move into 
2018 they’ll be returning to paying dividends again. So, that saw the share price
rise quite materially, if you remember we had invested further amounts into SpaceandPeople
back in January when the share price had been very weak so since then it’s performed
really strongly.

The other one I should mention on the positive side was Alpha FX Group PLC (LON:
AFX), which we bought into it on the IPO, the share price has performed very strongly
and it hit our target price, so we came out of that.

The two negatives that we should mention, Quarto, I did mention, had a difficult
first half and subsequent to that, we’ve seen the forecasts revised won quite materially.
It was then approached by an international buyer although that didn’t turn into 
anything, the regulatory requirements to culminate a bid were quite complicated 
so that got pushed back. As we moved into November, they subsequently announced 
that H2 has shown good performance but it’s not enough to make up the weak first
half. So, I was quite pleased that the performance in H2 is looking quite strong,
it’s significantly up in terms of where it was last year, H2 on H2, but it’s quite
clear that the first half performance was very weak. So, we’re working very closely
with them on understanding their options and how they’re going to make sure that
the business is managed effectively as we move into the new year.

 

**Q3: Talking about next year for Gresham House Strategic, what is the outlook like
for the fund going into 2018?**

**A3**: I’m pretty bullish on where we are, really for a couple of reasons. The 
first is if you look at how value and growth have performed over the long term, 
certainly if you back look over 40/50 years, we’re at a situation now where the 
underperformance of value versus growth is at an almost all-time extreme. So, whenever
it has been this far out of kilter, there has been a strong performance of shares
with value characteristics, so I think it’s quite an interesting time from a market
perspective to be looking at strategies which focus a bit more on value.

So, looking at what’s in our portfolio, if you take into account the fact that you
can buy Gresham House Strategic shares at 20 odd percent discount to NAV, and we’ve
got a little bit of cash left in the portfolio, you can buy a portfolio with underlying
assets which is on 5.3 times EBITDA and that compares to buying shares in the All-
Share which is on 8.7 times EBITDA. The growth in our portfolio, again this is weighted
average across the holdings it has forecast us in the market, the weighted average
growth is 16% of the sales line and that compares to 4% in the All-Share so effectively,
you can buy a much higher growth for a much lower price.

The final point in our portfolio is that we’re sitting on average on net cash whereas
compared to the All-Share on average is modestly geared so you’ve got a portfolio
on a lower rating with higher growth and a strong balance sheet that you can access
through Gresham House Strategic.

So, I think that positions us quite well, if you look at intra-stock correlations
have fallen significantly over the last six months and that’s started to point more
towards stock picking. You’ve seen tremendous momentum in the market over the last
few years, driving valuations higher and higher and we’ve started now to see that
correlation breaking down and I think that bodes well for a stock picking strategy.

So, that leaves me positive for the outlook, as I said, I think the strongest argument
here is around the valuation and the growth characteristics of the businesses that
we own so that should bode well for performance in the future.

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