Gresham House Strategic PLC (LON:GHS) Managing Director Graham Bird caught up with DirectorsTalk for an exclusive interview to discuss how 2016 went for them, standout investments, his view on prospects for the year, interesting sectors and stocks he likes the look of for 2017
Q1: First off Graham, how do you feel 2016 played out for you?
A1: Overall I was very pleased with 2016 particularly given that it was our first full year operating Gresham House Strategic using the new Strategic Public Equity mandate.
I think, for me, a number of things stand out, we were able to start making investments, building an attractively valued portfolio, we exit the year with a very attractively valued and growing portfolio, we see through to valuation we think is on about five and half times EBITDA and growing in excess of 20%. Importantly, we’ve been able to find good investments and utilised the Strategic Public Equity strategy proving that the investment case really is there and I think we’ve indicated that.
I think secondly, throughout the year we have seen healthy net asset value growth and importantly that’s been resilient against a more volatile market. So particularly at the beginning of the year where we saw a lot of volatility, particularly in the small-cap markets, our net asset value was relatively resilient throughout that and that was pleasing.
I think probably the most important thing for was in the underlying portfolio companies, certainly the majority of those, we’ve seen strong underlying operational performance from those companies. Ultimately that will drive through towards share price and total shareholder return performance so that’s been pleasing.
So yes, I think it’s been a good year from that perspective, we’ve established Gresham House as a name in this space, we’ve got the strategy going and the portfolio has performed well. I think it’s also key to say that there’s been a couple of challenges, certainly within Gresham House Strategic, the discounts to net asset value has persisted and that’s always a frustration but we’re working hard on telling the story and we do see that discount coming in and I would like to see that over the next few months as we continue to market and prove that the story works very well.
I think probably the other point is, as always, when you start out on these strategies, we began the year with a substantial cash holding, we have invested some of that money, if we do still sit on some cash. So to some degrees it has been a little bit of a cash drag towards the back end of the year but that of course presents great opportunities for us to make investments as we enter 2017 and we’ve got a big pipeline for that. So yes, overall, very pleased with the year.
Q2: Were there any standout investments in your portfolio?
A2: Yes, I think I can probably signal, or bring up, three of them in particular:
Northbridge Industrial Services Plc (LON:NBI) has ended the year with a very very strong share price performance. This was a company we invested in in April last year, we own just over 10%, where we underwrote an equity issue really to reduce the debt position in the company. It’s a business which operates in the oil field services sector and its main business is loadbanks where it has a global leadership position particularly in the larger mobile loadbank market. The share price had fallen significantly during 2015 and we had engaged with the management team and spent a lot of time working with them and then help them recapitalise the business, as I say in April.
I think the standout pieces have really been that whilst it’s been a very challenging year for the oil services sector as a whole and we have yet to see real results coming through on the turnaround on that, what we have seen towards the back end of the year is real sort of green shoots coming through, resumption of activity by some of the bigger oil field services companies and that is expected to filter through to some of the smaller players such as Northbridge Industrial Services Plc. I think where Northbridge has done very well is that they responded early to the difficulties, they raised money, fixed the balance sheet, they’ve done a lot of cost-cutting and that positions the business very favourably for a return of growth and a return of activity in the oil services sector. As sentiment has turned, investor appetite for Northbridge and this type of stock has returned very strongly so we’ve seen a very very strong share price performance, it’s up just over 90% from when we put in money so that’s been a very pleasing share price performance on that one.
The second one is Quarto Group Inc (LON:QRT), this is up just over 45% since we initially invested around about a year ago and actually what’s been behind Quarto Group, which is an illustrated book publisher, has been very strong operational performance so the share price performance has been absolutely underpinned by results driven by a very strong management team. If we go back to the reason why we invested in this company, not only were we backing a strong management team with a very clear plan for value creation but we could see a number of value creations levers. So firstly, the industry itself has a relatively modest organic growth but Marcus Leaver, CEO, has a clear plan to consolidate and he has a platform which can deliver very strong synergies through that consolidation and therefore he can grow his earnings base. Alongside that, they’re generating good cash flow and are reducing debt and of course as they reduce debt that accrues back to the equity holders as value, as the business continues to grow. I think during the year we’ve seen real evidence of some of those catalysts coming through so the acquisition strategy is working, a good example is Ivy Press, a business that was acquired back in 2015, which was acquired at a time it was doing EBITDA in round numbers of about £350,000 and in its first full year of ownership, as part of the Quarto Group Inc, had produced over £1.2 million of EBITDA. So a very strong indication of the strategy around delivering synergy both in cost synergy and also top line by leveraging the Quarto distribution platform. The recent acquisition announced early autumn last year, becker&mayer in the US, represents a similar opportunity as far as I’m concerned so the acquisitions consolidation strategy really proving up and I think being recognised by the markets is a very strong shareholder value creation strategy.
Second piece of course is I think they outperformed on generating cash and reducing the debt showing they can grow the business and cut the debt at the same time. I think probably also helped by some anecdotal evidence where we’ve seen, for the first time in a number of years, in both North America and in Europe, growth in printed books, outstripping e-books, and that’s the first time since the early 2000’s. So again the market’s stabilising and returning to growth but really driven by sound operational performance so very pleased with that and the business is still on a undemanding PE ratio, single digits, and I think there’s quite a lot further upside potential there too.
The other one I would probably signal out is Be Heard Group PLC (LON:BHRD), another of our holdings, whilst the share price has performed satisfactory, it’s up just under 20% in the year, I think the reason for signalling this one out is the progress that the business has made in the last 12 months. Bearing in mind that Peter Scott and Robin Price, who came together to build Be Heard Group and build a network of digital marketing agencies, made their first acquisition in November and into December 2015 by reversing into a cash shell, throughout 2016 they’ve made substantial progress. They’ve made three acquisitions and they have very clearly articulated their strategic goal, what they’re looking for, and each one of those acquisitions has fitted exactly with what they had set out to do. I think importantly, we’re starting to see some of the top line synergies come through and whilst there anecdotal evidence at the moment the cash flow profile looks very attractive, and in fact the most recent acquisition that they made they were able to do without raising further capital proving that they have capacity now to really propagate the growth strategy. So signalling them really for the momentum and progress that they’ve made in the 12 months, this is a substantially different business now to what it was 12 months ago.
Q3: What are your views on prospects for this year?
A3: I’m relatively optimistic for 2017, we obviously have some European elections coming up and we’ve still got Brexit overhanging where the markets are etc. but I think more generally we’ve certainly seen a return of risk appetite and that’s evidenced by some of the rotation we’ve seen back into cyclicals and back into value stocks. In fact, it’s something I would point out, in Q1 last year we highlighted a chart which showed how value had underperformed against growth for a number of years which runs contrary to long term trend and it’s like the underperformance had only been this severe in the tech boom in 2000, towards the back end of 2016 we’ve seen that underperformance starting to reverse. So really signalling a return of risk appetite, rotation back into more sort of traditional cyclicals and so on, I think that’s positive around the way people are looking at things.
The second piece is of course inflation is the big word everyone is using, talking about what’s happening in the US, today we’ve seen inflation figures coming out of China also the sentiment coming out of China and I think a view that a bit of inflation coming back into the system will be positive. Of course, Trump and the US election talking more about infrastructure, infrastructure spending and all of those things I think are alerting people to where spending can happen and changing the risk appetite. So we’ve certainly seen some money coming back in, in fact as part of that we’ve seen some appetite coming back into the small-cap sector, the back end of last year there were a number of small-cap IPO’s which have gone very successfully, which it runs contrary to the middle of the year a number of them were pulled as we came up to the Brexit vote. So I’m quite positive about that and I think whilst overall UK and internationally equity markets are still on relatively high valuations compared to historic norms, particularly if you look in the small-cap sector, there are still enormous dispersions between the highly valued stocks and those that display more value characteristics. As a result there’s still lots of opportunities to access there and I think with growing investor appetite for risk we should see a number of those opportunities coming through.
So yes, overall, I’m positive particularly for our strategy which is really focussed on value, small-cap and very much the stock picking.
Q4: What sectors do you think will be interesting this year?
A4: Thinking particularly I suppose the smaller-cap end technology remains a very strong driver, notably in the AIM market so there are some quite big themes that we’re looking at in technology. I think the flavour of the month is artificial intelligence and that feeds through to things like machine learning, automated vehicles and certainly technology that can analyse and make decisions based on big data sets, digital marketing falls into that, information analytics, clever retail. So I think you’re going to see a lot of opportunities coming through there, it is the high phase so I think valuation may be quite high but I think it’s a very interesting area and it’s an area where we’re seeing significant advantages so that’s something that I think will drive technology.
The area in technology I’m more interested in are some of the technologies which are becoming more mainstream. They’ve been through the hype, they’ve been through a bit of disillusion but now they’re becoming widely-adopted; areas such as cloud, mobile connectivity, engagement, social, areas lime that where we seeing bigger companies now really taking these on board. So I think that will continue to drive some of the companies particularly on the AIM market and the smaller cap market.
Other interesting areas, industrials I would have a look at, again talking about those rotations towards cyclicals. Companies that could do well there I think some of the engineering companies with specialised products, those selling outside the UK that can really benefit from the lower exchange rate and with US earnings I think will continue to do well.
Finally, of course, financial services, assuming of course we can avert a European banking crisis but with rising interest rates, or the expectation of rising interest rates, that ought to feed through into the financial sector and I think there are some interesting opportunities in that area too.
Q5: Are there any particular stocks that you like the look of for 2017?
A5: Yes, I think certainly within the technology space, the area that I’ve mentioned around some of the technologies becoming more mainstream, so mobile connectivity, those sorts of things, IMImobile PLC (LON:IMO) is a big holding of mine. I think it’s in a very strong position, it’s benefiting from broad corporate adoption of the multi-channel and mobile communications as well as the trend to modular integrated technology where components of functionality can be plugged into enterprise solutions. The business has got very strong operational momentum, it delivered good results in November showing strong organic growth, high reoccurring revenues, strong cash generation, it’s got a strong balance sheet and a proven ability to make acquisitions so it ticks a lot of boxes along those lines and I think it’s got a very attractive valuation.
A couple of businesses similarly ones which I don’t own at the moment which we’re looking at, Redstoneconnect PLC (LON:REDS), it’s been a business which had had difficulties in the past but I think under the Chief Executive, Mark Braund, they’ve done a lot to fix and turnaround the business. They are now well-placed to benefit from the growth in smart buildings, connectivity and infrastructure spend, they’ve got a strong position in the UK market and I think are interestingly positioned around some of those technology trends. So there’s a couple of in the tech sector.
I think in the industrials area, businesses again which cross over between the cyclical and some of the technology trends behind all of that, Ab Dynamics PLC (LON:ABDP) is a great business, it’s already quite highly valued but is very much benefitting from smart vehicles, rapid adoption of artificial intelligence into motor vehicles and into the motor vehicles sector. So that’s one to watch.
Stadium Group plc (LON:SDM) I quite like especially the design and manufacturing which again stands to benefit from increased machine connectivity which we will see with growth of Internet of Things and so on.
The of course there’s some of the businesses which stand alongside the likes of Northbridge Industrial Services so TP Group PLC (LON:TPG), a small company or Pressure Technologies Plc (LON:PRES), another small company which I think could benefit from a rebound in the oil services sector.
So there are some names, there are a few others, I think in financial services the outsourcers and service providers could do well, continued regulation is pushing a lot of the, particular the smaller financial services companies to outsource more and more. So there’s a lot of growth happening for businesses that can access that.