At the tail end of 2018, I outlined a strong investment case to buy shares in Aim-traded investment company Gresham House Strategic (GHS:1,120p) (‘How Gresham House Strategic is outperforming’, 31 December 2018).
It has paid dividends, quite literally. Not only has GHS’s share price risen by 20 per cent in the past six months, but the board has just declared a final payout of 11.1p a share (ex-dividend 5 September) to take the total payout to 19.85p a share for the financial year to 31 March 2019. The directors are committed to raising it by 15 per cent a year over the next two financial years, implying a minimum payout of 26.2p a share in the 12 months to March 2021.
The board can afford to be generous as GHS was not only one of the top-performing UK small-cap funds in the 12-month reporting period, beating its benchmark by 11 percentage points, but booked £16.4m of realisations and net realised profits of £5.4m, too. Since Gresham House Asset Management took over the mandate in August 2015, the fund has produced a net asset value (NAV) total return of 42 per cent to 30 June 2019 – or more than double the 19.8 per cent total return on the FTSE Small-Cap index. Interestingly, GHS has generated a Sharpe Ratio – as defined by the average return earned in excess of the risk-free rate per unit of volatility or total risk – of 1.54 since inception, not only outperforming its peers, but indicating an attractive risk/reward profile, too.
At the end of the second quarter this year, GHS NAV of £47.5m (1,335p a share) included a £10.8m stake in Aim-traded technology company IMImobile (IMO:325p); an £8.4m holding in Augean (AUG:120p), a company engaged in the provision of specialist services focused on hazardous waste; and a £6.7m investment in Northbridge Industrial Services (NBI:134p), a company specialising in hiring out industrial equipment. Gains on all three companies, and the takeover of Tax Systems, were key drivers of the aforementioned NAV outperformance.
| Bargain Shares Portfolio 2016 performance | |||||
| Company name | TIDM | Opening offer price (p) 05.02.16 | Latest bid price (p) 18.07.19 | Dividends (p) | Total return (%) |
| Bioquell (see note one) | BQE | 125 | 590 | 0 | 372.0% |
| Volvere (see note six) | VLE | 419 | 1185 | 0 | 193.1% |
| Gresham House | GHE | 312.5 | 625 | 3 | 101.0% |
| Oakley Capital | OCI | 146.5 | 239 | 13.5 | 72.4% |
| Bowleven (see note two) | BLVN | 18.935 | 11.8 | 15 | 59.9% |
| Gresham House Strategic | GHS | 796 | 1110 | 32.25 | 43.5% |
| Juridica (see note three) | JIL | 36.1 | 14 | 32 | 27.4% |
| Mind + Machines (see note four) | MMX | 8 | 7.5 | 0 | 2.8% |
| French Connection | FCCN | 45.7 | 38 | 0 | -16.8% |
| Walker Crips (see note five) | WCW | 44.9 | 25 | 5.59 | -31.9% |
| Average return | 82.3% | ||||
| FTSE All-Share Total Return | 5180 | 7532 | 47.7% | ||
| FTSE AIM All-Share Total Return | 747 | 1039 | 42.2% | ||
| Notes: | |||||
| 1. Simon Thompson advised buying Bioquell's shares at 149p in February 2016. Bioquell bought back 50 per cent of shares in issue at 200p each in June 2016 through a tender offer and Simon recommended buying back the shares in the market at 145p to give an average buy in price of 125p (‘Bargain shares updates’, 22 June 2016). Company was taken over at 590p cash per share in January 2019. | |||||
| 2. Simon Thompson advised banking profits on half your holdings in Bowleven shares at 33.75p, and running the balance ahead of drilling news at the Etinde prospect in Cameroon in the second quarter of 2018 (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019. The total return reflects this share sale. | |||||
| 3. Simon Thompson advised buying Juridica's shares at 41.2p in February 2016. Juridica subsequently paid out a special dividend of 8p a share in June 2016 and Simon recommended buying shares in the market at 61p using the cash proceeds to take the average buy in price to 36.1p (‘Brexit winners', 1 August 2016). Juridica then paid out a special dividend of 32p a share in September 2016 and total return reflects this distribution. Simon advised selling the holding at 14p ('Taking Q1 profits and running gains', 4 April 2017), hence the price quoted in the table. | |||||
| 4. Simon Thompson advised buying Mind + Machines shares at 8p in February 2016. Mind + Machines subsequently bought back 13.22 per cent of the shares in issue at 13p a share. The total return reflects this capital distribution. Simon advised selling the entire holding at 7.5p which is the exit price stated in the table ('Strategic acquisitions', 9 May 2018). | |||||
| 5. Simon Thompson advised selling Walker Crips shares on Monday, 4 March 2019 at 25p ('Bargain Shares Portfolio updates', 4 March 2019). | |||||
| 6. Simon Thompson advised rendering 41.18 per cent of your holdings back to company at 1290p a share. Tender completed 19 June 2019 ('Tenders, takeover and hitting target prices', 3 June 2019). Return is adjusted to factor in this capital return. | |||||
Source: London Stock Exchange share prices | |||||
New investments made since the March financial year-end include a £2.5m investment in specialist engineering group Pressure Technologies (PRES:121p); and a £2.1m pre-IPO investment in the convertible loan notes of Lakes Distillery, which will convert to equity at the point of IPO. Both investments highlight the ‘value’ orientation of the portfolio and a strategy focused on UK and European smaller public companies that are intrinsically undervalued, displaying characteristics such as low valuation multiples, high free cash return on capital characteristics and tangible asset cover. GHS’s investment managers maintain a strong focus on cash generation, improving return on capital and creating shareholder value through strategic, operational or management initiatives. The aim is to generate a 15 per cent annualised return over the medium-to long-term.
GHS’s shares have so far produced a total return of 43.5 per cent since I suggested buying in my 2016 Bargain Shares Portfolio, but still offer value priced on a 15 per cent discount to the last reported NAV of 1,317p at 12 July. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed on www.ypdbooks.com.
