- Concentrated portfolio of 15 holdings includes seven new purchases
- Net cash reduced from £10.5mn to £2.4mn (6.6 per cent of NAV)
- Total shareholder return of -0.3 per cent in latest six-month period despite market turmoil
- Shares trade on four per cent discount to spot NAV
Small-cap closed end fund Rockwood Strategic (formerly Rockwood Realisation and Gresham House Strategic) has not been immune to the market turmoil this year, but it’s performing far better than peers, as has been the case since I included the shares in my 2016 Bargain Shares Portfolio.
In the six-months to 30 September 2022, Rockwood net asset value (NAV) declined 10.4 per cent on a total return (TR) basis, outperforming both the FTSE Small-Cap (ex-ITs) and FTSE Aim All-Share indices by 9.9 and 12.2 percentage points, respectively. Moreover, a narrowing of the share price discount meant that shareholders suffered a tiny loss over the holding period. The outperformance is not a one-off as over the past three years the fund has delivered a total shareholder return of 65 per cent and NAV TR of 44.3 per cent, massively outperforming the six per cent TR on the FTSE Small-Cap (ex-ITs) and 4.6 per cent negative TR on the FTSE Aim All-Share indices.
Rockwood’s ‘value’ orientated approach to stock selection, targeting companies trading below intrinsic value and offering potential catalysts to unlock the share price discount, chime with my own stock picking strategies. For instance, Rockwood’s top-performing holding is a £10.5mn stake in Crestchic (LOAD: 309p), a company that makes, sells and hires load-banks and one that is riding the boom in data centres. Buoyed by a series of earnings upgrades, shares in the company have surged 147 per cent since I first highlighted the investment case last autumn. I maintained that positive advice when I covered the interim results (‘Riding a strong earnings cycle’, 29 September 2022), noting that lowly rated Crestchic (2023 price/earnings (PE) ratio of 11.3) is also a takeover candidate given its geographic spread of business (half of sales are overseas), high return on capital employed, improving free cash flow generation (6.3 per cent free cash flow yield for 2023) and the hidden value in its rental fleet (insured for £40mn, or six times carrying value). The holding accounts for 29 per cent of the fund’s NAV and my 350p target price is conservative.
Another portfolio company that is a likely candidate for corporate activity is media group Centaur Media (10.1 per cent of NAV). Centaur is trading on only 4.5 times next year’s cash profit forecasts to its enterprise valuation despite offering growth, improving levels of profitability and free cash flow generation, the latter being a key metric for Rockwood’s investment team which is led by fund manager Richard Staveley.
Sensibly, Rockwood has been using the stock market rout to recycle most of its £10.5mn cash pile at the 31 March 2022 financial year-end (a result of cash mainly booked from takeovers of investee companies) to make seven new purchases (accounting for a fifth of NAV) across a range of sectors. The purchases include City Pub Group (CPC), Argentex (AGFX) in foreign currency services, Galliford Try (GFRD) in construction, RM Group (RM) in educational services and Finsbury Food (FIF) in food manufacturing. All these companies trade at a deep discount to Rockwood’s assessment of intrinsic value, offer considerable upside to historic or industry profit margins, and are highly cash generative. Another stock picking criteria is that all holdings have potential to deliver an internal rate of return (IRR) of 15 per cent so that Rockwood can double its money within five years.
Argentex offers foreign currency services to small- and medium-sized enterprises (SMEs), a segment of the market that is also targeted by Aim-traded fintech payments group Equals (EQLS: 93p), a business I am especially keen on (‘Profiting from SMEs’, 7 September 2022). Both companies offer high returns on capital employed, high profit margins, ongoing organic growth and conservative looking earnings estimates to support potential upgrades.
Rockwood’s shares have delivered a total return of 133 per cent since I included them in my 2016 Bargain Share Portfolio, or more than four times the 32 per cent total return on the FTSE Aim All-Share index, and are up from the 1,370p level when I covered the annual results (‘Bargain Shares: A trio of mis-priced investment opportunities’, 27 June 2022). Trading on a four per cent share price discount to spot NAV per share of 1,501p, the investment team is worth backing. Medium-term 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 at £16.95 each plus £3.95 postage and packaging. Details of the content can be viewed on www.ypdbooks.com.
Promotion: Subject to stock availability, both books can be purchased for £25 plus £5.75 postage and packaging.
