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Gresham House Strtgc (GHS)

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Tuesday 23 June, 2020

Gresham House Strtgc

Final Results

RNS Number : 7197Q
Gresham House Strategic PLC
23 June 2020
 

Gresham House Strategic plc -
Full Year results for the year ending 31 March 2020

 

 

GHS outperforms, raises dividend and expands investment opportunity pipeline

 

Gresham House Strategic plc (GHS or the Company) is pleased to announce its audited results for the year-ended 31 March 2020.
 

Stand-out performance versus closed- and open-ended peers, despite market conditions, over the year

· NAV of 1,062.2 pence/share, down 14.3% during the period, impacted by 1Q20 market downturn

Outperformed FTSE Small Cap ex IT index, by +10.5%

· Total Shareholder Return (TSR) of -5.2% over the year, and +16.2% on 3-year basis

Beating FTSE Small Cap ex IT by +18.5% and +41.4%, over 1 and 3-year periods respectively

· Top-tier performance rankings, compared to both closed and open-ended peers over 3 years:

2nd of 26 AIC UK Smaller Companies funds for 3-year NAV (+4.1% vs sector average -8.4%)

2nd among the 50 equivalent UK Smaller Companies sector OEIC funds (GHS TSR vs sector average +4.8%)

· Since inception[1], NAV total return up 13% and TSR of 24.5%, well ahead of relevant indices

FTSE Small Cap down 11.6% and FTSE AIM All-Share losing 5.1% over the same period

 

Tightening share price discount, despite COVID-19 market sell-off

· Discount narrowed from 22.6% to 15% over the financial year, peaking at 3.4% in December 2019

· £1.7 million of share buybacks support Board objective to maintain narrower discount

 

Board reaffirms 15% dividend increase for FY2020/21, repeating prior year commitment

· Final dividend of 12.8 pence per share proposed, bringing total dividends for the year to 22.9 pence per share

 

Continued outperformance since year-end[2]

· NAV has rallied 14.3% since 31 March 2020, materially outperforming FTSE AIM All-Share index by +20.9%, but remains ‑7.7% lower on 12-month basis

· Positive TSR of 0.4% compares to declines in UK indices and AIC / OEIC smaller companies' sector

 

Investment Management highlights

· Strong investment performance, in particular from:

Augean plc, UK's largest hazardous waste business

IMImobile plc, material investment in mobile communications specialist, fully exited post year-end

Successful December 2019 IPO of asset management business services provider MJ Hudson

· Five new investments made, with exciting return outlooks, low valuations and clear catalysts, timing often linked to the companies' need for capital, including:

Leading housing digital conveyancing platform ULS Technology plc

English whisky distillery Lakes Distillery, via secured convertible loan note at 20% per annum return

Market-leading piling, foundation services and equipment specialist Van Elle Holdings plc

· Operational and turnaround support in under-performing investments, and five smaller holdings exited

· Built team capacity and capability through the hire of Richard Staveley, an experienced small-cap fund manager, and Paul Dudley, a corporate finance specialist

 

Outlook

· Structural dearth of smaller companies' research continues to drive sector opportunity post-MiFID II

· COVID-19 downturn creating a surge in company re-financing needs and thus many more investment opportunities

· Consistent commitment to value, free cash flow generation and medium term investment time horizon

· Concentrated, engaged, SPE approach and portfolio are well positioned for the challenges ahead

· Board will continue to consider all opportunities to grow GHS.

 

The Directors have recommended a final dividend of 12.8 pence per share in respect of the year ended 31 March 2020.  This will be put to shareholders at the AGM which is to be held at 10am on 17 September 2020. If approved, the dividend will be paid on 30 September 2020, to shareholders on the register of members on 4 September 2020, the ex-dividend date will be 3 September 2020.

David Potter, Chairman of Gresham House Strategic plc, commented:

"We outperformed the market and indices over the period, despite the downward market adjustment during February and March. Our portfolio included only one company exposed to sectors most affected by COVID-19, and we entered the market collapse with nearly 20% of the fund in cash. Our Investment Manager has been closely engaged with our portfolio companies to assess their situation which has allowed us to move fast to help those who needed finance. The past year has highlighted the benefits of the closed-ended structure and beyond the immediate opportunities which are visible, the structural attractions of our long-term, strategic public equity approach are strong".

 

Anthony Dalwood, Fund Manager, Chairman of the Investment Committee and CEO of Gresham House plc said:

"This is an exciting time for our Strategic Public Equity approach. Our long-term focus has paid off during the past year and we are working hard to unearth the very best investment opportunities the current market and economic environment are generating. We continue to work closely with our portfolio companies to unlock and grow shareholder value."

 

Richard Staveley, Fund Manager and Managing Director of Strategic Public Equity, Gresham House plc, added:

"With ongoing uncertainty regarding near-term economic activity, UK small caps are particularly cheap compared to large caps. This is reminiscent of the fantastic investment opportunities in the financial crisis more than a decade ago. Within small caps, value stocks are the cheapest compared to growth stocks in a decade.  We expect the re-financing opportunity set to last for some time, as companies seek to raise equity capital and the upside is large for those investors willing to engage with smaller companies, due diligence the risks and support their development. In time, the priority will move from those which need urgent liquidity, to those with ambitious growth plans to unlock, and we remain highly focused on finding the very best investments to materially grow NAV."

 

A copy of the GHS annual report will shortly be available in the Key Documents section of its website at  www.ghsplc.com where further information on the Company can also be found. 

 

The financial information set out in these statements does not constitute the Company's statutory accounts for the year ended 31 March 2020, prepared in accordance with section 435 of the Companies Act 2006, but is derived from those accounts.  Statutory accounts will be delivered to the Registrar of Companies in due course. The auditors have reported on these accounts and their report was unqualified and did not contain a statement under section 498(2) of the Companies Act 2006

 

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014 (MAR). Upon the publication of this announcement, this inside information is now considered to be in the public domain. For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of GHS by David Potter, Chairman.

 

- ENDS -

 

 

For further information, please contact:

 

Gresham House Strategic plc

Chairman

 

 

David Potter

 

 

07711 450 391

Gresham House Asset Management Ltd

Fund Managers

 

 

Richard Staveley

Anthony Dalwood

 

07864 802 532

020 3837 6278

finnCap

Nominated Adviser

Joint Broker

 

William Marle

Mark Whitfield

 

 

 

07712 010 135

07388 380 466

Panmure Gordon (UK) Limited

Joint Broker

Tom Scrivens

Michael Bateman

020 7886 2500

 

 

 

KL Communications

PR

 

Charles Gorman

Camilla Esmund

Alex Hogan

020 3995 6699

 

 

About Gresham House Strategic plc

GHS invests in UK smaller public companies, applying private equity techniques and due diligence alongside a value investment philosophy to construct a focused portfolio expected to be comprised of 10-15 companies.


The Investment Manager, Gresham House Asset Management Ltd (Gresham House, GHAM, or Investment Manager), aims for a high level of engagement with investee company stakeholders, including management, shareholders, customers, suppliers and competitors, with the aim of identifying market pricing inefficiencies and supporting a clear equity value creation plan and targeting above market returns over the longer term.

 

About Gresham House Asset Management Ltd (GHAM)

Gresham House Asset Management Ltd, the operating business of Gresham House plc (GHE), manages funds and co-investments across a range of differentiated alternative investment strategies for third-party clients. The company is built around a long term investment philosophy and applies private equity techniques to due diligence and investment appraisal.

 

Chairman's statement

 

Dear Shareholder,

 

Making forward looking statements in Chairman's letters is a risky business. I am sure I am not alone in getting it wrong when I wrote to you in November. I was speculating that once the Brexit uncertainty was out of the way, things would look set fair for the SPE strategy and our Company. Along with virtually every other business, we did not have 'pandemic' anywhere on our risk register and certainly not at the top. But here we are, and an old saying has come right again "the hurricane always strikes from a different direction".

 

Although it is too early to make definitive conclusions about the fallout from COVID-19, a few things seem discernible in the fog:

 

Households, businesses and governments lacked resilience. There were no savings, no reserves, no stocks, too much leverage, too long supply chains and too much on a knife edge of "just in time". It is possible to expect a more cautious and conservative approach in the future.

 

History tells us that when governments take sweeping powers, they are reluctant to give them up quickly. The nature of the policy response prioritising massive borrowing will be a cost to the younger generation who may welcome an ongoing higher level of Government involvement in the economy.

 

There will be differential outcomes for various industrial sectors as it is generally assumed that practices and behaviours across customers, suppliers and the nature of business interaction will experience some permanent structural change and without doubt there will be a rapid and dramatic shift to digitalisation.

 

How does this leave GHS and our shareholders? Having had two years when I could report that we have outperformed the market and indices, it is ironic to be able to say that we have done it again in falling markets. The GHS net asset value (NAV) outperformed the FTSE Small Cap Index by 10.5% in the year and by 29.3% over the three years to the end of March 2020. And on a Total Shareholder Return (TSR) basis, GHS beat the index by 41.4% over the three years, coming second among its UK Smaller Companies peers, both compared to other investment companies, and the equivalent open-ended funds. Despite the downward market adjustment during February and March, our decline has been less than the market and it is important to understand why that is.

 

Our portfolio contained only one company engaged, and even then, only to a small extent, in retail, leisure, hospitality or transportation; the four sectors immediately decimated by the lockdown. We entered the market collapse with nearly 20% of the Company in cash. So that is the good news from an historical perspective.

 

The second piece of good news is that in markets like these, "babies can get washed out with the bathwater". Many secure companies with reasonable business plans and prospects find themselves in difficulty, usually because they need finance in some form. As we are in close communication with and have a deep understanding of our investee companies, we can move fast to help if needed and appropriate. In the wider market we will actively seek out the best opportunities. During March, extensive communications occurred with all our investee companies to assess their situation. Most were able to manage within their existing financial resources, but a few needed some assistance. Our pipeline of possible investments has never been stronger and since the end of the year a couple of new investments have been made.

 

In the Investment Manager's Report, you will see a summary of each of the key companies we are invested in and our assessment of their resilience in the face of what comes next. I am convinced that our knowledge of, and relationships with, our investee companies will demonstrate the validity of the Strategic Public Equity strategy in the coming months.

 

I mentioned in November that Richard Staveley had joined the management team at Gresham House as joint Fund Manager alongside Tony Dalwood, who remains also Chairman of the Investment Committee, bringing his track record of over 20-years in this specialist area to the day to day process. Graham Bird remains a member of the Investment Committee as he pursues his executive and non-executive career. I am glad that his experience and corporate knowledge will still be at our disposal having made a significant contribution to the Company since inception. In addition to Richard Staveley, the team has been strengthened by the appointment of Paul Dudley, who joins the team alongside Laurie Hulse, to handle the corporate finance aspects of our transactions. Gresham House, our largest shareholder, is growing as a platform for SPE investing as a result of other investment mandate wins and is expanding its capabilities in areas such as marketing, public relations and investor relations.

 

There have been some changes to our shareholder base. M&G, who had been a founding shareholder in the Company in 2015 realised their 12% holding in December 2019 with various existing and new shareholders taking their place. The GHS TSR of 24.5% since inception[3]  compares to the FTSE Small-Cap Index of 11.6%. We have continued to grow our investor base among private individuals mainly through their wealth managers. The events of the last year have underlined the benefits of closed-end funds, particularly for private investors. We have underlined our commitment to all investors by honouring our promise to raise our dividend by 15% this year and commit to do so by at least that again in 2020/21.

 

One of the most pleasing aspects of the year has been the narrowing of the discount between the share price and the NAV (-22.9% March 2019, -15% March 2020.) This has been as a result of good performance and a careful programme of share buy-backs. During the year, we spent £1.7 million which helped support the share price rising from 1,030 pence to 1,320 pence. Maintaining a narrower discount remains an important objective of the company and it reached a low of -3% before COVID-19 impacted markets. We believe that there has never been a better opportunity amongst unloved and un-researched small companies. MIFID II has also continued to work to our advantage as research on small companies dwindles and I hope that next year we will be able to capitalise further as the manager builds in team capabilities. There has been increased focus on how investment companies can attract and involve retail shareholders. The closed-end structure has proved its worth recently and it is to be hoped that IFAs and the retail platforms focus on bringing these benefits to the attention of their clients in seeking the best way to access the excess returns we have delivered historically through our specialist approach.

 

We have a large number of quite small shareholders, some of whom appear to have lost touch with us. Shareholders may be surprised to hear that we have £22,000 of uncashed dividend payments. We make continuous efforts to trace these shareholders, however, we shall in due course apply to the courts for the relevant outstanding sums to be re-credited for the benefit of the remaining shareholders.

 

I would like to thank my colleagues on the Board, our Investment Management team at Gresham House and all our other stakeholders for their constructive engagement during the year.

 

David Potter

Chairman

 

22 June 2020

 

 

INVESTMENT PORTFOLIO TOP 10 HOLDINGS AS AT 31 MARCH 2020

 

Company

Deal type

% of total portfolio

Value

% ownership of the company

 

Augean Plc

 

Hazardous and Industrial waste management services in the UK.

 

 

Secondary - cash generation, performance recovery and re-rating

23.3%

£8.6m

6.1%

Northbridge

 

Specialist load bank and drilling tool design and rental serving global markets.

 

Recovery and growth capital - equity and Convertible Loan Note (CLN)

11.2%

£4.2m

11.8%

Pressure Technologies

 

Specialist metallic components and wear-parts for high pressure and hazardous environments.

 

 

Secondary recovery capital - strategic refocus to drive organic growth and cultural change

6.7%

£2.5m

15.1%

The Lakes Distillery

 

Whisky distillery based in a UNESCO world heritage site in the Lake District.

 

Primary growth capital equity, CLN.

 

6.0%

£2.2m

N/A

IMI Mobile

 

Digital consumer communications software and services.[4]

 

Secondary - growth and re-rating; reinvestment of cash flow

5.6%

£2.1m

0.8%

Be Heard

 

Mid-market UK digital media group.

Original investment through growth capital equity and CLN. Now focused on integration, cash generations and organic growth

 

5.5%

£2.0m

10.6%

MJ Hudson

Legal services focussed on the Asset Management sector in the UK and Europe.

 

Primary - pre-IPO growth capital - equity and CLN converted into equity

4.9%

£1.8m

2.4%

ULS Technology

Technology business developing property conveyancing software.

 

Secondary growth capital - product roll out, re-rating and improved communications

4.0%

£1.5m

6.6%

 

 

 

 

 

Brandarchiteckts

 

Portfolio of UK healthcare and beauty brands.

 

Secondary growth capital - strategic refocus

2.8%

£1.0m

5.4%

 

Investment Manager's Report

 

Introduction

 

The background to the last 12 months for Gresham House Strategic plc has been tumultuous. The UK has been grappling with the uncertainty of Brexit and related negotiations, a General Election pitching vastly different views on the best path forward for the future of Britain, anaemic worldwide economic activity and the final few weeks of the financial year brought the onslaught of COVID-19 to the globe and UK. Whilst the NAV has fallen, it has outperformed almost all relevant competitors and stock indices.[5]  Additionally, both the team and the portfolio have evolved during the year and whilst the post-period end economic and 'lock-down' conditions create much uncertainty, we are even more confident that the SPE approach and process will deliver excellent future returns. The investment and economic environment are creating the opportunities that will drive the portfolio to meet and hopefully exceed our return targets in the future.

 

Investment highlights

§ GHS Total Shareholder Return[6]  of -5.19% in the year to 31 March 2020 compares to the average IMA open-ended fund universe of -17.95% where GHS has outperformed all but one UK Small Companies OEIC[7]

§ 12-month NAV total return[8]  performance of -14.3% to 1,062.2 pence[9] /share vs FTSE Small Cap Index total return of -24.7% in the year from 1 April 2019 to 31 March 2020

§ Four-year anniversary of management by Gresham House marked with strong audited NAV total return 5 of 31.6% since inception vs FTSE Small Cap Index total return of 13.9%

§ £1.7 million return of cash to GHS shareholders via a share buy-back and dividends funded by net profitable realisations and dividend income

§ Share price discount to NAV[10]  reduced from 22.6% at 31 March 2019 to 15.0% at 31 March 2020, having reached a low point discount of 3.4% in December prior to the recent market sell-off

§ A total of £11.1 million capital invested (in portfolio companies) between the start of the financial year and 31 May 2020[11]

§ Final dividend of 12.8 pence per share proposed, bringing total dividends for the year to 22.9 pence per share
 

Post-period end

§ Completed the realisation of the investment in IMImobile, reducing weighting from 23.4% to 5.6% during the year and generating £14.6 million profits and a 23.8% IRR over the past five years since strategy inception

§ NAV began to recover post-period end, increasing 14.3% since the year end to 1233.4 pence in the eight weeks to 31 May 2020

 

Portfolio highlights

§ Portfolio evolution:

  Outstanding investment performance from Augean plc and IMImobile plc

  Conversion of loan notes at IPO in MJ Hudson Group plc

  Five smaller investments exited

  Material progress of strategic catalysts at Pressure Technologies plc

  New investments in ULS Technology plc, Lakes Distillery Company plc and Van Elle Holdings plc

  Increased investment in Centaur Media plc

§ Increasing opportunities, as a result of COVID-19 and oil price shock, for private equity techniques to identify attractive investments at lower valuations and increased engagement

 

Market commentary

 

This was not a 'game of two-halves'. The reporting period is better described as one of phases. From March 2019 through to the appointment of Boris Johnson as leader of the Conservative Party in July 2019, market participants worried over the nature and outcome of Brexit negotiations and economic confidence waned. The next phase was characterised by the General Election campaign where a hard-left manifesto was adopted by the Labour Party. News of a historic Conservative victory in December 2019, providing a large majority, generated clarity of the direction of travel on Brexit and reduction in risk around a hard-left policy suite. Confidence was boosted and markets rallied. Even before the first Budget from the new government was announced, COVID-19 had emerged and the outlook for consumers, corporates and governments was transformed beyond any New Year prediction made just a few weeks earlier. Other factors in the background include the collapse of Woodford Investment Management and low economic growth in Europe, much slower growth in China and the linked trade war rhetoric and actions under President Trump. It is rare that a 12-month period can incorporate both the lowest level of unemployment in decades and the conditions for a return to the highest levels in the outlook.

 

Table of performance

 

 

 

 

 

Start date

14 Aug 15

31 Mar 19

30 Sep 19

31 Mar 19

01 Apr 17

End date

31 Mar 20

30 Sep 19

31 Mar 20

31 Mar 20

31 Mar 20

 

Since inception

FY20 H1

FY20 H2

1 year

3 year

Share price total return

24.5%

11.4%

-15.0%

-5.3%

16.2%

NAV total return

13.0%

-0.2%

-14.1%

-14.3%

4.1%

FTSE Small Cap total return

-11.6%

-0.3%

-24.2%

-24.4%

-25.2%

FTSE All Share total return

3.1%

-18.7%

-12.5%

Source: Bloomberg Data as at 31 March 2020

Note: Inception August 2015

 

Performance

 

The portfolio is very concentrated and therefore it should be expected that over any shorter period, such as a year, a dominant stock or two will drive performance. On a positive basis, this period's driver has been Augean plc. We will always run our winners if our investment thesis still holds and valuation upside exists, which is the case for Augean, but we remain ever mindful of our exit thesis.

 

On the negative side, we decided to exit our investment in Escape Hunt and crystallise a material loss. The investment was already disappointing compared to our original investment thesis, which left it vulnerable as COVID-19 set in. The company had failed to become profitable on schedule, making our equity investment in the company vulnerable to an extended lockdown - the company's operations require consumers to be locked inside a room for 60 minutes and in close proximity to others. We, therefore, chose to recover what capital we could to reinvest in new opportunities than risk further value erosion.

 

We are pleased to be able to report that the NAV performance has partially recovered post-period end, with the NAV growing 16.3% in the eight weeks to 31 May 2020, ending the month at 1,233.4 pence and continuing to outperform equity markets.
 

NAV Performance Attribution

 

Top 5 contributors to NAV FY20

 

 

 

Top five performers

Profit/Loss in the year

% uplift

p/share

Augean plc

  3,692,287

10.0%

106.07

IMI Mobile plc

  1,642,317

4.4%

47.18

The Lakes Distillery Company plc (CLN)

  338,344

0.9%

9.72

Pressure Technologies plc

  98,996

0.9%

9.72

Hanover Active Equity Partners II LP

  23,759

0.3%

2.84

 

 

 

 

Top 5 detractors from NAV FY20

 

 

 

Investment

Profit/Loss in the year

 

 

Escape Hunt

-£ 2,567,069

-6.9%

-73.75

Northbridge Industrial Services plc (equity and CLN)

-£ 2,384,353

-6.4%

-68.50

Centaur Media plc

-£ 1,365,135

-3.7%

-39.22

BeHeard plc (equity and CLN)

-£ 1,168,225

-3.2%

-33.57

Brand Architekts Group plc

-£ 642,749

-1.7%

-18.47

 

Data as at 31 March 2020

 

Investment activity

During the period we made a number of portfolio changes. We purchased five new holdings and exited five positions. We also continued to reduce the holding in IMImobile as our investment thesis was completed. This has now been fully exited, post-period end.

 

During the first half of the year, we exited a number of small positions where our investment thesis have not delivered, enabling deployment of capital into higher conviction opportunities. These were Quarto, Prophotonix and Hydrodec. During the final quarter, with COVID-19 emerging, we exited leisure business Escape Hunt and alternative lender PCF plc where risk profiles had increased significantly. Total realisations in the reporting period were £12.4 million, almost entirely from profitable investments in the period; including IMImobile (£5.3 million, 24.5% IRR), Augean (£1.6 million, 162% IRR) and Tax Systems (£1.9 million, 26.4% IRR).

 

We put £11.1 million of cash to work in the year to 31 March 2020, and an additional £3.2 million post-period end. We invested the majority of this into new investments: £2.1 million into The Lakes Distillery, £2.1 million into ULS Technology plc, £2.0 million into Van Elle Holdings plc and smaller investments of £940,000 in Fulcrum Utility Services and £490,000 in Bonhill Group plc. We also increased our investments in Centaur Media plc by £1.4 million and in Pressure Technologies by £1.5 million.

 

Investment review

To varying degrees, all portfolio companies will be impacted by the first order and knock-on effects of this enforced economic shutdown which, despite fast and material central bank monetary and government fiscal support, will significantly curtail economic activity and cause bankruptcies, impair end-market demand, extend sales cycles, reduce credit availability, as well as disrupt employees and suppliers. Furthermore, the collapse in the oil price will have additional negative effects on those of our holdings with exposure to this industry. However, the portfolio finishes the year with little direct exposure to the impacted sectors of oil production, travel, leisure, retail or financial industries. We seek to support our portfolio companies more than ever through this difficult period, including financially, if prudent to do so, and we will also exploit share prices which are at an even greater discount to intrinsic value. We remain heavily engaged across the portfolio and highlight the excellent news of the appointment of Sir Roy Gardner as Chairman of Pressure Technologies in January. Some new investments were established prior to the recent market sell-off, which has affected small quoted companies more than large plc's in line with other 'risk-off' periods and across the board. However, we believe these companies offer compelling value and strong business prospects once economic activity recommences and we are confident they will generate the returns we target over our typical three to five-year holding period.

Top 10

 

Augean plc

Our investment was 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, in 2018 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). Having exceeded 30% of the portfolio during the final quarter, we reduced our position modestly into secondary market demand. The management team have done an outstanding job developing and delivering upon their strategy, which resulted during 2019 in justified remuneration. External factors have driven further outperformance as strong volumes and pricing in waste flows created by emerging 'energy-for-waste' plants have boosted profitability and cash flow such that Augean has been able to 'pay' the still disputed HMRC assessments, without admitting 'guilt' or accepting them, thus de-risking the equity investment case for other investors. We anticipate COVID-19 effects on profitability will be modest, mainly centred on North Sea activities. As such, Augean will in 2020 again demonstrate the highly cash generative business that it is, driven from its strategic position as the largest hazardous waste company in the UK. The shares now trade, in our view, at a significant discount to intrinsic value and transaction multiples in the relevant sector.

 

Northbridge Industrial Services plc (Northbridge)

It remains the case that the recent results from Northbridge finally provided a material return to profitability following our initial investment in 2016. Increased business activity, in the US and the traditional markets for load banks, have benefitted from emerging areas, such as Data Centres and Energy Storage Systems. The 'Crestchic' business division therefore entered our financial year with a full production schedule. The collapse in the oil price and world-wide economic downturn is going to have a negative effect, the extent of which is currently unclear. The company has reduced debt and has unencumbered freehold properties, in addition to its significant asset-backed hire fleet. The 'Tasman' business division will be more heavily impacted but is a smaller proportion of group profitability than in the last downturn and has pivoted more to gas projects, which may be more resilient than oil. We are currently heavily engaged with the Board and Executive team to ensure that the company drives and protects shareholder value during the next period.

 

Pressure Technologies plc

Additional investment via a block placing at the start of the year made us the largest shareholder, backing a new management team to deliver a return of organic growth and simplification of the operational structure of the business. Chesterfield Specialist Cylinders (CSC) is a leader in the design, manufacture and maintenance of large-scale high-pressure cylinders for military, marine and oil and gas industries. A significant opportunity is emerging for their expertise in the Hydrogen sector. Defence activities remain the dominant sector. Precision Machined Components (PMC) supplies key metallic engineered components that are destined for extreme or hostile environments in mission critical functions, such as the oil and gas and extractive industries. It came under significant pressure in the oil and gas downturn between 2014 and 2018 and will do so again. New CEO, Chris Walters joined in September 2018 and commenced the implementation of a revised strategy to dispose of the loss-making alternative energy business, reducing debt in the process, and to rationalise the core businesses PMC and CSC with a goal of reinvigorating organic growth. He now has a new set of challenges. We are delighted, therefore, that the highly experienced Sir Roy Gardner has become the new Chairman to help guide the business through this period.

 

The Lakes Distillery Company plc (Lakes Distillery)

We made a pre-IPO investment of £2.1 million via a secured CLN that pays an 8% cash yield and an additional 12% payment in kind (PIK) roll-up interest, combining to generate a 20% per annum return. The loan notes convert to equity at the point of IPO which is now likely to be delayed. We provided growth capital to the business to further develop production capacity and fund additional whisky production in future. Lakes Distillery is a recently established, leading English distillery with a vision to create one of the prime single malt whiskies in the world. The company was formed in 2011, commenced operations in 2014 and has steadily grown retail sales. It has an impressive facility in the Lake District, with a number of income streams to support the growth of its brands. The distillery is based on the banks of the River Derwent in the English Lake District National Park, a UNESCO World Heritage Site. The company has already established a UK and international sales base with gin, vodka and blended whisky ahead of its largest release of a premium single malt whisky product, and online sales have accelerated significantly in recent months. It runs a visitor centre, bistro and shop at the distillery which hosts over 100,000 visitors per annum generating sales of c.£2 million but is currently closed due to 'lock-down' restrictions. If the company has not floated within three years, the loan plus rolled up interest are repayable or can be extended on pre-agreed terms. We have security over the property and whisky stocks.

 

IMImobile plc

The company has been a material part of the portfolio since the Investment Manager's appointment. A clear investment thesis was developed and has pleasingly been delivered for this international mobile communications services specialist. During the period, the company made an acquisition in the US and delivered further organic top-line growth. The technology sector both in the UK and elsewhere has performed strongly and valuations across the sector have moved higher, in some cases to all-time high multiples. IMImobile shares have themselves been re-rated in recent years, not in the least part, in our view, due to the engagement and involvement we provided. Key workstreams included revised investor relations and communications approach, simplified share capital structure and Board composition changes. During the period, we further reduced the position and post-period end have exited.

 

Be Heard Group plc (Be Heard)

As has been previously reported, following disappointment to our original investment thesis we have been heavily engaged with our investment in marketing services company Be Heard. 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 replace him. 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 2019 results demonstrated the difference these changes have made. After significant reorganisation work, full-year EBITDA has increased to £4 million from £1.6 million in 2017. 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.

 

MJ Hudson Group plc (MJ Hudson)

We made our original investment in MJ Hudson in 2016. The company is led by the highly experienced and dynamic Matthew Hudson who is utilising his extensive prior business-building capabilities to develop a leading services business to the asset management industry. This is being achieved both organically and through acquisition. The attractions of what the group offers and the quality of what has been built to date were demonstrated by him and his senior management team listing the company on AIM on 12 December 2019, the day of the General Election. This was no mean feat, during a very difficult year for new issues generally. The business now faces a disrupted end market which will no doubt create opportunities and the net cash balance sheet is well positioned for further progress.

 

Centaur Media plc

We doubled our existing position in Centaur Media, where the new CEO's strategy to rebuild margins after significant portfolio restructuring is highly focused on future value creation. The business struggled, like many B2B media businesses, to adapt quickly enough to the structural changes that were occurring in the business world as a result of digitalisation. The previous CEO had very effectively grasped the nettle and disposed of a range of titles and divisions, ably supported by Finance Director (and now the new CEO) Swag Mukerji utilising his private equity experience, and with this process almost completed handed over the reins. What remains has significant unrecognised value. There are two divisions: Legal and Marketing. Significant cost savings are being extracted from the business due to historic central costs reflecting a much larger business. The legal division centres on the industry-leading property "The Lawyer". The marketing division has a range of activities serving that industry including the top industry event "Festival of Marketing". The impact of COVID-19 on the events industry is clear, and a down-turn in advertising is also inevitable. However, Centaur Media's properties have largely migrated to subscription and digital activities; with net cash we believe the new team is highly focused on shareholder value with lots of   levers to pull.

 

ULS Technology plc

During the period, we purchased ULS Technology, the leading digital conveyancing platform for housing transactions. Their new product, DigitalMove, has potentially transformational capabilities for the business, improving the efficiency and speed of the process materially for consumers and advisers alike. Despite high investor desire for 'platform' businesses and with resulting valuations commensurate, ULS Technology is valued very attractively. We believe this is in part due to unexpected executive changes in 2018, in addition to a fragile housing transaction market and the loss of a material client. Since then, significant Board changes have been made, most importantly the appointment of Martin Rowlands as Chairman. As market leader, the company still has quite a small market share in a fragmented market, and we see the opportunity for ULS Technologies to grow substantially once the housing market re-opens. Further work is required to clearly explain and communicate this to investors, whilst financial delivery on DigitalMove is critical to driving the significant value that trade and private equity potential buyers also see in this digitisation of the housing market. The company generated £4.8 million profit in the year to 31 March 2020 and was capitalised at £23 million (31 March 2020) at period end.

 

Brand Architekts Group plc (Brand Architekts)

This was a year of huge change for the company, formerly known as Swallowfield. The reasons for this stem from the sale of the company's low margin contract manufacturing activities for £35 million consideration (100% cash) in July 2019. This has left shareholders with a large net cash balance and also a need for executive change. The Board has only recently announced the appointment of a new CEO and FD. They take responsibility for activities now solely in the development of consumer brands in the personal care category of consumer retail. Lead brands are Super Facialist, Fish, Dr Salts and Dirty Works. The portfolio clearly has some work to do and the external environment is extremely challenging, albeit the company has a listing and good relationships with key retailers such as Boots and Sainsburys. Innovation, digital channels and creativity are going to be key whilst from a strategic viewpoint, scale - either organically or acquisitively - is required to offset central costs.

 

New top ten investment post-period end

 

Van Elle Holdings plc (Van Elle)

We took an initial position in Van Elle, a leading piling and ground engineering specialist for the construction industry and a market leader in the Rail sector, pre-COVID-19. We have subsequently acted as a cornerstone investor in an issue of new stock to support the business through the period of disruption and through to the opportunities which lie ahead. Van Elle will benefit from a high level of infrastructure spending that we expect in the next few years. This spending was arguably well overdue, and the clear communication by the new UK Government provided confidence of a commitment to this changing. This was subsequently evidenced by the 'go-ahead' for the massive HS2 project, which Van Elle should benefit from. The company, however, has been disappointing investors since its IPO in 2016. We are backing a new management team and Board evolution to professionalise the business, enhance the banking arrangements and drive improved returns in future years from a very well invested fleet of equipment.

 

Outlook

All companies and individuals are striving to predict what lies ahead. The recent crisis demonstrates that often we have an inaccurate sense of certainty or confidence in what the future holds. Therefore, it is so important to have an understanding of value. With careful analysis, a conservative approach to financial leverage and deep insight into a company's value drivers, a material margin of safety can be created to enable investments into stocks with significant medium term returns. Near term outlooks have of course been impaired, but for those that survive this current crisis their market positions may be stronger, the competitive position easier and their cost-bases leaner, primed for profit growth in the future.

We expect the national discussion around 'lives' vs 'livelihoods' to intensify.  The speed of transition back to normality (if in many instances this is indeed ever possible) is fraught with uncertainty. We believe it is prudent to expect, on average, economic activity to be impaired for some time based on the debt overhang this crisis is generating. The work on tests for antibodies and a vaccine is likely to be successful eventually. Those over-leveraged companies and weaker industry players going into this crisis may not survive, including many of the already loss-making businesses that have been increasingly in vogue in recent years, but the banking sector is better placed to deal with this stress than when it entered the global financial crisis of 2008-09. The longer term repercussions of the use of helicopter money and the level of fiscal stimulus taking government debt to previously unacceptable levels await us all.

The financial requirements of companies due to COVID-19 will generate significant opportunities for capital deployment during this financial year. Abundant additional capital from public markets to support these already ignored and under-researched companies is not in evidence. These conditions typically influence fund managers to focus primarily on what they own and know. We must remain careful to consider what structural changes are underway such that value traps are avoided and ensure we have a sufficient margin of safety to offset an on-going challenging environment. However, by hunting in an overlooked area of the market, driving influence in outcomes and behaviours via our engaged approach, we believe the seeds for continued and future performance of the portfolio are available. We believe strongly that our concentrated, engaged, SPE approach and portfolio are well positioned for the challenges ahead.

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 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 make a qualitative assessment of 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 cash flow 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 other capital instruments.

 

 

Statement of Comprehensive Income for the year ended 31 March 2020

 

 

 

 

 

Year ended

 

Year ended

 

 

 

 

31-Mar-20

 

31-Mar-19

 

 

Note

 

£'000

 

£'000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Losses) / Gains on Investments

 

8

 

(5,728)

 

  6,102

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

Bank Interest income

 

 

 

8

 

  11

Loan note interest income

 

 

 

782

 

  634

Portfolio dividend income

 

 

 

265

 

  225

 

 

 

 

1,055

 

  870

Administrative expenses

 

 

 

 

 

 

Salaries and other staff costs

 

3

 

(138)

 

  (129)

Performance fee

 

13

 

-

 

  (2,333)

Other costs

 

4

 

(1,363)

 

  (1,257)

Total administrative expenses

 

 

 

(1,501)

 

  (3,719)

 

 

 

 

 

 

 

(Loss) / profit before taxation

 

 

 

(6,174)

 

  3,253

Taxation

 

5

 

-

 

  - 

 

 

 

 

 

 

 

(Loss) / profit for the financial year

 

 

 

(6,174)

 

  3,253

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 - Equity shareholders of the Company

 

 

 

(6,174)

 

  3,253

 

 

 

 

 

 

 

Basic and Diluted earnings per ordinary share for (loss) / profit

 

6

 

  (174.34p)

 

  91.06p

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

There are no components of other comprehensive income for the current year, (2019: None), all income arose from continuing operations.

 

 

 

Statement of Financial Position as at 31 March 2020

 

 

 

31-Mar-20

31-Mar-19

 

Note

 

 '000

 

 '000

Non-current assets

 

 

 

 

 

Investments at fair value through profit or loss

8

 

29,960

 

40,718

 

 

 

29,960

 

40,718

Current assets

 

 

 

 

 

Trade and other receivables

9

 

266

 

106

Cash and cash equivalents

 

 

6,864

 

6,728

 

 

 

7,130

 

6,834

Total assets

 

 

37,090

 

47,552

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

Trade and other payables

 

 

(178)

 

(473)

Performance fee payable

 

 

-

 

(2,333)

Total liabilities

10

 

(178)

 

(2,806)

Net current assets

 

 

6,952

 

4,028

 

 

 

 

 

 

Net assets

 

 

36,912

 

44,746

 

 

 

 

 

 

Equity

 

 

 

 

 

Issued capital

11

 

1,751

 

1,788

Share premium

 

 

13,063

 

13,063

Revenue reserve

 

 

11,224

 

19,058

Capital redemption reserve

 

 

10,874

 

10,837

Total equity

 

 

36,912

 

44,746

 

 

 

 

 

 

 

The NAV per share on 31 March 2020 is 1,060.4 pence (2019: 1,258.6 pence)

 

These financial statements were approved and authorised for issue by the Board of Directors on 22 June 2020. Signed on behalf of the Board of Directors.

 

 

 

David Potter    Charles Berry

Chairman                                                                                                                                 Director

 

 

 

Statement of Cash Flows for the year ended 31 March 2020

 

 

 

 

 

Year ended

 

Year ended

 

 

 

31-Mar-20

31-Mar-19

 

 

Note

 

£'000

 

£'000

Cash flow from operating activities

 

 

 

 

 

 

Cash flow from operations

 

a

 

(3,157)

 

(686)

Net cash outflow from operating activities

 

 

(3,157)

 

(686)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of financial investments

 

8•

 

(11,360)

 

(10,124)

Sale of financial investments

 

 8•

 

16,313

 

16,356

Net cash inflow from investing activities

 

 

4,953

 

6,232

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Dividends paid

 

7

 

(752)

 

(924)

Share buy backs

 

 

 

(908)

 

(938)

Net cash outflow from financing activities

 

 

(1,660)

 

(1,862)

 

 

 

 

 

 

 

Change in cash and cash equivalents

 

 

 

136

 

3,684

Opening cash and cash equivalents

 

 

 

6,728

 

3,044

Closing cash and cash equivalents

 

 

 

6,864

 

6,728

 

 

 

 

 

 

 

Note

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

£'000

 

 '000

(Loss) / profit for the year

 

2

 

(6,174)

 

3,253

Rolled up interest

 

 

 

(329)

 

(226)

Losses / (gains) on investment

 

8

 

5,728

 

(6,102)

Operating results

 

 

 

(775)

 

(3,075)

 

 

 

 

 

 

 

Change in trade and other receivables

 

 

 

42

 

(35)

Change in trade and other payables

 

 

 

(2,424)

 

2,424

Net cash outflow from operations

 

 

 

(3,157)

 

(686)

 

 

 

 

 

 

 

The purchase and sale of financial investments are the cash paid or received during the year and excludes unsettled investments as

at 31 March 2020

 

 

 

Statement of Changes in Equity for the year ended 31 March 2020

 

 

 

D shares

Ordinary

Share

Revenue

Capital

Total

 

 

Share

Premium

Reserve

Redemption

Equity

 

 

Capital

 

 

Reserve

 

 

£'000

£'000

£'000

£'000

£'000

£'000

Balance at 31 March 2018

10

1,827

13,063

17,667

10,788

43,355

 

 

 

 

 

 

 

Profit and total comprehensive income

 

 

 

 

 

 

for the year

-

-

-

3,253

-

3,253

Total profit and comprehensive income for the year

10

1,827

13,063

20,920

10,788

46,608

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

Share buy back

-

(49)

-

(938)

49

(938)

Dividends paid

-

-

-

(924)

-

(924)

Balance at 31 March 2019

10

1,778

13,063

19,058

10,837

44,746

 

 

 

 

 

 

 

Loss and total comprehensive loss

 

 

 

 

 

 

for the year

-

-

-

(6,174)

-

(6,174)

Total Loss and comprehensive income for the year

10

1,778

13,063

12,884

10,837

38,572

 

 

 

 

 

 

 

Contributions by and distributions to owners

 

 

 

 

 

 

Share buy back

-

(37)

-

(908)

37

(908)

Dividends paid

-

-

-

(752)

-

(752)

Balance at 31 March 2020

10

1,741

13,063

11,224

10,874

36,912

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2020 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 16 "Leases" is effective for accounting periods beginning on or after 1 January 2019. 

 

The adoption of the above standard had no impact on the Company's reported net assets as the Company does not have any leases.

 

New and revised accounting standards and amendments that are effective for annual periods beginning on or after 1 January 2019:

 

· Amendments to IFRS 9: Prepayment Features with Negative Compensation

· Annual Improvements to IFRS 2015 - 2017 Cycle

· IFRIC 23: Uncertainty over Income Tax Treatments

 

The adoption of the standards and amendments listed above did not have any impact on the amounts recognised in prior periods and are not expected to significantly affect the current or future periods.

 

New Standards and interpretations not yet applied

 

Other standards and amendments that are effective for subsequent reporting periods beginning on or after 1 January 2020 and which have not been early-adopted by the Company include:

 

· Definition of Material (Amendments to IAS 1 and IAS 8);

· Revised Conceptual Framework for Financial Reporting

 

These standards and amendments are not expected to have a significant impact on the financial statements in the period of initial application and therefore detailed disclosures have not been provided.

 

Basis of Preparation (continued)

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 Directors acknowledge that the coronavirus (COVID-19) outbreak has had a significant adverse economic impact globally, and that this has caused substantial volatility in financial markets. The Directors nevertheless consider the Company to be well placed to operate through the crisis and to continue to operate for at least twelve months from the date of this report, as the Company has sufficient liquidity to pay its liabilities as and when they fall due and also to invest in new opportunities as they arise. The Company is in a net current asset position of £7.0 million (2019: £4.0 million) and a net asset position of £36.9 million (2019: £44.7 million). Furthermore, the Company has a cash balance of £6.9 million (2019: £6.7million) and non-discretionary expenditure for the financial year was £1.5million (2019: £3.7million), which is covered 4.6 times by the year end cash position. The Company's forecasts and projections, taking into account the current economic environment and other, 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 Company has consistent, predictable ongoing costs and all major cash outflows, such as for the payment of dividends or for investment into portfolio companies, are at the full discretion of the Board.

 

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 held at amortised cost and are accounted for at transaction value when an asset or liability is incurred 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 the International Private Equity and Venture Capital Valuation Guidelines (the IPEV guidelines) and industry norms which include calculations based on appropriate earnings or sales multiples.

 

The IPEV guidelines which are effective for reporting periods on or after 1 January 2019 have been adopted by the Company. The core principles of the new IPEV guidelines are:

 

(i)  Price of a recent investment removed as a valuation technique and is no longer a valid methodology in its own right; and

 

(ii)  Valuing debt investment is expanded.

 

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 IPEV 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.

 

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.

 

Interest receivable is included on an effective interest rate basis.

 

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 recognised in equity.

 

Performance Fee

Under the terms of the Investment Management Agreement, the Company will pay the Investment Manager a performance fee in respect of each performance fee period in which the Net Asset Value per Ordinary Share on the last business day of such performance fee period exceeds both a compounding hurdle growth in Net Asset Value per share of 7% per annum (compounding weekly, the 'Hurdle Net Asset Value per share') and the highest Net Asset Value per share at which a performance fee was previously paid (the 'High Watermark'). The performance fee shall be calculated at a rate of 15% of the amount by which the Net Asset Value per share exceeds the High Watermark, multiplied by the time weighted number of shares in issue during such performance fee period, provided that the Performance Fee payable will be reduced to ensure that the Net Asset Value per share after the payment of such Performance Fee does not fall below the Hurdle Net Asset Value per share. Up to 50% of any performance fee may (at the Board's discretion) be satisfied by the issue of Ordinary Shares.

 

The performance fee is calculated for each performance fee period which is aligned with the Company's accounting year. It is accounted for on an accrual basis and is recognised in the Statement of Comprehensive Income once a performance fee is triggered during the performance fee period.  The performance fee becomes payable at the end of the performance fee period.

 

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 recognised 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. It also requires Management to exercise their judgement in the process of applying the accounting policies.  The main area of estimation is in the inputs used in determination of the valuation of the unquoted investments in Note 8. 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.

 

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 loss for the year was £6.174 million (2019: profit of £3.253 million).

 

The Company has recognised losses on investments through the statement of comprehensive income of £5.728 million (2019: gains of £6.102 million).

 

3 Information regarding Directors and employees

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

£'000

£'000

Directors' remuneration summary

 

 

Basic salaries

129

125

Social security costs

9

4

 

138

129

 

 

 

 

 Year ended 31 March 2020

 Year ended 31 March 2019

 

 

 Emoluments

 Social Security costs

 Total

 Emoluments

 Social Security costs

 Total

 

 

 '000

 '000

 '000

 '000

 '000

 '000

 

Analysis of Directors' remuneration

 

 

 

 

 

 

 

C Berry

26

-

26

25

-

25

 

D Potter

51

-

51

50

-

50

 

H Sinclair

26

-

26

25

-

25

 

K Lever

26

-

26

25

-

25

 

Social security costs

-

9

9

-

4

4

 

 

129

9

138

125

4

129

 

         

 

 

The Company has no employees.

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

No.

Directors

 

 

Investment and related administration

  4

  4

 

  4

  4

 

4 Other costs

 

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

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

£'000

£'000

Auditors remuneration

 

 

  Fees payable to the current auditor for the audit of the Company's annual financial

  statements

31

26

  Fees payable to the Company's current auditor and its associates for other services:

 

 

  Under provision of audit fee for year ended 31 March 2019

3

-

  Fees paid for review of interim report

3

-

  Other services relating to taxation

13

10

 

 

 

Analysis of other costs:

 

 

Professional fees

379

338

Management fee

858

795

Other general overheads

76

88

 

1,363

1,257

 

5 Taxation

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

£'000

UK corporation tax

 

 

Corporation tax liability at 19% (2019: 19%)

-

-

 

 

 

Current tax

-

-

Deferred tax

-

-

Tax on (loss)/profit from ordinary activities

-

-

 

Factors affecting the tax charge for the current period

The tax assessed for the year is different than that resulting from applying the standard rate of corporation tax in the UK: 19% (2019: 19%)

 

 

5 Taxation (continued)

 

The differences are explained below:

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

£'000

£'000

Current tax reconciliation

 

 

Loss before taxation

(6,174)

3,253

Current tax charge at 19% (2019: 19%)

(1,173)

618

 

 

 

Effects of:

 

 

Non-taxable income

1,037

(1,202)

Deferred tax not recognised

136

584

Tax on (loss)/profit on ordinary activities

-

-

 

Deferred tax

There remains an unrecognised deferred tax asset in respect of tax losses and other temporary differences. The unrecognised deferred tax asset is £29 million (2019: £26 million) for the Company. The increase in the balance for unrecognised deferred tax is due to an increase to management expenses carried forward available for deduction against future income. The assessed loss on which no deferred tax has been recognised amounts to £151 million (2019: £153 million).

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

£'000

£'000

Company deferred tax asset

 

 

Balance at 1 April

-

  -

Movement in the year

-

-

Balance at 31 March

-

  - 

 

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.

 

 

Year ended

Year ended

 

31 March

31 March

 

2020

2019

 

£'000

Earnings

 

 

(Loss) / Profit for the year

(6,174)

3,253

 

 

 

Number of shares ('000)

 

 

Weighted average number of ordinary shares in issue for basic EPS

  3,541

  3,573

Weighted average number of ordinary shares in issue for diluted EPS

  3,541

  3,573

 

 

 

Earnings per share

 

 

Basic EPS

(174.34p)

91.06p

Diluted EPS

(174.34p)

91.06p

 

As at 31 March 2020, the total number of shares in issue was 3,480,884 (2019: 3,555,330). During the year, the Company cancelled nil Treasury shares (2019: nil). From October 2019 to March 2020, 74,446 shares were bought back (2019: 99,714). There are no share options outstanding at the end of the year.

 

7 Dividends

 

The Company paid £752,374 in dividends to shareholders in the year ended 31 March 2020 (2019: £924,387).

 

8 Investments at fair value through profit or loss

 

 

 

 

Year ended 31 March 2020

 

 

 

Value at

 

 

 

 

Transfer

Value at

 

 

31 March

 

Disposals

(Loss) / gain

 

between

31 March

 

 

2019

Additions

Proceeds

on Disposals

Revaluation

levels

2020

 

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Investments in quoted companies

(Level 1)

 

31,849

9,010

(13,843)

(199)

(5,560)

2,301

23,558

Other unquoted investments (Level 3)

 

8,869

2,474

(2,671)

359

(328)

(2,301)

6,402

Total investments at fair value through profit or loss

 40,718

11,484

 (16,514)

  160

(5,888)

  -

29,960

          

 

 

 

 

 

 

Year ended 31 March 2019

 

 

 

 

 

Value at 31 March 2018

Additions

Disposal Proceeds

Gain on disposals

Revaluation

Transfer between Levels

Value at

31 March 2019

 

 

 

£'000

£'000

£'000

£'000

£'000

£'000

£'000

Investments in quoted companies (Level 1)

 

 

36,283

8,248

(16,256)

2,783

2,785

 

(1,994)

31,849

Other unquoted investments (Level 3)

 

 

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 

           

 

8 Investments at fair value through profit or loss (continued)

 

The revaluations and (loss) / gain on disposals above are included in the statement of comprehensive income as (losses) / gains on investments.

 

 

Value at

Value at

 

31 March

31 March

 

2020

2019

 

£'000

 

 

 

Opening valuation

  40,718

40,449

Acquisitions

11,484

  10,523

Unrealised and realised (losses) / gains on investment

(5,728)

6,102

Disposals

(16,514)

(16,356)

Closing valuation

  29,960

  40,718

 

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

 

(ii)   level two measurements are valuations 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

 

2020

2019

 

£'000

Level 1

  23,558

31,849

Level 2

-

  -

Level 3

6,402

8,869

 

  29,960

  40,718

 

On 12 December 2019, MJ Hudson floated and was admitted to AIM. As a result of this, there was a transfer from Level 3 to Level 1 of the fair value hierarchy for MJ Hudson which amounted to £2,300,574. For the year ended 31 March 2019, there was a transfer from Level 1 to Level 3 for Tax Systems plc which amounted to £1,994,168, as a result of a take-over and subsequent de-listing of the company.

 

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 2020 and 31 March 2019, all investments, except for the investments in the table below, fall into the category 'Level 1' under IFRS 7 fair value hierarchy. 

 

8 Investments at fair value through profit or loss (continued)

 

A summary of the Level 3 investments are as follows:

 

 

31 March 2020

 31 March 2019

 

Material investments included

£'000s

Material investments included

£'000s

Market value

Be Heard Group Holdings

1,838

MJH Group Holdings (Bond)

2,063 

(reviewed for impairment)

The Lakes Distillery Company

2,348

MJH Group Holdings (Equity)

475

 

Hanover Equity Partners II LP

254

Be Heard Group Holdings

1,788

 

Northbridge Industrial Services plc convertible bonds

1,962

Northbridge Industrial Services 9lc convertible bonds

2,319

 

 

 

Hanover Equity Partners II LP

230

 

 

 

Tax Systems plc

1,994

Contracted sales proceeds in post balance sheet period

None

  -

None

  -

 

 

6,402 

 

8,869

 

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.

 

Investments in Level 3 investments have been valued in accordance with the IPEV guidelines, and represent the following:

· Hanover Equity Partners II LP was purchased on 11 July 2017. It is valued based on the NAV of the Limited Partnership which is a proxy for fair value as its underlying investments are held at fair value;

 

· Be Heard Group plc Bond was purchased on 28 November 2017, and a further investment was made on 10 July 2019. The bonds are valued at fair value which approximates to the bond issue amount, as the value of the conversion right is considered to be nil. There has been no change in the circumstances of Be Heard Group plc that would indicate a material change in value;

 

· Northbridge Convertible Bond was purchased on 10 April 2018, and a further investment was made on 3 July 2018. The bonds are valued at fair value which approximates the bond issue amount plus the "in the money" value of the conversion right, valued using a Black Scholes valuation model; and

 

· The Lakes Distillery Company plc Convertible Bond was purchased on 20 June 2019. It is valued at fair value which approximates to the bond issue amount plus rolled up "payment in kind" notes and capitalised interest.

 

Investments in quoted companies (Level 1) have been valued according to the quoted bid price as at 31 March 2020.

 

9 Trade and other receivables

 

 

 

 

 

 

 

 

 

 

 

31 March

31 March

 

 

 

 

2020

2019

 

 

 

 

£'000

£'000

Other debtors

 

 

 

  244

101

Prepayments

 

 

 

  22

  5

 

 

 

 

  266

  106

 

 

10 Trade and other payables

 

 

 

 

 

 

 

 

 

 

 

31 March

31 March

 

 

 

 

2020

2019

 

 

 

 

£'000

£'000

Performance fees payable

 

 

 

-

2,333

Other creditors

 

 

 

  212

Trade creditors

 

 

 

  91

176

Accrued expenses

 

 

 

74

    79

Social security and other taxes

 

 

 

  6

  6

 

 

 

 

  178

2,806

 

Other creditors related to the acquisition of further equities in Fulcrum Utility Services Ltd, an existing investment, in March 2020. This was settled in April 2020 (2019: £0.21 million that related to the acquisition of further equities in Northbridge Industrial Services, Be Heard plc and Swallowfield plc).

 

11 Issued capital

 

 

 

 

 

 

 

 

 

31 March

31 March

 

 

 

2020

2019

 

 

 

£'000

£'000

Called up, allotted and fully paid:

 

 

 

 

3,480,884 (2019: 3,555,330) Ordinary Shares of 50 pence (2019: 50 pence)

 

 

1,741

1,778

10,000 (2019: 10,000) D shares of 100 pence (2019: 100 pence)

 

 

10

10

 

 

 

1,751

1,788

 

As at 31 March 2020, the total number of shares in issue were 3,480,884 (2019: 3,555,330).  During the year the Company bought back 74,446 shares (2019: 99,174).

 

The average share price of Gresham House Strategic plc quoted Ordinary Shares in the year-ended 31 March 2020 was 1,138.5 pence. In the year the share price reached a maximum of 1,355.0 pence and a minimum of 865.0 pence. The closing share price on 31 March 2020 was 902.5 pence.

 

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 SPE 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 2020, £23.6 million of the Company's net assets were invested in quoted investments, £6.4 million in unquoted investments and £6.9 million in liquid balances (31 March 2019: £31.8 million in quoted investments, £8.9 million in unquoted investments and £6.7 million 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 financial assets at amortised cost 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 £30.0 million (2019: £40.7 million).

 

The investments in 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 2020, the Company held interests in 15 companies (2019: 15 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 quoted equity instruments is ultimately sensitive to changes in quoted share prices. The value of investments in CLN, where the valuation methodology is to estimate the value of the conversion option of the instrument, is similarly linked to quoted share prices. The table below shows the impact on the return and net assets if there were to be a 25% (2019: 20%) movement in overall share prices.

 

 

As at 31 March 2020

 

 

+25%

-25%

Security

Valuation basis

Fair value

Impact

£'000

Impact per share
(in pence)

Impact £'000

Impact per share
(in pence)

Quoted investments

Latest share price

  23,558

  5,890

169.20

  (5,890)

  (169.20)

Unquoted investments

 

 

 

 

 

 

- Northbridge and Be Heard CLNs

Bond issue amount + conversion right

  3,800

  38

1.08

  (11)

  (0.32)

 

 

As at 31 March 2019

 

 

+20%

-20%

Security

Valuation basis

Fair value

Impact

£'000

Impact per share
(in pence)

Impact £'000

Impact per share
(in pence)

Quoted investments

Latest share price

  31,849

  6,370

179.16

  (6,370)

  (179.16)

Unquoted investments

 

 

 

 

 

 

- Northbridge and Be Heard CLNs

Bond issue amount + conversion right

  4,107

  380

10.70

  (278)

  (7.83)

 

The impact of a change of 25% (2019: 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.

 

A sensitivity has not been performed for the other unquoted investments held by the Company, as there is no exposure to market price risk in the valuation methodology applied for these investments.

 

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 in an interest paying current account 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.

 

12 Financial instruments and financial risk management (continued)

 

The Company's maximum exposure to credit risk is:

 

 

 

 

 

31 March

31 March

 

 

 

 

2020

2019

 

 

 

 

£'000s

£'000s

Loan stock investments

 

 

 

6,148

  6,156

Cash and cash equivalents

 

 

 

6,864

  6,728

Trade and other debtors

 

 

 

266

106

 

 

 

 

13,278

  12,990

 

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. The credit rating of The Royal Bank of Scotland plc by Fitch Ratings is A+ (2019: A+)

 

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.

 

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 2020 is £36.9 million (31 March 2019: £44.7 million) 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, its Investment Manager and Gresham House plc as a significant shareholder.

 

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 2020, Gresham House Strategic plc was charged management fees of £858,000 (2019: £795,000) by GHAM.

 

There is no performance fee payable to GHAM as at 31 March 2020 (2019: £2.333 million (includes VAT)).

 

As at 31 March 2020, the total amount owing to GHAM is £61, 000 (2019: £2.465 million).

 

As at 31 March 2020, 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

R Staveley                                                                                5,179  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 £7.5 million with the SPE Fund LP.

 

The Directors' remuneration and their interest in the Company are disclosed in the Director's remuneration review in the annual report.

 

There are no other related party transactions of which we are aware in the year ended 31 March 2020.

 

14 Subsequent events note

 

The COVID-19 pandemic continues to adversely impact the UK and world economy. The effect of this on the investment portfolio has been reflected in the fair value of investments at 31 March 2020. As the full impact of the pandemic and Government restrictions is unknown, there may be further information that emerges but the impact of this could not be known at 31 March 2020.

 

It is noted that post year end, the unaudited NAV has increased to 1,237.6 pence per share as at 5 June 2020 (1,060.4 pence per share at 31 March 2020).

 

 

[1] GHAM appointed as Investment Manager on 14 August 2015

[2] To 31 May 2020

[3] To 31 May 2020

[4] The investment in IMIMobile was exited post year end.

[5] The FTSE Small Cap Index is referenced because we invest in small companies and the FTSE All-share Index is referenced because the Company mainly invests in equities

[6] Total shareholder return is the financial gain that results from a change in the stock's price plus any dividends paid by the Company during the measured interval divided by the initial purchase price of the stock

[7] Data compiled by FE Trustnet and Morningstar for the year to 31 March 2020, shows that GHS outperformed all but one open-ended UK smaller companies' funds. Since inception in August 2015, GHS has outperformed its benchmark by 17.7%

[8] NAV total return is the change in the net asset value of the Company over a given time period

[9] The audited NAV per share includes valuations of the Company's unlisted investments as at 31 March 2020. The valuation of all unlisted investments, which comprise approximately 15% of the NAV, almost all of which are CLN, will be reviewed for the purposes of the audited financial statements for the year-ended 31 March 2020

[10] The discount is the difference between share price and NAV per share, expressed as a percentage

[11] As at 31 May 2020


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END
 
 
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