Liontrust UK Smaller Companies Fund

March 2019 review

The Liontrust UK Smaller Companies Fund returned 3.1%* in March, compared with the 0.7% return from the FTSE Small Cap (excluding investment trusts) Index.

 

As investor sentiment towards UK equities continued to be shaped by developments on the key big picture topics of the moment – Trade Wars and Brexit – it was again pleasing that share price activity within the Fund was largely driven by bottom-up considerations, i.e. corporate newsflow from portfolio holdings.

 

Shares in customer engagement software provider Netcall (+50.1%) rebounded strongly from a steep slide in the prior six months as interim results issued during March highlighted a “clear inflexion point” in its business transition, with cloud service bookings exceeding product sales for the first time. Total annual contract value rose 10% year-on-year to £15.1m at 31 December 2018. Investors had been perturbed by a decision announced last October to ramp up investment costs in order to accelerate this transition. In light of these concerns, clear evidence that the strategy is already beginning to bear fruit was welcomed by the market. Netcall stated that first half trading was in-line with its expectations for the period and that the second half of its financial year has so far seen strong sales momentum and order inflow which is significantly ahead of the same period last year.

 

Teleradiology specialist Medica (+31.3%) staged a similar recovery from a Q4 2018 share de-rating. Full-year 2018 results were the catalyst with sales of £29m up 16% over the year – in line with expectations – and outlook comments guiding towards further double-digit revenue gains in 2019 following a good start to the year. The company’s network of contracted radiologists saw a net increase of 56 to 362 and all of its major service lines experienced volume growth, with NightHawk scanning leading the way with a 19.4% increase. The rally in the share price comes despite an element of uncertainty introduced by CEO John Graham’s decision to step down during 2019.

 

SimplyBiz (+20.8%) was another stock to move higher. 2018 results showed a 15% increase in revenue to £50.7m and a 62% rise in adjusted profit before tax to £8.6m once one-off costs relating to its initial public offering (IPO) were stripped out. The Fund participated in the March 2018 IPO of the company, which provides a range of services to financial advisers and intermediaries. Over 2018, SimplyBiz grew its network of member firms by 9% to 3,726. The company’s distribution network is one of two core Economic Advantage intangible assets we believe it possesses, alongside significant recurring income. Shares in the company have performed well this year after a January trading update stated that earnings would be higher than forecast, following strong revenue growth and margin expansion. Having stated in its trading update that it was on the look-out for further selective acquisitions within its “highly-fragmented” marketplace, SimplyBiz in March also agreed to pay £74m to acquire Defaqto -  a fintech platform serving over 8,500 advisers. The acquisition will be part financed by a £29m placing at 180p, a fund raising at a c.10% discount, in which the Fund participated.

 

The only major portfolio disappointment in March was Proactis (-37.4%) – among the largest detractors for a third month in a row. The position was sold from the Fund this month, concluding a managed exit from the position which began after a concerning investor update in February. Having initially been willing to continue backing the company following a management reorganisation announced in January this year, developments in February led the fund managers to conclude that the risks associated with the holding had grown too large. One of the more concerning aspects of February’s profit warning – which cited a lower level of retention and a deterioration in US and European businesses’ pipelines – was that it came just a month after its January statement had suggested trading was progressing in line with expectations.

Team17 (+18.0%) is a video gaming specialist that publishes its own titles – 12 during 2018 – and also provides a range of services to third-party developers needing assistance with commercialisation, distribution, etc. Results released during March showed that Team17 experienced a near 50% increase in revenues to £43.2m in 2018. Gross margins rose by 18%, proportionately lower than the sales increase as a higher share of third-party revenues pushed down gross margins from 57% to 46% as accounted for a higher share of sales. The company referred to its start to 2019 as very encouraging and had a solid pipeline of game launches planned for the year. The results were well received by investors, helping the shares prove resilient to a 5.5% placing from an institutional shareholder later in the month.

 

Having stated in January that 2018 EBITDA (earnings before interest, tax, depreciation and amortisation) would be at the “top of the range of market expectations”, Gamma Communications (+14.5%) came good with results showing a 34% increase to £48.3m. The provider of voice, data and mobile communications for businesses saw an 18% increase in revenue to £285m, led by its indirect sales channel as its number of channel partners grew from 1,089 to 1,150 over the year.

 

Craneware (-7.5%) reported a 15% revenue increase in the six months to 31 December 2018 to $35.8m. It is the largest provider of pricing and billing systems to US hospitals and commented on a supportive market environment during the period as US healthcare operators increase demand for accurate financial and operating data. In our view, one of Craneware’s core Economic Advantage intangible assets is its level of recurring business; it already has visibility on over US$70m of this financial year’s sales – almost 90% of the markets forecast for the whole year.

 

Smart Metering Systems (-14.1%) slid ahead of April’s scheduled release of 2018 full-year results, despite it announcing a new contract win during the month. The company has been appointed preferred national smart meter supplier for SSE Energy’s small business customers.

 

Positive contributors included:

Netcall (+50.7%), Medica Group (+31.3%), IMImobile (+28.2%), SimplyBiz Group (+20.8%) and Team17 (+18.0%).

 

Negative contributors included:

Proactis Holdings (-37.4%), Smart Metering Systems (-14.1%), Animalcare Group (-12.7%), Iomart (-8.9%) and JTC (-8.8%).

 

Discrete years' performance** (%), to previous quarter-end:

 

 

Mar-19

Mar-18

Mar-17

Mar-16

Mar-15

Liontrust UK Smaller Companies I Inc

1.9

17.1

26.3

18.1

-3.0

FTSE Small Cap ex ITs

-3.1

2.2

19.7

5.9

1.2

IA UK Smaller Companies

-2.6

14.9

18.7

8.2

-2.1

Quartile

1

2

1

1

3

 

*Source: Financial Express, as at 31.03.2019, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg.

 

**Source: Financial Express, as at 31.03.2019, total return (net of fees and income reinvested), bid-to-bid, primary class.

 

For a comprehensive list of common financial words and terms, see our glossary here.

 

 

Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Some of the Funds managed by the Economic Advantage team invest primarily in smaller companies and companies traded on the Alternative Investment Market.  These stocks may be less liquid and the price swings greater than those in, for example, larger companies. The performance of the GF UK Growth Fund may differ from the performance of the UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.

Disclaimer

The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product.  Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.
Tuesday, April 16, 2019, 12:10 PM