Liontrust Special Situations Fund

August 2018 review

The Liontrust Special Situations Fund returned 0.6%* in August, compared with the -2.8% return from the FTSE All-Share Index.

 

UK large-caps underperformed heavily in August; the FTSE 100 Index returned -3.3% compared with the -0.6% performance from the mid-cap FTSE 250 Index

 

A tilt away from the largest stocks in the index probably helped the IA UK All Companies sector record an average return of -1.3%, avoiding around half the fall in the FTSE All-Share. This effect was also a factor for the Special Situations Fund which has a FTSE 100 weight of 44% (the FTSE 100 is 80% of the FTSE All-Share’s market cap). Fund performance was further helped in relative terms by zero weighting to weak banks and mining sectors as well as a number of good stock-specific returns.

 

A range of Fund holdings released interim results. More of these show up in this month’s negative contributors than positive, but a good overall Fund return was possible as a result of stocks such as Next Fifteen Communications (+12.7%) and Brooks Macdonald (+11.3%) moving higher as investors continued to digest previous months’ newsflow.

 

The two interim results releases that did catalyse moves to the upside came from Wood Group (+11.9%) and Aggreko (+12.8%), both of which published interim results. The tone of Wood Group’s statement was set with the first line: “Performance in the first half is at the upper end of our guidance range, reflecting continued momentum in trading and delivery of cost and revenue synergies”. While it left its full-year guidance unchanged, investors moved to price in the better-than-expected performance in the first half. Proforma revenues, which adjust for the acquisition of Amec Foster Wheeler (AFW), showed 14% growth to US$5.3bn. EBITA (earnings before interest tax and amortisation) came in at US$260m, the upper end of the US$250m – US$260m range it had guided towards. Comments regarding the AFW integration were bullish, with over US$50m in annualised cost synergies expected to be delivered by the end of the year, and its three year synergy target raised from at least US$170m to over US$210m. With an order book standing at US$10.6bn, Wood Group has visibility over around 85% of this year’s total expected revenue.

 

The tone of Aggreko’s comments caused investors to nudge 2018 earnings forecasts higher; the company stated that it is “well on track to deliver… full year guidance”. Adjusted revenue rose 14% on an underlying basis to £857m in the first half of 2018 while profit before tax increased 8% to £59m. In unadjusted terms, revenue and profit growth was inhibited by the strength in sterling relative to US dollars (in which Aggreko derives much of its sales and earnings) compared with the first half of 2017. Following a turbulent few years which most recently included setbacks at its Argentinian operations, Aggreko looks to have turned a corner after a divisional reorganisation. Its Rental Solutions division saw the strongest growth in the period, with revenues up 32%, driven by North America due to hurricane-related work and high demand from sectors such as construction, refining and oil & gas.

 

Of the half-year results that were poorly received, Statpro (-22.0%) was the heaviest faller. On first glance, the release seemed to contain little cause for share price weakness. Revenue rose 22% to £27.2m in the first half of 2018 while adjusted EBITDA increased 23% to £4.3m. This growth primarily reflecting the impact of the Delta acquisition, which has integrated well so far. Furthermore, the company stated that it is on course to meet analysts’ full year expectations. The sell-off appeared to have been sparked by concerns over a 2% drop in annualised recurring revenues.

 

Good headline sales growth in Domino’s Pizza’s (-6.5%) interim results was undermined by operational problems at some of its international businesses where it states it has “taken us some time to refine the operating model and cost base at store level”. Total sales increased by 13% to £617m, feeding through to 23% growth in revenues to £259m. In its international division – which accounts for only 8% of the total – growing profits in Iceland and Germany were offset by losses in Switzerland, Norway and Sweden. With respect to the UK, the company commented that the trading environment remains uncertain, but it was nevertheless able to maintain its guidance for full-year underling profit before tax.

Quality assurance provider Intertek (-12.7%) grew revenue by 3.9% in constant currency terms over the interim period, but it was 1.8% lower at £1.35bn in actual rates – slightly below expectations. Operating profit rose 6.4% to £226m in constant currency terms. The interim dividend was boosted by more than a third as Intertek implemented a new dividend policy which targets a payout ratio of around 50%.

 

While Intertek’s results triggered some share price weakness, investors had earlier in the month welcomed the news of a US$480m cash acquisition of Alchemy, an industry leader in ‘people assurance’ content and technology. The consideration represents a multiple of well over 20x this year’s forecast of US$22m EBITDA, but Intertek expects rapid growth from the business, which it states should be EPS accretive from its first full year. 2018 billings for Alchemy are expected to be US$66m, with 20% growth per annum forecast.  Intertek provides assurance services which identify and mitigate risks in operations, supply and distribution chains and quality management. This acquisition enables it to meet the growing demand for client-facing employee assurance solutions that identify and manages skill gaps. Alchemy has a particularly strong presence in the food industry, where it has over 1,100 clients.

 

Having rallied strongly in April on the back of a bullish Q1 trading update, shares in Rotork (-5.5%) gave up some ground following August’s release of interim results. The results were solid, however, and Rotork’s shares remain a top Fund performer in 2018. The actuator manufacturer revealed 15% constant currency revenue growth to £331m, a 13% uplift in order intake at £365m and a 25% increase in adjusted operating profit to £65.4m. Rotork commented on a continuation of favourable market trends seen since the last quarter of 2017 and confirmed full year guidance for high single-digit revenue growth (after a currency headwind of around 3%) and a slight expansion in operating margins.

Savills (-9.7%) shares dipped after reporting an 18% drop in profit before tax. Although the company commented that this represented “a better than anticipated performance” given the fall in transaction volumes it expected at the start of the year, investors remain nervous regarding trends in the real estate market.

The Fund’s cash level temporarily rose to over 9% at month end – the result of proceeds being received from ION’s takeover of Fidessa Group. Takeovers of holdings have been a reasonably frequent characteristic over the years, and can be a bittersweet experience. They can also result in short-terms spikes in cash levels due to the fact that proceeds are received in one payment, but are reinvested into the market in a measured manner due to the need to be mindful of the price impact of the Fund’s investments.

We anticipate that cash will return to more normal levels in the coming weeks and months as new positions are added to the Fund. In August, one new position was initiated: Imimobile, a cloud communications software provider.

Positive contributors included:

Aggreko (+12.8%), Next Fifteen Communications (+12.7%), Wood Group (+11.9%), Brooks Macdonald (+11.3%) and Gamma Communications (+8.9%).

 

Negative contributors included:

Statpro Group (-22.0%), Intertek (-12.7%), Savills (-9.7%), Domino’s Pizza Group (-6.5%), and Rotork (-5.5%).


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

 

Jun-18

Jun-17

Jun-16

Jun-15

Jun-14

Liontrust Special Situations I Inc

15.3

23.0

6.9

8.9

12.0

FTSE All Share Index

9.0

18.1

2.2

2.6

13.1

IA UK All Companies

9.1

22.5

-4.1

7.0

14.0

Quartile

1

2

1

2

3


*Source: Financial Express, as at 31.08.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.

 

**Source: Financial Express, as at 31.06.2018, 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.
Monday, September 17, 2018, 2:15 PM