Liontrust Special Situations Fund

February 2018 review

The Liontrust Special Situations Fund returned -1.6%* in February, compared with the -3.3% return from the FTSE All-Share Index.

 

The market sell-off intensified at the start of February, as US wage data stoked inflationary expectations and saw investors further reprice assets for a world of rising interest rates – in the US and in the UK. Futures markets are now pricing a 50%+ chance of two Bank of England rate rises to 1% by the end of 2018, compared with a 25% probability at the start of the year. The Bank’s Monetary Policy Committee issued a quarterly inflation report which confirmed it would need to raise rates “somewhat earlier and to a somewhat greater extent” than it had forecast in its November 2017 comments.

 

Bond yields continued to rise and equities softened, with most of the damage done in the first week of the month. Weakness was fairly broad based, although there was some limited evidence of bond-proxy areas of the market faring worse than others; telecoms (-8.0%) and utilities (-6.5%) were two of the weakest areas.

 

The Fund’s experience was better than the wider stockmarket during February, with a takeover offer and a number of positive updates taking the edge off disappointing developments at the AA.

 

If we start by addressing the biggest negative, the AA (-36.9%) began the month in solid enough fashion, releasing a full year trading update for the year to 31 January 2018 which stated that EBITDA (earnings before interest, tax, depreciation and amortisation) will be in line with the lower £390m-£395m level set in September 2017. New roadside assistance members grew 7% year-on-year while retention remained at 82% despite an increases in Insurance Premium Tax. Paid members fell 1% to 3.29m, a decline the company attributed to a discontinuation of free roadside membership for AA insurance customers, and the associated free-to-paid upsell opportunity. Within insurance, 6% growth in motor policies offset a 5% decline in home policies.

 

However, shares in the company were hit heavily later in the month as its new CEO, Simon Breakwell, outlined a strategic plan that would involve additional operational and capital expenditure of £45m this year. This means that FY2019 Trading EBITDA guidance is lowered to £335m-£345m, while its dividend will be cut to 2p a year. The level of debt the AA is carrying – a legacy of its private equity days prior to initial public offering (IPO) – is leading to an uncomfortable level of financial leverage which is feeding through to share price volatility. We are monitoring developments keenly in the expectation that the company’s high recurring cash flow can be used to pay down the debt pile. While we will review the holding as required, we feel that now would be an odd time to lose faith in the stock. The unexpected management succession and rebasing of earnings expectations has  depressed the share price, but the new strategy has yet to been given a chance to yield results.

 

On a more positive note, the day after issuing full year results Fidessa Group (+59.2%) revealed that it was in discussions regarding a possible all-cash takeover offer from Temenos. The proposed offer level of £35.67 compared with the £23.65 share price at the start of the month. The following day Fidessa and Temenos subsequently announced that the deal was to be recommended by Fidessa’s board at this level. Fidessa supplies financial software to asset managers and brokers; generating revenues through recurring licence and support fees that mean its products are effectively embedded in many of its clients’ businesses and services. This gives it strong Economic Advantage credentials which act as a barrier to competition, and we are not surprised that these characteristics have proven attractive to Temenos, a Swiss financial software peer. 

 

NEX Group (+13.4%) reported a 3% revenue increase in the quarter to 31 December 2017, a period of lower volatility than the prior year comparable when the US election result boosted volumes. However, it commented that markets have been noticeably more active since January as FX volatility has increased. The company additionally stated that the operating margin for the NEX Optimisation division is on course to deliver targeted improvements for the second half of its financial year.

 

In the year to 31 December, GlobalData (+7.0%) recorded revenue growth of 22%, of which 15 percentage points was organic expansion with the remainder the result of two acquired businesses in the healthcare and construction fields – Infinata and MEED. The company extended its acquisitive strategy with the announcement of another possible acquisition; it is exploring the purchase of Views Limited, a data analytics company serving the energy, construction and financial services sectors. The proposed deal would be financed through the issue of shares equivalent to 18% of GlobalData’s current share capital.

 

Full year results from precision instrumentation producer Spectris (+4.5%) showed 6% like-for-like sales growth and a 13% total increase to £1.53bn as it experienced an “improving demand backdrop” in some of its key industries. A recovery in metals, minerals and mining activity contributed to robust growth in its Materials Analysis division. Growth in 2018 should be supported by the acquisition of Concept Life Sciences – a deal which was announced during January. The business will add test service capabilities to the company’s Materials Analysis segment. A cash consideration of £163m represents an EBITDA multiple of over 17x, which reflects the double digit growth which Spectris expects from the business. At the same time, Spectris has further shuffled its portfolio of assets by disposing of Microscan, a ‘machine vision technology business’. The sale realised cash proceeds of £91.9m which will fund the bulk of a £100m share buyback.

 

A trading update from Next Fifteen Communications (+5.7%) stated that it expects to meet guidance for the year ended 31 January despite the adverse impact of US dollar weakness on the c.60% of revenues which are generated in the US. It experienced an improvement in organic revenue growth, which rose by a high single-digit rate in the second half of the year. The company also commented that it expects a long-term positive earnings impact from the recent changes to US tax law, although it is too early to quantify this.

 

Full-year results from Reckitt Benckiser (-15.1%) were poorly received. Net revenue rose to £11.5bn, up 15% in constant exchange rates but flat on a like-for-like basis. Adjusted operating profit increased 12% to £3.12bn. Margins were squeezed by 70bps to 27.1%. Outlook comments included an expectation of 2-3% like-for-like revenue growth and further margin pressures in 2018.

 

Aside from AA and Reckitt Benckiser, other spots of weakness in the portfolio reflected a tough market backdrop rather than company specific setbacks. For example, Hargreaves Lansdown (-6.5%) shares slid despite releasing interims results showing net new business of £3.3bn and a 9% increase in assets under administration to £86.1bn (as at 31 December 2017). Likewise, there seemed little wrong with final results from Weir Group (-7.8%), which showed a 19% constant currency increase in revenues, a 25% expansion in operating profit and 20% uplift in orders – boosted by particularly strong demand from North American oil & gas customers. Oil prices dropped almost 5% during February, which contributed to the company’s share price weakness.  

 

We added one more holding to the Fund’s portfolio in February – IntegraFin, which joined the London market via an IPO. The fund participated in the IPO at 196p per share. The stock had a strong debut, rallying to 263p by month-end. IntegraFin owns the Transact investment wrap platform, and in our view possesses intangible Economic Advantage assets in the form of its distribution network and high level of recurring revenues. 

 

Positive contributors included:

Fidessa Group (+59.2%), NEX Group (+13.4%), StatPro Group (+11.5%), GlobalData (+7.0%) and Next Fifteen Communications (+5.7%)

 

Negative contributors included:

AA (-36.9%), Reckitt Benckiser (-15.1%), Paypoint (-10.0%), Weir Group (-7.8%) and Hargreaves Lansdown (-6.5%).

 

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

 

 

Dec-17

Dec-16

Dec-15

Dec-14

Dec-13

Liontrust Special Situations I Inc

16.8

15.8

13.9

1.9

21.2

FTSE All Share Index

13.1

16.8

1.0

1.2

20.8

IA UK All Companies

14.0

10.8

4.9

0.6

26.2

Quartile

1

2

1

2

4

 

*Source: Financial Express, as at 28.02.2018, total return (net of fees and income reinvested), bid-to-bid, institutional class.


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This content 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. Examples of stocks are provided for general information only to demonstrate our investment philosophy.  It contains information and analysis that is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified. It should not be copied, faxed, reproduced, divulged or distributed, in whole or in part, without the express written consent of Liontrust. 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, March 19, 2018, 11:35 AM