[ad_1]
Adopting a value-orientated approach to stock selection, targeting companies trading below intrinsic value and offering potential catalysts to unlock the share price discount, is one of my favoured investment techniques. It is also the investment strategy of Rockwood Strategic (RKW: 182p), a small-cap equity fund that continues to perform well in challenging market conditions for small and micro-caps.
In the 12 months to 30 September 2023, the fund delivered a 28 per cent total return (TR) and 25.4 per cent shareholder return, or three times the 8.8 per cent TR on the FTSE Small Cap (ex-Its) index. The FTSE Aim All-Share TR index lost almost 10 per cent of its value in the same period. Moreover, Rockwood is the number one ranked fund over the last one, three and five years by net asset value TR in the AIC UK Small Companies sector. Admittedly, the last six months have been tough as Rockwood’s net asset value declined 5.5 per cent, but this was almost half the reversal in the FTSE Aim All-Share TR index.
One consequence of the low rating of UK small caps is that this under researched market segment is increasingly attracting interest from private equity and trade buyers. Indeed, investment manager Richard Staveley highlights “we are receiving takeover approaches left, right and centre and expect more to be forthcoming if the stock market does not recognise the deeply undervalued future cashflow potential of our portfolio.”
Recycling cash into new investment opportunities
- NAV of £49.8mn (185p) at 30 September 2023
- Cash of £3.5mn excludes proceeds from four bid situations
- Four new investment holdings
Since the company’s 30 September 2023 half-year end, Rockwood has received takeover offers for a raft of portfolio companies at hefty bid premiums: econveyancer software group Smoove (SMV – 69 per cent bid premium); property portal Onthemarket (OTMP – 93 per cent premium); and The City Pub Group (CPC – 65 per cent premium). Lowly rated food manufacturer Finsbury Food (FIF) is in a bid situation, too.
The redeployment of takeover receipts into new opportunities purchased in ‘buyer’s market’ conditions is a win-win situation for the fund, says Staveley. That’s because when the market environment eventually changes, he expects the re-rating of Rockwood’s holdings to be material as investors belatedly react to the catalysts that are now in place across the portfolio for improved profitability and value creation. This in turn should lead to a re-acceleration of the compounding of Rockwood shareholders’ wealth via NAV growth.
Interesting new investments
Bearing this in mind, Rockwood has made four new investments including fallen angel James Fisher & Sons (FSJ), a specialist engineering service to the energy, defence, renewables and marine markets. Previous management misfired on capital allocation through an over-energetic acquisition strategy with the inevitable lack of integration, loss of operational control and distressed balance sheet through a build-up of excessive debt. Operating margins halved. A set-piece Rockwood opportunity, Staveley believes.
The £131mn market capitalisation company reported pre-tax profit of £16.2mn in 2022, but margins are depressed and borrowings elevated, so portfolio rationalisation is required to accelerate debt reduction alongside improved cash generation. A new high-quality management team has been appointed and should be up to the task. If they can enhance profitability and return on capital employed (ROCE) back to historic levels, the recovery in financial performance could be material and support a re-rating in due course.
Staveley has also added Aim-traded storage business Restore (RST) to the portfolio, a recovery play my colleague Jemma Slingo highlighted over the summer (‘This small cap might be the ‘easiest turnaround story’ around’, 29 August 2023). Chief executive Charles Skinner, who built the business between 2009 and 2019, has returned “hitting the ground sprinting”, says Staveley. It’s an interesting recovery play with legs.
Awaiting a turn in small-cap investor sentiment
Interestingly, Staveley notes that the market down cycle is already quite extended and the effect of higher interest rates is starting to impact economies. He anticipates that once central banks are comfortable inflation is tamed, monetary policy should ease and a marked improvement in stock market conditions, if history is anything to go by, is highly likely.
In the first stages of a market recovery, if history does rhyme or repeat then UK small companies should lead and those with value and recovery characteristics will perform even better. Rockwood’s portfolio looks ideally placed to outperform in those market conditions.
So, although Rockwood’s share price has drifted 11 per cent since the annual results (‘This value investment fund offers eye-catching returns’, 26 June 2023), the holding has delivered a healthy 169 per cent gain in my 2016 Bargain Shares Portfolio and the shares are well worth tucking away. Buy.
■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £4.95, or £25 plus P&P of £5.75 for both books.
[ad_2]
Source link