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Rockwood Strategic PLC
27 November 2023
Rockwood Strategic (RKW)
27/11/2023
Results analysis from Kepler Trust Intelligence
Rockwood Strategic (RKW) has released its results for the six
month period ending 30/09/2023. The trust saw NAV and share price
total returns of -5.5% and -2.5% respectively during the period,
compared to equivalent returns of -10.3% in the FTSE AIM All Share
Index and 2.9% in the FTSE Small Cap (Ex-ITs) Index.
That six month period captured a difficult period for UK small
company shares which follows an exceptional fund track record over
longer periods. In the 12 months to 30/09/2023, RKW delivered total
returns for shareholders that were close to 30%. Since the period
end and as at 22/11/2023, RKW was the top performer in the AIC's UK
Small Cap sector over 1, 3, and 5 year periods. Annualised returns
for that five year period were in excess of 20% on a share price
total return basis.
This strong track record meant that RKW traded at a premium for
much of the period, enabling the board to issue new equity to
investors, expanding the shareholder base by 5.7%. We note that
this is at a time when UK small caps and the wider investment trust
sector have been massively out of favour, with average discounts
for closed-ended funds at levels last seen during the financial
crisis.
RKW Chairman Noel Lamb said: "The first half of our financial
year has been a challenging one for UK small company stock market
investors, with sustained outflows from the asset class amidst
negative sentiment as interest rates continued to rise against a
subdued economic backdrop. For those with sensible time horizons
these are typically the conditions for positive future medium-term
returns, not least due to the heavily depressed valuations of small
company shares relative to history. Private Equity and Trade Buyers
are clearly recognising the opportunities created by this
environment with the drumbeat of takeovers within Rockwood's
portfolio continuing throughout 2023."
Kepler View
Rockwood Strategic (RKW) takes a unique approach to the UK small
cap sector, with manager Richard Staveley investing at the smallest
end of the London Stock Exchange. He looks for companies that are
undervalued and which have the potential to deliver a 15% IRR over
a three to five year time frame. This process is helped by the fact
that few other fund managers can invest in these companies, mainly
due to size and liquidity constraints, and that they typically have
little to no research coverage. RKW also takes an active approach
with the firms it invests in, meaning members of the RKW team
regularly taking up board positions with portfolio companies and
push for change where needed. In the period Nick Mills from the
investment team joined Trifast as a NED.
Three takeover bids in the RKW portfolio since the end of
September are also a validation of the trust's investment process.
These were all announced at substantial premiums to prior day
closing prices, with Smoove acquired at a 69% premium, Onthemarket
a 56% premium, and The Pub Group a 46% premium. We note that the
prospective uplift for RKW was superior to each of these, given the
entry point at which the managers invested.
RKW is also arguably well-positioned to continue its impressive
track record moving forwards. The increasing level of M&A
activity we are seeing in the portfolio and wider UK stock market
is a sign that trade buyers and private equity firms clearly see
the value these companies offer, even if other investors do not. At
the same time, we think Richard's focus on valuations, cash flows,
and strong balance sheets mean the RKW strategy can succeed,
regardless of whether we are in a period in which rates have peaked
or where they remain 'higher for longer'. Recent news that Downing
Strategic Microcap (DSM) has plans to wind up means the trust is
now one of the only closed-ended funds offering investors access to
the UK's smallest companies.
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