Rockwood Strat. Regulatory News (RKW)

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.

CLICK HERE TO READ THE FULL REPORT  Visit Kepler Trust Intelligence for more high quality independent investment trust research.

Important information

This report has been issued by Kepler Partners LLP. The analyst who has prepared this report is aware that Kepler Partners LLP has a relationship with the company covered in this report and/or a conflict of interest which may impair the objectivity of the research.

Past performance is not a reliable indicator of future results. The value of investments can fall as well as rise and you may get back less than you invested when you decide to sell your investments. It is strongly recommended that if you are a private investor independent financial advice should be taken before making any investment or financial decision.

Kepler Partners is not authorised to make recommendations to retail clients. This report has been issued by Kepler Partners LLP, is based on factual information only, is solely for information purposes only and any views contained in it must not be construed as investment or tax advice or a recommendation to buy, sell or take any action in relation to any investment.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Kepler Partners LLP to any registration requirement within such jurisdiction or country. In particular, this website is exclusively for non-US Persons. Persons who access this information are required to inform themselves and to comply with any such restrictions.

The information contained in this website is not intended to constitute, and should not be construed as, investment advice. No representation or warranty, express or implied, is given by any person as to the accuracy or completeness of the information and no responsibility or liability is accepted for the accuracy or sufficiency of any of the information, for any errors, omissions or misstatements, negligent or otherwise. Any views and opinions, whilst given in good faith, are subject to change without notice.

This is not an official confirmation of terms and is not a recommendation, offer or solicitation to buy or sell or take any action in relation to any investment mentioned herein. Any prices or quotations contained herein are indicative only.

Kepler Partners LLP (including its partners, employees and representatives) or a connected person may have positions in or options on the securities detailed in this report, and may buy, sell or offer to purchase or sell such securities from time to time, but will at all times be subject to restrictions imposed by the firm's internal rules. A copy of the firm's Conflict of Interest policy is available on request.

PLEASE SEE ALSO OUR TERMS AND CONDITIONS

Kepler Partners LLP is authorised and regulated by the Financial Conduct Authority (FRN 480590), registered in England and Wales at 70 Conduit Street, London W1S 2GF with registered number OC334771.