HgCapital Trust said its net asset value rose 6 percent during the six months to 30 June, from £348 million to £369 million. This was more than double the FTSE All Share's 3 percent rise over the same period – although it was a much smaller rise than in the previous six month period, to 31 December, when NAV jumped by 16 percent.
The trust also substantially narrowed its discount to NAV, which now stands at just 2.3 percent – well below some of its listed peers – after its market capitalisation improved from £312.9 million to £362.5 million.
For its top 20 investments, which account for about 90 percent of HgCapital's overall portfolio, performance was strong: sales and earnings before interest, tax, depreciation and amortisation rose 17 percent and 12 percent respectively. Some companies experienced contracting margins, however, including healthcare companies Casa Reha and Voyage.
Ian Armitage, chairman of general partner HgCapital, described the results as “solid” in an interview with Private Equity International.
“We don't have very high gearing at the portfolio company level in most cases, and where we do, the businesses are highly cash-generative,” he said. “Our portfolio companies are well placed for consolidation plays in their markets – we and they have the financial firepower to take advantage of rivals' weaknesses.”
HgCapital Trust has £94 million of cash on its balance sheet, equivalent to 26 percent of its NAV. Armitage said it made sense to be “long on cash when the market is short”, adding that the trust had boosted its available firepower by negotiating a £40 million three year standby unsecured loan facility with Lloyds TSB.
The trust made two investments in the first half, deploying £29 million. It also acquired a stake in HgCapital's sixth fund from Alliance Trust for £15 million in a secondary deal. Armitage said the trust would look to acquire further stakes in Hg6 on the secondary market if opportunities presented themselves.
The disposals of German lighting company SLV and Dutch semiconductor group SiTel generated cash proceeds of £40 million. It also agreed the sale of talc producer Mondo Minerals to Advent International, which has yet to complete.
The Trust has written down two investments over the last six months – commercial laundry business JLA and residential care provider Voyage Group. Armitage said the writedowns had been a prudent measure as valuations for any company with UK government contracts, particularly in the healthcare sector, have fallen. “Both are doing very well though, with profits flat or rising,” he said.
Some businesses written down to zero during the recession by HgCapital have enjoyed a resurgence and are now generating a proft, but are still being held at a zero valuation, Armitage said, citing Swiss fastener-manufacturer KVT as an example.
Numis Securities, which was appointed by HgCapital Trust as its corporate broker earlier this year, took a positive view of the results. “[As] 35 percent of the portfolio is valued at cost … we believe there is potential for significant uplifts for first time valuation at the year end. HgCapital remains our core recommendation in the listed PE sector,” it said, in a research note.
However, Oriel Securities analyst Iain Scouller downgraded his 'buy' recommendation to 'reduce', writing: “Almost two-thirds of the portfolio is either cash or invested in recent vintages, with the 2009, 2010 and 2011 vintage years representing about 40 percent of NAV. This may take some time to mature. Given the NAV was below our expectations and the value of the unquoted investments is likely to have been negatively impacted by falls in comparable quoted company multiples since the end of June, we are downgrading the recommendation to reduce.”