Gresham House Strategic Plc

Double discount offers real value

05 Feb 2018 / Corporate research

GHS is an investment company that applies private equity (PE) techniques, together with a “value” philosophy. At its half-year-end in September, it had a focused portfolio with 12 investments representing 75% of NAV; since then, it has spent or committed further capital, bringing its available cash balance to £3m. It aims to distribute half of realised gains through either dividends or share buybacks. To this end, it paid a 15p maiden dividend in FY17 and bought back 1% of its shares. It is currently trading on a 26% discount to NAV; management aims to close this gap over time.

  • Strategy: The managers aim for a considerably higher level of engagement with investee company stakeholders – management, shareholders, customers, suppliers and competitors – to identify market-pricing inefficiencies and support a clear equity value-creation plan, targeting above-market returns over a longer-term investment horizon. This is part of the private equity technique.
  • Undervalued: GHS is focussing on undervalued smaller companies – typically less than £250m – where it believes there are value-creation opportunities through change, whether that is strategy, operations or management. It expects to own stakes for between three and five years.
  • NAV growth to date: Since the first NAV release in August 2015, the NAV has risen 13%, despite carrying a weight of cash as the investment policy was applied. Over the same period, the FTSE SmallCap Index rose 21%, with growth stocks continuing to outperform value.
  • Risks: In addition to the straight look-through risks to the concentrated underlying holdings, shareholders face the risk that the discount to NAV does not narrow or may even widen further. While the share price is naturally anchored to the NAV, wide variations can persist for long periods of time.
  • Investment summary: In Tony Dalwood and Graham Bird, GHS has some very experienced and successful managers. Their strategy to pursue close engagement in undervalued smaller companies is sound, although currently unfashionable. Fashions change and investors buying today have the advantage of being able to buy £1 of undervalued assets for just 74p.