Q1 Portfolio Update as at 31 March 2021

Schroder British Opportunities Trust plc

 

Q1 Portfolio Update as at 31 March 2021

 

This is the first quarterly shareholder update since the initial public offering ("IPO") of Schroder British Opportunities Trust plc (the "Company", or "SBO") on 1 December 2020, and we are delighted to provide the below commentary from the Company's Portfolio Managers.

 

Commentary From The Portfolio Managers

 

Award Winning

 

At the end of March, the Company received external recognition and was awarded the 'Most Exciting Investment Company IPO' accolade at the ADVFN International Financial Awards. The panel-judged awards celebrate best of breed products and services from across the financial industry, both nationally and internationally, and are recognised across the international retail investor market. We would like to thank ADVFN for identifying the Company's potential and selecting it as the winner in this prestigious category.

 

General

 

Since IPO, the portfolio management teams have been focussed on deployment of the IPO proceeds, with c. 80% now deployed across public and private equities. As at 31 March 2021, the portfolio comprised of 30 companies and had a strong near term pipeline of additional private equity investments. The Company's NAV per ordinary share had risen by approximately 4.2% since the initial public offer to 102.16 pence (cum income) at the period end.

 

At IPO, we highlighted the significant opportunity that exists to invest in high quality, growth companies, which we believe have attractive valuations. Despite the UK being in its third lockdown, our spirits have not been dampened; rather we have continued to focus on ensuring the portfolio is a beneficiary of all aspects of economic expansion, such as technological-, industrial- and consumer growth. Whilst the portfolio is currently weighted towards public companies, we are on track to have invested approximately 25% of the IPO proceeds into private companies in the first six months since IPO. 

 

The top ten equity positions as at 31 March 2021 are set out below, some of which we will refer to within this update.

 

Top 10 Equity Holdings	Public / Private	% of Net Asset Value
Rapyd	Private	4.2
Graphcore	Private	3.8
Trainline	Public	3.4
National Express Group	Public	3.3
Learning Curve Group	Private	2.9
Ibstock	Public	2.8
Polypipe Group	Public	2.7
Ascential	Public	2.6
Breedon Group	Public	2.5
GB Group	Public	2.5

 

Source: Schroders. Top 10 equity holdings as at 31 March 2021. The Company's daily NAV calculation re-values the public asset holdings on a daily basis. The private asset valuations will be revalued quarterly post period end and are currently held at cost.

 

Portfolio Activity - Private Equity

 

Since IPO we have made three private equity investments for the Company, including the Company's two largest equity positions as at 31 March 2021. Within these portfolio companies, we are pleased to highlight several developments which reflect the pace at which progress is being made.

 

As a reminder, we previously invested in Learning Curve Group, a leading private UK training and education specialist, in December 2020. On 1 March 2021, Learning Curve Group announced that it had completed the acquisition of Antrec Limited, further solidifying its position as one of the UK's largest training providers, supporting over 160,000 learners each year. Antrec delivers a range of funded and commercial adult learning courses in areas such as construction and health and social care as well as being the leading provider of high quality Taxi Driver Preparation courses in Liverpool City Region.  The acquisition forms part of Learning Curve Group's ambitious strategic growth plans in the UK.

 

We also previously invested in Graphcore, a leading machine intelligence semiconductor business, in December 2020 as part of its US$222m Series E funding round. Since our investment, the company has also begun shipping its new IPU-POD16 DA (Direct Approach), a powerful, compact, affordable system for innovators to explore new machine intelligence approaches enabled by Graphcore pioneering Intelligence Processing Unit (IPU) technology.

 

In January 2021 we announced our investment in Rapyd, a leading global Fintech-as-a-Service company with significant UK operations, as part of its US$300m Series D financing round. Since then, Rapyd recently announced a partnership with JL Stream (Jaldi Live), the new "Made in India" social live streaming app, to provide a complete payment solution to JL Stream users globally. With Rapyd's Collect and Disburse solutions, along with the Rapyd Global Payments Network, JL Stream offers its users a localised payment experience on the app, enables streamers to get paid, and reduces JL Stream's costs compared to building its own global payment infrastructure.

 

We continue to be excited about the future potential of these private equity investments, which are already showing progress.

 

Looking forward to potential new investments, we believe our private equity investment pipeline is strong, with good progress being made on additional near term private equity investments, and we look forward to updating investors with news of further investments in due course.

 

Portfolio Activity - Public Equity

 

Comforted by improving consumer confidence data and the pace of deployment of coronavirus vaccines, we sought to increase our exposure to stocks that would be a beneficiary of the easing of lockdown restrictions both domestically and internationally. This saw our weight in the consumer discretionary sector increase during the quarter, taking SBO's exposure to public companies to approximately 50% of NAV as at 31 March 2021.

 

In March 2021, we invested in SSP Group, a leading global operator of food and beverage outlets in travel locations, principally airports and railway stations. At the time we believed that a combination of new equity and refinancing of existing debt would be required to repay near term maturing facilities, reduce its leverage and provide it with extra liquidity to survive a protracted lockdown scenario. The company has since announced a rights issue and associated refinancing of debt facilities. Whilst the stock has done well since the announcements of various vaccine discoveries in November 2020, we believe there are various long term structural growth drivers underpinning the investment case.

 

Similarly we also introduced City Pub Group into the portfolio as a potential beneficiary of the reopening theme. City Pub Group owns 48 unbranded premium pubs located largely in London, Cathedral cities and market towns (with a further 4 sites in development),  and is expected to see increased sales from the release of pent-up demand when restaurants and pubs are expected to recommence trading in April 2021. In our view the  company has an attractive balance sheet with more than sufficient liquidity and a low loan-to-value, which should put it in good stead to take advantage of attractively priced sites from competitors that have exited the market. Given the quality of its sites, combined with appetite from domestic and international institutions for attractive freehold real estate in the UK, we think there is a possibility that the company or its assets could be bid for.

 

These two new positions complement other holdings such as Dalata Hotel Group and Gym Group, which are also expected to be beneficiaries of an improved consumer outlook. Despite their early tenure in the portfolio, the new positions have done well since purchase.

 

Shortly after IPO, we took out a futures position, which we will continue to gradually reduce as we invest further in the pipeline of private equity opportunities.

 

Equity Raises - Public Equity

 

In keeping with the theme of the Company to invest in companies in need of primary equity (either now or in the future), we recently participated in the IPO of Tinybuild, a global video games publisher and developer, which generates a portion of its revenues in the UK. The company is vertically integrating itself by incorporating video game development within its strategy, which means increasing its ownership of intellectual property; as such we expect it to generate higher margins in the future from better economics. Furthermore we believe that its successful track record of producing strong video game franchises, combined with its social media engagement, should enable it to continue to generate revenues as its titles mature. The company raised £36.2m in primary IPO proceeds, which will be used to fuel its strategy and fund future acquisitions. The shares did well upon launch, rising c.29% on its first day of trading and ending the quarter up c.35%.

 

We also participated in the IPO of Trustpilot, the global online review company with an estimated 7.1% market share in the UK, which raised c.£47m in order to support its growth plans and reduce leverage. Whilst its share price was volatile on the first day of trading and its performance was disappointing, the shares recovered to finish flat at the end of the quarter.  Despite this, we believe there is a medium term opportunity for the company to achieve margins similar to comparative 'Software As A Service' companies.

 

Lastly, and as we had been expecting, SSP Group announced a c.£475m 12 for 25 rights issue on 17 March 2021 in order to strengthen its balance sheet - a transaction that we intend to participate in.

 

Positive And Negative Performers - Public Equity

 

Our position in Volution Group has been one of our strongest positive contributors to performance, partly driven by strong H1 2021 results, with profit before tax 5% greater than some estimates. The better than expected result was due to adjusted operating margins increasing from 18.3% in H1 2020 to 21.1%, which exceeded management's previous guidance that 20% would be achieved by the end of the fiscal year. We continue to believe that the strong regulatory tailwinds and conducive government policies will provide structural support to the investment case.

 

Our holding in Bodycote, the world's leading provider of heat treatment and specialist thermal processing services, also did well, in part due to a set of in-line Fiscal Year ("FY") 2020 financial results. Despite pandemic-driven challenges in its end markets, in particular within civil aerospace, the company's management was able to implement an extensive cost reduction programme. We regard any end market softness to be cyclical in nature and continue to be attracted to what is overall a high quality business with high-teens through-the-cycle operating margins, low-teens return on invested capital and a strong balance sheet.

 

Elsewhere, our position in Blue Prism held performance back recently, driven by news of further competition in its end markets. Towards the end of the period we reduced our position to reflect the increased risk in the investment case, and will continue to monitor the competitive landscape closely.

 

Portfolio Disposal - Public Equity

 

We exited our position in IQE after the company guided to flat growth in H1 2021, which saw the shares fall 15% in response. In our opinion lack of growth within the semiconductor space despite strong secular growth trends (5G and 3D sensing) is unusual; as such we redeployed the sale proceeds elsewhere in the portfolio where we had higher conviction.  The disposal meant we gave back the initial gains we had made since the stock's purchase in December 2020.

 

ESG - Public Equity

 

We care passionately about sustainability and expect to engage with our companies on all matters relating to ESG; additionally we will dispose of investments if over time we feel they are not making sufficient progress. Our engagement typically takes place during official meetings or by letter to the appropriate company representative, which is often the CEO.  We aim to be specific on relevant topics, which has thus far included tackling issues around diversity, corporate governance and climate change to name a few.

 

A number of our portfolio companies released ESG-specific news during the period. For example, following our strong engagement with Keywords Studios at the end of December 2020, the company has since made ESG improvements, some of which are in line with our suggestions. In January 2021, the company announced the appointment of a female Chief Operating Officer who will also serve on its board, thus improving the board's overall gender balance. Furthermore, in March 2021, its FY 2020 annual results were released, with the ESG highlights being: i) the establishment of a Global Diversity & Inclusivity Council; ii) the quantification of scope 1 and scope 2 greenhouse gas emissions for the first time; and iii) the establishment of a US$500,000 hardship fund to support colleagues as a result of the COVID-19 pandemic. We look forward to the release of the FY 2020 annual report in order to study more closely what developments have been made on other matters that were discussed.

 

Any references to investee companies in this announcement are for illustrative purposes only and are not a recommendation to buy and/or sell, or an opinion as to the value of that company's shares. This announcement is not intended to provide, and should not be relied on, for investment advice or research.

 

United Nations' Sustainable Development Goals

 

Our investment strategy focuses on companies which we consider to be sustainable from an environmental, social and governance perspective, and that support at least one of the goals and/or sub-goals of the United Nations' Sustainable Development Goals ("SDGs").

 

The United Nations launched its SDGs in 2015, defining the biggest challenges facing global societies. They comprise 17 discrete goals, each targeting distinct threats and underpinned by a comprehensive range of metrics and have a further 169 sub goals.

 

The below table serves to illustrate which SDGs are aligned to some of the Company's current holdings. Our aim is to encourage our investee companies to incorporate SDGs within their own reporting if they have not already done so.

 

Company	Select SDGs
Rapyd	SDG 8 - Decent Work And Economic Growth SDG 10 - Reduced Inequalities
Learning Curve	SDG 4 - Quality Education SDG 8 - Decent Work And Economic Growth
Keywords Studios	SDG 5 - Gender Equality SDG 8 - Decent Work And Economic Growth
Volution	SDG 11 - Sustainable Cities And Communities SDG 13 - Climate Action

 

Further information on the SDGs can be found at https://sdgs.un.org/goals .

 

Outlook

 

March 2021 saw the announcement of the UK Budget, which we believe will put small and mid-sized companies in good stead to navigate the upcoming year. The Chancellor's intention is to ensure the economy recovers strongly and whilst corporate tax rates are set to rise in April 2023, British businesses will continue to benefit from low rates, as well as generous business investment tax relief. 

 

We believe portfolios with high levels of exposure to industrials and construction are well positioned given the help provided to the housing market through the stamp duty holiday extension and the new mortgage guarantee scheme, both of which should help stimulate housing market activity. The Company has invested in a number of companies that we believe are well positioned to benefit from these government initiatives as the construction and 'Repair, Maintenance and Improvement' market are expected to strengthen through the recovery. 

 

Business investment is a key theme of the Budget with tax relief benefits of £25bn over the next two years designed to 'spur investment'.  We are particularly excited about the benefits of this relief to UK software companies and small and medium sized enterprises, which are another key investment theme for the Company.

 

Looking beyond the UK, we believe many equity markets around the world are reaching new highs, as the scale of the economic recovery is capturing the imagination of global investors.  Loose monetary policy and massive fiscal expansion continues across the major economies which is fuelling the re-rating of global equities.  Our view is that there continues to be considerable scope for earnings upgrades over the coming two years and the UK will be a key beneficiary.  The Company contains a number of domestically exposed businesses which we believe should perform well as the consumer recovery gets underway, whilst our exporters are seeing strong business momentum as the global economy thrives.

 

 

Enquiries:

 

Schroder Investment Management Limited   Benjamin Hanley	020 7658 3847
Peel Hunt   Liz Yong, Luke Simpson, Tom Pocock (Investment Banking)   Alex Howe, Chris Bunstead, Ed Welsby, Richard Harris (Sales)	020 7418 8900

Important information:

Key risks applicable to the Company can be found in the Company's prospectus dated 10 November 2020, which is available, subject to certain access restrictions, on the Schroder website www.schroders.com/sbo.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Past Performance is not a guide to future performance and may not be repeated. 

 

This information is a marketing communication. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions.

The Company's Portfolio Managers, Schroder Investment Management Limited and Schroder Adveq Management AG, have expressed their own views and opinions in this announcement and these may change.

This announcement may contain "forward-looking" information, such as forecasts or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or projection will be realised.

Issued in April 2021 by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registration No 4191730 England. Authorised and regulated by the Financial Conduct Authority

 

About Schroder British Opportunities Trust plc

 

Schroder British Opportunities Trust plc has been established to invest in a diversified portfolio of both public equity investments and private equity investments consisting predominantly of UK Companies with strong long-term growth prospects.

 

ESG company engagement is a key feature of the Company's investment strategy. The Company's focus is on companies with business models which are considered to be sustainable in terms of both the longevity and durability of their businesses and their environmental, social and governance (ESG) behaviours.

 

The Company's ordinary shares are listed on the premium listing segment of the Official List of the Financial Conduct Authority and were admitted to trading on the main market for listed securities of the London Stock Exchange in December 2020 under the ticker "SBO".

 

Further information on the Company is available at www.schroders.com/sbo