RCS - Rockwood Strategic - Results analysis from Kepler Trust Intelligence

Rockwood StrategicAnnouncement

19/11/2024 14:45

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RNS Number : 8417M  Rockwood Strategic PLC  19 November 2024

Rockwood Strategic (RKW)

19/11/2024

Results analysis from Kepler Trust Intelligence

Once again, Rockwood Strategic (RKW) has delivered an index-beating
performance in the half-year period ending 30/09/2024, with a NAV and share
price total return of 22.9% and 21.7% respectively, compared to a decline in
the FTSE AIM All-Share Index of -0.4% and an increase in the FTSE Small Cap
(ex-ITs) Index of 13.2%.

The last three years have been challenging for UK small-caps, with poor
investor sentiment and a difficult macroeconomic environment weighing on
valuations. Against a decline of 40.5% and 5.8% respectively in the FTSE AIM
All-Share and FTSE Small Cap (ex-ITs) indices, Rockwood has achieved a
commendable NAV and shareholder total return of 48.5% and 68.0% respectively
in the three-year period ending 30/09/2024.

Strong contributors to outperformance included business loan platform Funding
Circle, communications specialist Filtronic and education market services
provider RM Group.

Chair Noel Lamb commented: "The portfolio continues to well exceed our target
15% Internal Rate of Return (IRR) over three to five years. However, the
primary driver for profit growth in our usual investment time horizon is
self-help and better operational execution, leading to substantially improved
profit margins and free cash flow generation."

Kepler View

Rockwood Strategic (RKW) takes a differentiated approach to the UK small-cap
sector by investing at the sub-£250m end of the market cap spectrum, which is
relatively untapped by other small-cap funds due to size and liquidity
constraints. Manager Richard Staveley holds a high conviction portfolio of
around 20 companies, looking for undervalued and overlooked companies with the
potential to deliver a 15% IRR over three to five years.

Funding Circle, an SME-focused lending platform, has been a stand-out
performer for the trust, with Rockwood buying an initial stake in January at
34 pence per share when the market cap of the company was below its
unrestricted net cash position. Rockwood's engagement with the management team
led to the instigation of a share buyback programme, sale of its loss-making
US business and a UK cost-saving program with the company's share price rising
to just under 140 pence by the period end.

Another success story for Rockwood is Filtronic, a provider of specialist
communications equipment, with the trust first purchasing a stake in May 2023.
The company announced a multi-year strategic partnership with SpaceX earlier
this year accompanied by significant upgrades to earnings forecasts. As a
result, Filtronic's share price has increased more than five-fold from 12
pence at the time of investment to 68 pence (as at 30/09/2024).

Both of these examples are testament to Richard's stock-picking expertise and
the potential alpha generation from his active engagement with the company
which is akin to a private equity approach. Rockwood's focus on 'self-help'
change programmes to drive earnings growth, rather than relying on macro
factors, has provided the foundation for the trust's impressive returns over
the last five years despite the challenging backdrop for UK small-caps.

Looking ahead, the outlook for UK equities looks more promising given the
improving macroeconomic backdrop and clear signs of a revival in investor
appetite. While stock-specific factors will continue to be the primary driver
of returns, Rockwood's high-conviction portfolio is well-placed to capitalise
on a broader sector recovery but should, as the last few years have shown, be
able to continue to produce attractive returns even if the current conditions
persist.

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