Page 23 - DIY Investor Magazine | Issue 41

Acquisitions have also proved a tailwind for the returns of BlackRock Smaller Companies (BRSC) with recent bids for portfolio companies Numis, The City Pub Group,
Ten Entertainment and Ergomed at substantial premiums. By way of example, Deutsche Bank paid a premium of more than 70% (to the closing share price prior to the announcement) to acquire broking firm Numis.
FORGING A PATH
The UK small-cap sector boasts a broad universe spanning a wide range of sectors which, combined with a lack of research, offers a fertile hunting ground for stock pickers. Roland Arnold, manager of BRSC, aims to unearth
‘hidden gems’ by focusing on high-quality growth companies with the ability to perform irrespective of the wider economic environment.
Bloomsbury Publishing, probably best-known for the Harry Potter series, ticks this box and is a longterm holding of BRSC. The company has pursued an active policy of diversification to improve its resilience across the economic cycle, including geographic expansion with North America now accounting for around 50% of revenue.
Bloomsbury has also
‘THE CASH-GENERATIVE
broadened its offering NATURE OF MANY
across consumer and
UK SMALLCAPS IS OFTEN
OVERLOOKED AND
non-consumer markets, UNDERPINS CONSISTENT
with academic, professional INCOME STREAMS
and educational publishing TOGETHER WITH ROBUST
offering higher and more BALANCE SHEETS’
predictable profit margins. On the digital side, the company has pursued an acquisition-led strategy, seeking to leverage the strong demand for digital resources which also contribute recurring subscription revenues.
A strong track record of revenue and earnings growth has underpinned the company’s five-year total return of over 200% (as at 03/06/2024) and is testament to the company’s ability to buck the downward trend of the wider market. Income accounted for more than 35% of total returns,
illustrating the cash-generating quality of the business.
However, the cash-generative nature of many UK small- caps is often overlooked and underpins consistent income streams together with robust balance sheets to weather a downturn. The bluechip roster of UK large-caps may be a honeypot for income-seekers but the MSCI UK Small Cap Index is trading on a dividend yield of 3.6%, not far behind the 3.8% of the MSCI UK Large Cap (as at 30/04/2024).
One such example is Gamma Communications, a provider of business-to-business communication services in the UK and Europe, and a top ten holding for BRSC. Gamma is highly cash-generative, with a consistent cash conversion rate of around 100%, and a strong balance sheet with
a significant
net cash position. As a result, the company has
a progressive dividend policy and recently initiated its first share buyback.
Gamma has achieved a compound annual growth rate in
EPS of 16% over the last five financial years, demonstrating
its ability to deliver in
‘INVESTORS KEEPING FAITH challenging market
IN THE SUPERIOR GROWTH conditions. It also boasts
POTENTIAL OF UK strong recurring revenue
23 DIY Investor Magazine
SMALL-CAPS MAY BE streams (accounting
REWARDED IF THE
for c. 90% of total revenue)
LONG-AWAITED RECOVERY
and a high gross margin
COMES TO FRUITION’ thanks to an asset-light
cloud software model.
While Gamma has enjoyed a year-to-date share price
· August 2024
increase of more than 30% (as at 04/06/2024), Roland
recently noted: “Despite the shares’ revaluation to
a midteens price-earnings ratio this year, they remain significantly undervalued when compared to other
companies with similar financial characteristics.”
As we know, past performance is not a reliable indicator of future success but investors keeping faith in the superior growth potential of UK small-caps may be rewarded if the long-awaited recovery comes to fruition. In the meantime, both Bloomsbury and Gamma demonstrate the value
of active stock-picking to deliver returns through the economic cycle, with BRSC delivering a fiveyear NAV total return of 18% and a current dividend yield of 2.8%
(as at 04/06/2024). BRSC has also qualified as an
AIC ‘dividend hero’ thanks to 20 consecutive years
of dividend growth.
SEE THE LATEST RESEARCH ON BRSC HERE >
WATCH VIDEO HERE
Disclaimer: Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by BlackRock Smaller Companies. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.