Stifel reveals hits – and the one that got away

Stifel’s six turnaround tips at the start of 2024 have done well relative to peers but analysts lament the one that got away.

Stifel is largely sticking by the six recommendations it made at the start of this year but laments the one that got away: Hipgnosis Songs Fund (SONG).

A bidding battle for the music royalties fund, which owns rights to the catalogues of artists including Shakira and Neil Young, has sparked a remarkable turnaround in fortunes.

It was announced on 18 April that Nashville-based independent music company Concord would pay $1.4bn for Hipgnosis, representing a premium of about 32% to the previous day’s closing price. The shares soared 31% on the news.

In the year to date, shares in the fund have risen 42.5% and the net asset value (NAV) has increased 13.3% as the discount has closed from more than 30% in March to a 7.75% premium today.

It follows a tumultuous time for Hipgnosis, which launched a strategic review last year after a shareholder rebellion led to a board overhaul, a portfolio revaluation and a dispute with its investment adviser over a call option.

‘While we thought long and hard about including it within our top picks, there was just too much noise to include it in our list at the start of this year, especially given our base case was that a sale at an acceptable price would not occur as quickly as it has,’ Stifel said in a report compiled by research analysts Sachin Saggar, Iain Scouller and William Crighton.

Beyond Hipgnosis, the report said that Stifel’s top picks had ‘performed particularly well in aggregate at the halfway point compared with the sector peers’.

There were mixed fortunes in performance terms, however, with share prices posting everything from a gain of almost 60% to a modest loss, and NAV total returns ranging from zero to almost 12%.

One key factor holding back performance was a lack of monetary easing. At the start of the year, the analysts’ underlying assumption was the interest rates had peaked and cuts would be forthcoming.

‘While the ECB [European Central Bank] has cut rates by 25 basis points, the US and the UK have been unchanged and the higher for longer theme has been dominant. Hence, while interest rates have stopped being a headwind, they have not been a tailwind to share prices as we expected at the start of the year,’ the report said.

Their expectation may soon come to pass, however, with the Bank of England this week signalling an August cut, sending the stock market higher.

As we near the end of the second quarter, we take a look at how Stifel’s six recommendations have fared from the start of the year to 20 June.

Seraphim Space Investment Trust

Recommendation: Neutral
Discount to NAV: -43.06%
Share price total return year to date: 57.85%
NAV total return: 0.85%

Seraphim Space (SSIT), the £226m space tech investor, is Stifel’s biggest winner of the year so far in share price terms, having rocketed almost 60% amid good financial and funding progress by its portfolio companies.

While the NAV has been relatively flat, the return opportunity that Stifel identified at the start of the year was the extreme discount of 55% in January.

‘We thought [this] was more than pricing in the risks around valuations and funding requirements,’ said Crighton. The discount duly narrowed to 40% by late February.

Stifel points to underlying performance appearing healthy and portfolio companies demonstrating an ability to secure further capital when needed, with new investors often leading rounds. This has promoted confidence around valuations.

However, on the basis that the discount is now more in line with industry peers and the belief that further upside is limited, Stifel has downgraded its recommendation from positive to neutral.

‘In addition, the recent IPO of Astroscale (circa 3% of NAV) has resulted in a valuation around 20% below that of its last funding round late last year, highlighting the inherent risk around valuing these companies and hence why such discounts exist on these high potential risk/reward funds such as Seraphim,’ said Crighton.

Foresight Sustainable Forestry

Recommendation: None
Discount to NAV: -6.95%
Share price total return year to date: 55.9%
NAV total return: 3.86%

Hot on the heels of SSIT is Foresight Sustainable Forestry (FSF), the £176m investor in UK forest and woodland.

It is conspicuously absent from Stifel’s update on the basis that it is a corporate broker and adviser on an agreed takeover. When the deal with Averon Park was announced on 29 May, valuing the company at 33% above the previous day’s closing price, Stifel said it represented ‘good value for shareholders’.

The discount at which the shares trade has gone from 38% in January to just shy of 7% today.

Taylor Maritime Investments

Recommendation: Positive
Discount to NAV: -33%
Share price total return year to date: 20.89%
NAV total return: 11.76%

Shares in Taylor Maritime Investments (TMI), the £488m shipping fund, have been strong so far this year, rising by more than 20%, a little behind its direct peer Tufton Oceanic Assets (SHIP), whose shares have risen by 28.73%.

However, TMI’s discount to NAV has remained broadly unchanged. The manager has continued to sell assets at or around prior valuations to help pay down debt.

This is a pick that Stifel is sticking with in the hope of the discount narrowing. Saggar said: ‘The Baltic Handysize Index has rebounded from the lows seen in February but has flatlined since. Hence, the upside optionality in spot rates driven by tight supply has not yet been realised.

‘Overall, we remain comfortable with our pick and look out for some discount tightening over the remainder of the year.’

3i Infrastructure

Recommendation: Buy
Discount to NAV: -8.91%
Share price total return year to date: 3.61%
NAV total return: 4.78%

Shares in the £3.94bn 3i Infrastructure (3IN) have ticked up almost 4% since the start of the year, which Scouller recognises as ‘one of the best returns in the infrastructure sector’ and compares with declines of 7.47% at HICL Infrastructure (HICL) and 5.07% at International Public Partnerships (INPP).

Stifel expects portfolio disposals to reduce net debt in due course. ‘We think some sale activity is possible later in 2024, which should help sentiment to the share price,’ said Scouller. ‘Dividend growth remains robust with a forecast [rise] of 6.3% in the current year to 12.65p.

‘We reiterate our buy recommendation and suggest the shares could trade up to a low single-digit discount, implying a price of around 350p.’

SDCL Energy Efficiency Income Trust

Recommendation: Positive
Discount to NAV: -30.36%
Share price total return year to date: 1.67%
NAV total return: 3.38%

Shares in the £1.08bn SDCL Energy Efficiency Income Trust (SEIT) have been volatile this year, falling to an all-time low of 55p in February but having since risen to around 63p.

Relative to the listed infrastructure sector, Saggar reckons the share price has held up well as a number of more established peers have continued to de-rate.

Positive developments include the sale of the United Utilities solar portfolio at marginally above the prior valuation. The manager also announced a strategic relationship with General Atlantic, its largest shareholder, which now has a 24.9% equity stake in the firm.

‘While the [fund’s] share price return has not been as strong as we would have hoped, we remain positive that a re-rating will occur in due course given the high discount,’ added Saggar.

NB Private Equity Partners

Recommendation: Buy
Discount to NAV: -26.35%
Share price total return year to date: -2.32%
NAV total return: -0.09%

NB Private Equity Partners (NBPE), the £1bn private equity fund, has arguably been the least successful of the six picks. It has pretty much treaded water since the start of the year, with modest declines in both share price and NAV and little change in the discount.

‘The level of activity in the private equity sector generally and especially realisations have been disappointing so far this year, with this being one factor behind flattish NAVs reported by many of the funds so far in 2024,’ said Scouller. ‘There are some signs of a pick-up in exits later this year, and if so this should be a positive factor at the year-end valuations.’

NBPE’s price has lagged other listed private equity funds, which have seen some narrowing of their discounts. The strongest performer in the sector in price terms has been HgCapital Trust (HGT), whose shares have risen more than 13%. Its portfolio is concentrated on the software sector and sensitive to listed market trends in that area. It is now trading close to NAV, having started 2024 on a mid-teen discount.

Stifel thinks NBPE remains relatively well positioned for three main reasons. Firstly, company-specific risk is relatively low with the 10 largest investments representing 35% of NAV. Secondly, leverage is modest at 2% of NAV, with a $300m bank debt facility being available until the end of 2029. And finally, outstanding commitments are minimal at $29m or 2% of NAV.

For these reasons, it reckons the shares should trade at a relatively low discount to the peer group. Stifel’s fair valuation is 1860p, a 15% discount to the expected NAV, and it retains its ‘buy’ recommendation.

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