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The European Smaller Companies Trust PLC: Full-Year Results 2024

HSL

The Henderson Smaller Companies Investment Trust plc

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Companies we’ve met recently: Keller

Company meetings are particularly essential as part of The Henderson Smaller Companies Investment Trust process. Here, we discuss how we met again with Keller, after first investing in February...

Smaller companies are notoriously less researched than their larger counterparts. However, in part because of their smaller size, our team has great access to these companies and their management teams. In seeking to exploit this advantage, a core part of our investment process is meeting the companies we invest in.

These meetings then inform our four ‘M’s method for assessing companies. This method looks at a company’s model, money, management and momentum.

Here, we discuss one such meeting recently. We met with senior leaders from a company whose stock we already owned to get an update on how the business is operating.

Case study: Keller

In March we met with the CEO and financial director of Keller. The company is a ground engineering business and has an 8% share of the global market.
Its scale is a reminder of the global nature of some UK smaller companies. It has subdivisions in 37 countries across five continents. This means it can effectively operate in an estimated 200-250 local markets.

We initiated a position in the company in February after meeting with leadership in August 2023. As always, at our most recent March meeting we assessed its progress according to our four M’s methodology.

The company’s model is a standout. Beyond its global reach, the company operates in a technical niche. We believe that general contractors are very unlikely to rotate into the specialised groundwork performed by Keller. This is because this work requires specific skills and equipment – some of the latter is unique to Keller.

Keller has a diversified stream of contracts, particularly in terms of size. This means the business is not dependent on specific areas of the market for revenue. The company has also improved the way it manages contracts and bidding, to improve profitability.

The jewel in Keller’s crown is its US business. It has significant market share, in part because of Keller acquiring other suppliers. In recent years, the company has focused on improving margins in the US, and this has paid off, with margins at around 9.6% in 2023, up from 4.3% in 2022. The region accounts for c. 80% of the business’ profits.

Keller has a relatively new management team. Its CEO joined in 2018 and was promoted to the top job at the end of 2019. Its CFO joined at the end of 2020. Together, they have refined the business’ operations, making it significantly more efficient.

For example, Keller left a number of territories where contracts and margins were less attractive. This has led to a dramatic improvement in financial returns.

On the money side, we note that Keller has improved profitability in recent years. It has significantly reduced its net debt and has cash on its balance sheet. These are markers of a financially healthy company.

Finally, Keller has been experiencing some significant earnings momentum in the last year. This reflects a 25% upgrade to earnings forecasts for 2024 since mid-2023. In our methodology, momentum describes the degree to which we believe there are market factors supporting a share price rise.

Keller has already seen its share price rise over 40% since we first invested, which has benefited The Henderson Smaller Companies Investment Trust. Keller currently represents around 0.8% of the trust’s portfolio.

Glossary

Balance sheet – A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Share price – EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.

 

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Important information

Please read the following important information regarding funds related to this article.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions.
    Specific risks
  • If a Company's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio that is diversified across more countries.
  • Where the Company invests in assets that are denominated in currencies other than the base currency, the currency exchange rate movements may cause the value of investments to fall as well as rise.
  • Most of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell, and their share prices may fluctuate more than those of larger companies.
  • This Company is suitable to be used as one component of several within a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested in this Company.
  • Active management techniques that have worked well in normal market conditions could prove ineffective or negative for performance at other times.
  • The Company could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Company.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The return on your investment is directly related to the prevailing market price of the Company's shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the Company. As a result, losses (or gains) may be higher or lower than those of the Company's assets.
  • The Company may use gearing (borrowing to invest) as part of its investment strategy. If the Company utilises its ability to gear, the profits and losses incurred by the Company can be greater than those of a Company that does not use gearing.
  • Using derivatives exposes the Company to risks different from - and potentially greater than - the risks associated with investing directly in securities. It may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • If the Company seeks to minimise risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or negative for performance.