THE MONTHLY May 2021 - Hardman & Co

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THE MONTHLY May 2021 - Hardman & Co
THE MONTHLY
      May 2021
THE MONTHLY May 2021 - Hardman & Co
FMarch 201

             Table of contents
             Feature article:
             A tale of three telcos ............................................................................................................3
                 Decline and fall........................................................................................................................ 3
             Background ............................................................................................................................4
                 Cable and Wireless – a tale of woe ................................................................................... 4
                 British Telecom – privatisation’s poster-boy struggles ................................................ 5
                 Vodafone – the glamour fades ........................................................................................... 7
                 Other UK telcos – the “disappeared” ................................................................................ 9
                 EU telcos ................................................................................................................................... 9
                 Conclusion ............................................................................................................................. 10
                 About the author ................................................................................................................. 11
             Company research ............................................................................................................. 12
                 Arbuthnot Banking Group ................................................................................................. 13
                 BBGI Global Infrastructure ............................................................................................... 14
                 City of London Investment Group .................................................................................. 15
                 Filta Group ............................................................................................................................ 16
                 Oakley Capital Investments Ltd ....................................................................................... 17
                 Palace Capital ....................................................................................................................... 18
                 Pantheon International....................................................................................................... 19
                 Real Estate Credit Investments ....................................................................................... 20
                 Sportech Plc .......................................................................................................................... 21
                 Surface Transforms ............................................................................................................. 22
                 Volta Finance ........................................................................................................................ 23
                 Yew Grove............................................................................................................................. 24
             Disclaimer ............................................................................................................................ 25
                 Status of Hardman & Co’s research under MiFID II .................................................. 25

May 2021                                                                                                                                                     2
A Tale of Three Telcos

                         A tale of three telcos
                         Decline and fall
                         Executive summary
                         ►   For investors, the UK telecoms sector has presented immense challenges.
                             Having boomed in the 1990s, mainly on the back of mobile telephony growth
                             rates, telecom shares subsequently fell back sharply, as major debt concerns
                             predominated. With Cable & Wireless (C & W) having exited, the UK sector now
                             consists of little more than British Telecom (BT), privatised in 1984, and
                             Vodafone, which was founded in the early 1980s.
                         ►   In 2000, the sector was riding high, with not just BT and Vodafone at its
                             forefront, but also C & W – the child of empire – which was effectively dissolved
                             almost a decade later. Record valuations at the turn of the century were
                             achieved not least by Vodafone, which had been powered by phenomenal
                             growth throughout the 1990s.
                         ►   The end of the C & W era, which had lasted for ca.150 years, was driven by the
                             controversial decision in 2000 to sell its 54% stake in Hong Kong Telecom
                             (HKT), which had accounted for around a third of its operating profits (after
                             stripping out minorities), in 1998. Thereafter, on the back of some dreadful
                             acquisitions, C & W went downhill quite quickly.
                         ►   BT, the poster-boy of privatisation, continues to struggle. Its share price is
                             currently just 19% above its 130p fully paid launch price in 1984, while its
                             underlying EBITDA, once adjustments are made for the £12.5bn EE mobile
                             telephony deal in 2016, has remained seemingly becalmed, at ca.£6bn p.a.
                             Moreover, there was an emergency £5.9bn rights issue in 2001, while the
                             current net debt figure of £18bn raises fears that another such issue may be on
                             the cards.
                         ►   Vodafone was founded in the early 1980s. By 2000, it had become the fourth
                             most valuable company in global history, fuelled by its growth throughout the
                             1990s – the decade of the massive £112bn Mannesmann acquisition. In recent
                             years, Vodafone’s strategy has been to rein in some of its overseas businesses,
                             to focus more on cable deals, to grow its EBITDA and to cut its net debt,
                             currently £38.4bn.
                         ►   In recent decades, other UK telcos have come to the stock market – and then
                             have gone; they include Atlantic Telecom, COLT, Energis, Ionica, Kingston
                             Communications (now KCOM), Telewest and Thus. Most of these stocks were
                             one-time FTSE-100 members. Currently, there are no obvious pure telecoms
                             companies set to take their places in the FTSE-100.
                         ►   Within the EU, many telecoms companies are also suffering, with only Deutsche
                             Telekom, capitalised at €76bn, being an exception, despite a flat share price
                             since 2002. Orange now dominates France Telecom and its growth prospects,
                             while the formerly highly rated Telefónica has been adversely affected by
                             declining earnings. Telecom Italia has suffered many reverses, both
                             commercially and at the corporate level, including dissenting shareholders.
                         ►   The new telecoms environment is adjusting to the dominance of Apple’s
                             iPhones, with its many apps, and other similar devices. In the telecoms sector,
                             investors need to move smartly. An investment in Nokia in mid-1996 and a well-
                             timed switch into Apple in December 2007, for example, would have yielded
                             returns of ca.300x over a 25-year period. The gain on Nokia shares in the 11
                             years would have been almost 16x and, over the past 14 years, during which
                             time Nokia’s shares have fallen by 87%, Apple’s shares have risen by 19x.

                                                                                                            3
A Tale of Three Telcos

                                      Background
Privatisation took off in 1980s       The privatisation policy of the 1980s began shortly after the election of the
                                      Conservative Government in 1979. One of the earlier disposals was the sale of the
                                      government’s residual stake in C & W.

Sale of BT in 1984 was pivotal        However, it was the far more high-profile majority stake sale of BT in 1984 that
                                      really attracted attention, since it was slanted specifically towards private investors.
                                      As such, it was the first major sale of the privatisation era – which stretched broadly
                                      from the early 1980s to the mid-1990s.

                                      Undoubtedly, this initiative attracted serious competition – but in an unexpected
                                      way. While Mercury Communications, a C & W subsidiary, had been lined up to take
                                      on BT, the real threat only became evident some years later. While BT had its own
                                      mobile telephony business – Cellnet, later to become O2 – the advance of Vodafone
                                      in its successful quest to become the world’s number one mobile phone company
                                      cost BT dear.

Three differing fates                 In the intervening decades, BT has faced a raft of challenges, many of which – even
                                      today – remain unresolved, while Vodafone’s pedestal, like its share price, has
                                      undoubtably slipped in recent years. Plus, C & W has been dismantled at a fraction
                                      of its former value.

                                      Cable and Wireless – a tale of woe
                                      C & W was established via various companies involved in laying the transatlantic
                                      cable in the 1860s, using the famous Great Eastern steam ship, designed by the
                                      legendary engineer, I.K. Brunel. Subsequently, C & W established itself throughout
                                      much of the fifth of the world’s land mass that comprised the British Empire,
                                      including Hong Kong, whose core telecoms business sustained the group until its
The child of empire                   sale in 2000.

                                      Having sold off its residual C & W stake in the early 1980s, C & W’s Mercury
Mercury lined up to compete with BT
                                      business was restructured, with the aim of it becoming a credible competitive force
                                      to BT – a role that was eventually assumed by Vodafone and other mobile players.

                                      Prior to the HKT sale to PCCW, C & W’s operating profits summary for 1997/98,
Hong Kong Telecom drove C & W’s       which is reproduced below, highlighted its financial dependence on HKT, although
numbers                               the 46% minorities stake (not deducted below) materially reduces this exposure.

Cable and Wireless – operating profit, 1997/98
Year-end March                                                                    £m                           % of op. profit
Hong Kong                                                                      1,052                                     64%
Other Asia                                                                        14                                      1%
United Kingdom                                                                   238                                     14%
Other Europe                                                                     -15                                     -1%
Caribbean                                                                        278                                     17%
North America                                                                     48                                      3%
Rest of the world                                                                 36                                      2%
Total                                                                          1,651                                    100%
                                                                                                 Source: Hardman & Co Research

                                                                                                                             4
A Tale of Three Telcos

Vindicated by subsequent political         While the sale of HKT may have looked like the beginning of the end for C & W, the
events?
                                           reality was that the political environment in Hong Kong, following the UK’s exit
                                           agreement with mainland China, meant that any long-term investment – as
                                           subsequent events have proved – was laden with risk.

Dire acquisitions record destroyed value   The real problem for C & W thereafter was its dreadful acquisitions record of buying
                                           mainly US-based technology businesses; a considerable part of the HKT proceeds
                                           was invested in these failing businesses, which included Digital Island and Exodus.

C & W’s messy fate                         It became clear, subsequently, that C & W’s days as a thriving global telecoms
                                           business, valued at ca.£38bn in 2000 and just ca.£4bn nine years later, were drawing
                                           to a close. Eventually, the company was split up, with C & W Worldwide being
                                           acquired by Vodafone for ca.£1bn in 2012, while the Caribbean-based C & W
                                           Communications was eventually bought for ca.$7.4bn by Liberty Capital in 2016. A
                                           sad end to a company with a long, proud and distinguished history.

                                           British Telecom – privatisation’s poster-
                                           boy struggles
                                           Like Deutsche Telekom, France Telecom, Telefónica and Telecom Italia, BT was
                                           privatised – the first in the queue in 1984 – as the effective monopoly owner of the
BT had to face the Vodafone upstart        national telecoms network. The one salient difference was that BT had to face
                                           competition in its expanding mobile market from sector upstart, Vodafone. By
                                           contrast, the four leading EU telecoms companies had all established their own very
                                           strong mobile brands before any competitor was able to mount a serious challenge.

BT’s gold-plated inheritance…              As such, for much of its 37 years as a quoted telecoms company, BT has faced
                                           challenge after challenge – and, often, has not responded well. After all, it inherited
                                           most of the UK telecoms network at privatisation in 1984 – its absence from Hull
                                           and the presence of privately owned networks being notable exceptions.

…but a raft of challenges                  The most serious of the challenges faced by BT have included:

                                           ►   Mobile telephony: The seemingly inexorable rise of Vodafone – effectively
                                               from a standing start in the early 1980s – in the rapidly expanding mobile
                                               telecoms market inflicted real damage on BT’s growth prospects, something
                                               that Deutsche Telekom, for example, did not face in Germany.

                                           ►   The emergence of Apple’s iPhones: The massive demand for these and related
                                               products has dramatically changed the nature of the communications market
                                               and seriously impaired BT’s growth prospects.

                                           ►   Lack of EBITDA growth: For around a generation, BT’s adjusted EBITDA has
                                               been seemingly becalmed at ca.£6bn p.a., once allowance is made for the
                                               additional debt taken on to finance the EE deal.

                                           ►   Cashflow deficits: BT has faced various cashflow issues, not least in 2001, when
                                               it had to launch a record-breaking £5.9bn rights issue; even today, with net debt
                                               of £18bn – more than its current market capitalisation – and a formidable
                                               broadband investment programme to finance, this issue has resurfaced.

                                           ►   Regulation by Ofcom: Having been allocated an RPI-3 pricing formula (for most
                                               of its core services) at flotation, regulatory involvement in BT’s affairs has become
                                               more invasive; the current – as yet, not fully agreed – rate of return debate for its
                                               planned nationwide fibre-optic broadband ramp-up is a case in point.

                                                                                                                                  5
A Tale of Three Telcos

                                        ►    Pension deficits: The perennial theme of BT’s burgeoning pension deficit deters
                                             potential shareholders. Despite periodic cash injections from BT, the pension
                                             deficit issue seldom seems to go away.

                                        ►    A bloated cost base: At flotation, BT had a high cost base; despite various cost-
                                             cutting initiatives, this issue persists and regularly offsets any revenue growth
                                             benefits.

                                        ►    Global division shortcomings: BT has sought to expand overseas, with few
                                             obvious benefits and many shortcomings; its global division has undertaken
                                             various writedowns, including the £530m losses sustained by BT Italia in 2017.

                                        ►    Demand for broadband investment: Politicians – perhaps unsurprisingly – are
                                             virtually unanimous that a speedy rollout nationwide of fibre-optic cable to
                                             modernise the UK’s broadband network is urgently required. BT has invested
                                             heavily in this area but, to complete, it will require very substantial financial
                                             resources in coming years.

                                        ►    Poor acquisitions: BT’s acquisition record is a poor one, so much so that
                                             investors generally expect BT to focus almost exclusively on the UK – deals,
                                             such as buying Germany’s Viag Interkom, for example, benefited neither BT’s
                                             finances nor its shareholders.

Lamentable return                       Even before adjusting for the £5.9bn emergency rights in 2001, BT’s share price
                                        today, at 155p, is little above the 130p fully paid issue price in 1984 – a
                                        lamentable return for long-term equity investors.

                                        While BT has paid decent dividends until quite recently, the overall verdict is
                                        that investing in BT will not have been very profitable, unless such investment
                                        was made during the boom period between 1997 and 1999, when its shares
                                        soared. There were also mini share price rallies for BT in 2007 and 2015.

Dreadful share price performance over   Since their peak in 2000, BT shares have lost ca.85% of their value, as the share
past five years                         price graph below shows.

                                        BT – share price performance, March 1985 to April 2021
                                        Daily [.FTSE List 23 of 102] BT.L                                            07/03/1985 - 23/04/2021 (LON)
                                            Line, BT.L, Trade Price(Last), 23/04/2021, 154.1500, -0.2500, (-0.16%)                     Price
                                                                                                                                       GBp
                                                                                                                                       1,000

                                                                                                                                       900

                                                                                                                                       800

                                                                                                                                       700

                                                                                                                                       600

                                                                                                                                       500

                                                                                                                                       400

                                                                                                                                       300

                                                                                                                                        200
                                                                                                                                       154.1500
                                                                                                                                        100
                                                                                                                                        Auto
                                                   1990         1995          2000         2005          2010        2015       2020
                                            1980                1990                       2000                      2010

                                                                                                                                  Source: Refinitiv

                                                                                                                                                  6
A Tale of Three Telcos

KPIs going in wrong direction         The recent weakness in BT’s share price is broadly explained by its five-year
                                      record since 2015/16, which shows that all the key financial variables have been
                                      going in the wrong direction – most notably, dividend per share, which has been
                                      cut sharply, due partly to COVID-19.

BT – financial summary over past five years
Year-end Mar (£bn)                                       2015/16        2016/17       2018/19        2018/19       2019/20
Revenues (adj.)                                             18.9           24.1          23.7           23.5          22.8
Operating costs (adj.)                                      15.1           19.9          19.8           19.6          19.2
Operating profit (adj.)                                      3.8             4.1           4.0            3.8           3.6
Profit before tax (adj.)                                     3.4             3.5           3.4            3.2           2.9
EPS (p per share, adj.)                                     31.8           28.9          27.9           26.3          23.5
DPS (p per share, adj.)                                     14.0           15.4          15.4           15.4          4.62
                                                                                                                Source: BT plc

The broadband rollout programme       In terms of broadband investment, and following prolonged negotiations with
                                      Ofcom, BT will be undertaking a massive rollout of fibre-optic installations under
                                      its Fibre to the Premises (FTTP) programme. BT recently confirmed “its plan to
                                      build FTTP to 20m premises by mid to late 2020s”. Nevertheless, the precise
                                      financial arrangements of this proposed investment remain unclear.

A long haul to recovery               More generally, to rediscover its growth profile, let alone to approach its share
                                      price rating in 2000, will require a prodigious effort, especially on behalf of BT’s
                                      core business, Openreach – it will be a long haul, unless a potential bidder
                                      intervenes.

                                      Vodafone – the glamour fades
                                      Vodafone’s origins date back to the early 1980s, when it emerged as Racal Telecom,
                                      a subsidiary of Racal, a leading electronics company of the day; the former’s
Bred in the Racal stable in 1982      founding slightly pre-dated the privatisation of BT. In 1991, it was demerged from
                                      Racal and separately quoted on the London market as Vodafone. During the 1990s,
                                      its year-on-year growth was phenomenal as mobile telephony boomed.

                                      In 1998, Vodafone undertook one of the largest acquisitions in corporate history,
To Germany and to Mannesmann
                                      when it acquired the German-based Mannesmann for £112bn – a deal that, in
                                      retrospect, looks to have been severely over-priced. However, Vodafone’s share
                                      price – at least initially – reacted positively.

To fourth most valuable company in    By 2000, and within just ca.18 years of its founding, Vodafone had become the
history within a generation – quite
                                      fourth most valuable company in global history; only Microsoft, Cisco and General
                                      Electric (GE), all US-based, commanded a higher market value at the time than
remarkable
                                      Vodafone.

GE shares have plummeted too          In the intervening period, Vodafone has lost around two-thirds of its share price
                                      value, although the plunge of the venerable GE – the company co-founded by
                                      Thomas Edison and, for decades, the bellwether of US industry – has seen its shares
                                      fall by more than 75% since 2000. Indeed, the latter figure incorporates the doubling
                                      of GE’s share price over the past year.

£84bn Verizon Wireless sale           In recent years, Vodafone has cut back its near global footprint, most notably in
                                      2013, when it sold its 45% stake in the US-based Verizon Wireless for £84bn.
                                      Instead, it has re-focused on the developing cable sector and on increasing its stalled
                                      EBITDA.

                                                                                                                             7
A Tale of Three Telcos

EBITDA is flat-lining                Unquestionably, growth in recent years has been elusive, with adjusted EBITDA
                                     being comparatively flat, at ca.€14bn, between 2015/16 and 2019/20; nor have
                                     revenues increased markedly.

                                     The table below shows Vodafone’s key financial data since 2015/16, although due
                                     allowance needs to be made for the exit from the Indian businesses since 31 August
                                     2018 and for the Liberty Global acquisition, which had a material impact on the
                                     accounts as from 31 July 2019.

 Key financial data for Vodafone, 2015/16 to 2019/20
 €bn                                 2015/16           2016/17             2017/18            2018/19               2019/20
 Revenues                               49.8              47.6                46.6               43.7                  45.0
 EBITDA                                 14.2              14.1                14.7               13.9                  14.9
 Operating profit (loss)                  1.3               3.7                 4.3               -0.9                   4.1
 Profit before tax (continuing           -5.1              -2.0                 4.8               -4.1                  -0.5
 operations)
 EPS (continuing operations, € per      -20.3               -7.9                  15.9            -16.3                  -3.1
 share)
 DPS (€ per share )                    14.48              14.77               15.07               9.00                   9.00
 Net debt                               36.9               31.2                31.5               27.0                   38.4
                                                                                                          Source: Vodafone plc

Germany and the Mannesmann legacy    Vodafone’s revenues and adjusted EBITDA for its core markets in 2019/20 are
                                     shown below. It is noticeable that Germany – accounting for 34% of adjusted
                                     EBITDA – is the key market; this is a legacy of the Mannesmann deal.

 Vodafone – key figures (2019/20)
 Year-end March (€bn)                                  Revenues    Adj. EBITDA                                EBITDA share
 Germany                                                   10.7             5.1                                       34%
 Italy                                                      4.8             2.1                                       14%
 United Kingdom                                             5.0             1.5                                       10%
 Spain                                                      3.9             1.0                                        7%
 Other Europe                                               4.9             1.7                                       12%
 Vodacom (data)                                             4.5             2.1                                       14%
 Others                                                     4.1             1.4                                        9%
 Total                                                     37.9            14.9                                     100%
                                                                                                            Source: Vodafone

2020/21 EBITDA projections           Looking forward, Vodafone will be focusing on the cashflow from its key markets. It
                                     is projecting EBITDA for 2020/21 at a slightly lower level – between €14.4 bn and
                                     €14.6bn – than the €14.9bn for 2019/20, mainly because roaming revenues, due
                                     to COVID-19 travel constraints, have been severely affected.

(Ad)vantage Vodafone                 Vodafone’s cashflow profile should also be boosted by the recent IPO in Germany
                                     of Vantage Towers, which operates ca.68,000 macro towers across nine countries.
                                     Following its recent minority stake sale, Vodafone’s retained stake still exceeds 80%;
                                     part of the proceeds from this IPO will go to paying down Vodafone’s high net debt.

                                                                                                                             8
A Tale of Three Telcos

                                           Other UK telcos – the “disappeared”
Vanishing FTSE-100 stocks of old           A generation ago, there were many quoted UK telcos. Apart from BT and
                                           Vodafone, they included Atlantic Telecom, COLT, Energis, Ionica, Kingston
                                           Communications (now KCOM), Telewest and Thus. Most of these companies
                                           were one-time FTSE-100 members.

Excess net debt did for many of them       Most of the “disappeared” were absorbed by other telcos, often because their
                                           finances had become too stretched; both Energis and Thus, for example, were
                                           absorbed by C & W. At one time, most had grandiose expansion plans, with
                                           COLT building out in a raft of leading EU cities, Energis expanding aggressively
                                           into Germany, and Telewest cabling large chunks of the UK. In the latter’s case,
                                           its debt mountain effectively meant its end as a quoted independent company.

                                           Ionica, too, which deployed innovative wireless “local loop” technology, had high
                                           hopes – these were dashed as it failed to secure sufficient financial backing.

BT/Vodafone aside, a very thin sector      This scenario leaves just three mainstream telecoms companies – the third is
representation nowadays                    the relatively small Telecom Plus – that are quoted on the main Stock Exchange.
                                           There are, though, some telecoms/technology companies on AIM that may, in
                                           time, be promoted to the main market.

                                           EU telcos
Growing EBITDA pushed bull case in         In the 1990s, many EU telecoms were privatised and, as the mobile telecoms
1990s…                                     sector took off, achieved very aggressive valuations, based on a rapidly
                                           expanding customer base, growing EBITDA numbers and impressive rollouts of
                                           mobile networks.

…while growing net debt pushed bear        However, from 2000 onwards, the worm turned. Debt levels soared – to the
case in 2000s                              consternation of many investors – and valuations fell.

Deutsche Telekom’s share price been flat   An obvious case in point was Deutsche Telekom, now by far the most valuable
as a pancake for a generation              of the privatised EU telcos. Until 2000, its share price had soared. Subsequently,
                                           it has been as flat as the proverbial pancake; the graph below illustrates this
                                           point.

                                           Deutsche Telekom – share price performance, January 2000 to April 2021
                                           Daily DTEGn.DE                                                                03/01/2000 - 23/04/2021 (FFT)
                                             Line, DTEGn.DE, Trade Price(Last), 23/04/2021, 16.0600, -0.0920, (-0.57%)                      Price
                                                                                                                                            EUR
                                                                                                                                             100

                                                                                                                                            90

                                                                                                                                            80

                                                                                                                                            70

                                                                                                                                            60

                                                                                                                                            50

                                                                                                                                            40

                                                                                                                                            30

                                                                                                                                             20
                                                                                                                                            16.0600
                                                                                                                                             10
                                                                                                                                             Auto
                                           2000   2002   2004    2006      2008      2010     2012     2014   2016         2018    2020
                                                             2000                                         2010                       2020

                                                                                                                                      Source: Refinitiv

                                                                                                                                                      9
A Tale of Three Telcos

                                           This very pronounced downward trend has been emblematic of the sector:
                                           Orange, the owner of France Telecom, and Telefónica – once a high-riding stock
                                           – have suffered similarly. In Telecom Italia’s case, it has been riven by major
                                           shareholder disagreements for years.

                                           EU telcos – market capitalisations at 23 April 2021
                                                                                                                       (£bn)
                                           Deutsche Telekom                                                             66.3
                                           Vodafone                                                                     37.5
                                           Orange (France Telecom)                                                      23.8
                                           Swisscom                                                                     19.4
                                           Telenor                                                                      18.6
                                           Telefónica                                                                   17.7
                                           British Telecom                                                              15.2
                                           Telia                                                                        12.2
                                           KPN                                                                          10.7
                                                                                                             Source: Bloomberg

Nokia’s collapse, despite 40% market       One of the most dramatic telecoms collapses in recent years has been that of
share of mobile phone sales                Nokia, the much-lauded mobile phone company from rural Finland that, by
                                           2007, had secured a 40% global market share in handsets. Thereafter, it has
                                           been downhill all the way, with Nokia’s current share price being 95% off its
                                           peak in 2007.

A fund manager’s dream – into Nokia in     Indeed, one of the great investor coups would have been to buy Nokia shares
mid-1996 and then a switch into Apple in   in mid-1996 and then to switch into Apple shares in mid-2007. The Nokia
                                           investment would have delivered a return of almost 16x over 11 years. Since
2007
                                           mid-2007, shares in Nokia have fallen by 87%, while those in Apple have risen
                                           by 19x. Compounding the near 16x rise in Nokia’s shares with a 19x rise in
                                           Apple’s shares over a 25-year period would have generated a ca.300x return –
                                           and would have been an ambitious fund manager’s investment dream.

                                           Conclusion
A roller coaster ride                      Long-term telecoms investors are likely to have experienced a roller coaster ride,
                                           with shares soaring in the lead-up to the new millennium. Then the boom times
                                           came to an end, although there was a pronounced rally in some telecom stocks
                                           before the financial crash in 2008/09.

                                           Thereafter, a combination of iPhone sales, falling mobile telecoms growth, tighter
                                           regulation and high debt levels has curtailed the sector’s expansion.

                                           Reversing this trend will be a long haul. Even shares in the EU’s most valuable
                                           telecoms business, Deutsche Telekom, have flatlined since 2002.

Apple and others in new financial league   Since 2000, each of C & W, BT and even Vodafone have really struggled, while
                                           shares in major US tech stocks, such as Apple, have moved into another trillion-
                                           pound financial league altogether.

                                                                                                                           10
A Tale of Three Telcos

                         About the author
                         Nigel Hawkins
                         Nigel Hawkins is the Infrastructure and Renewables Specialist at Hardman & Co.

                         Nigel specialises in the energy sector, with a particular focus on the expanding renewable
                         generation market, in both the UK and overseas, about which he has written several
                         reports assessing the sector’s finances. He has been involved in analysing the utilities
                         sector since the 1980s. He covered the privatisation of the water and electricity
                         companies for Hoare Govett between 1989 and 1995. Subsequently, he researched the
                         UK and EU telecoms sector for Williams de Broe. He has also written many feature
                         articles for Utility Week magazine since the mid-1990s. Between 1984 and 1987, Nigel
                         was the Political Correspondence Secretary to Lady Thatcher at 10 Downing Street. Nigel
                         joined Hardman & Co in February 2016. He holds a BA (Hons) in Law, Economics and
                         Politics from the University of Buckingham and is a senior fellow of the Adam Smith
                         Institute.

                                                                                                                11
The Monthly

Company research
►   Priced at 23 April 2021 (unless otherwise stated)

►   The following companies are clients of Hardman & Co.

May 2021                                                   12
The Monthly

Financials
Daily ARBB.L
  Line, ARBB.L, Trade Price(Last), 23/04/2021, 1,150, N/A, N/A
                                                                      29/04/2019 - 23/04/2021 (LON)
                                                                                             Price
                                                                                             GBp
                                                                                                      ARBUTHNOT BANKING GROUP
                                                                                             1,300

                                                                                                      Re-positioning to SME lending continues
                                                                                             1,200
                                                                                            1,150
                                                                                             1,100

                                                                                             1,000

                                                                                             900

                                                                                                      We reviewed the results in detail in our note 2020 results in line; 2021 outlook: strong
                                                                                             800

                                                                                             700

M J J   A S O N D J     F M A M J      J  A S O N D J     F M A
                                                                                             Auto     recovery. The key highlights were a small loss (as expected), with breakeven excluding
                                                                                                      deal costs. Margin pressure (from base-rate cuts) and a £2m rise in impairments were
 Q2 19 Q3 2019 Q4 2019 Q1 2020 Q2 2020   Q3 2020 Q4 2020 Q1 2021

                                                                 Source: Refinitiv                    driven by formulaic expected losses and exposure to the London taxi market. Overall
                                                                                                      credit quality was robust. The outlook is for i) strong profit and loan growth, ii) less pain
Market data                                                                                           from excess liquidity, iii) Asset Alliance profits to be generated after deal completed at
EPIC/TKR               ARBB/ARBN                                                                      end-March (it will also see a £10m equity uplift, as it is being bought below book), iv) a
Price (p)                1150/1150                                                                    gain on the sale of Tay mortgages, and v) lower forecast impairments.
12m High (p)                  1,190
12m Low (p)                     600
Shares (m)                     15.4                                                                   ►   Strategic outlook: ABG has transformed from a stable private bank with high-
Mkt Cap (£m)                    177                                                                       growth, specialist personal lending, into a stable private bank with high-growth,
Loans to deposits, 2021E       75%                                                                        specialist SME lending. Given regulatory changes, and the devasting effect claims
Free Float*                    42%                                                                        management has had on personal lenders, this appears timely, and value added.
Country of listing               UK
Market (UK)              AIM/AQSE                                                                     ►   Other news: ABG has continued reducing its Secure Trust stake with disposal
                                     *As defined by AIM Rule 26                                           of 750k shares on 31 March and a further 250k on 19 April. The residual holding
                                                                                                          is 820k shares, 4.4% of STB. The disposals were expected as ABG reallocates
Description                                                                                               capital to its SME businesses. We have reduced dividend income accordingly.
Arbuthnot Banking Group (ABG) has a
well-funded and well-capitalised                                                                      ►   Valuation: Our forecast scenarios and multiple valuation approaches see a broad
private bank, and has been growing                                                                        range of valuations: 1,027p (Dividend Discount Model) to 1,885p (Gordon Growth
commercial banking very strongly. It                                                                      Model); we have rolled forward our forecast year to 2022, resulting in a modest rise
holds a 4.4% stake in Secure Trust                                                                        in the latter. The share price is 91% of the end-2020 NAV.
Bank (STB).
                                                                                                      ►   Risks: Short term, the impact of lower base rates is critical. Going forward, the
Company information
                                                                                                          key risk is credit. Historically, ABG has been very conservative in lending criteria
Chair/CEO                                                    Sir Henry Angest
                                                                                                          and security taken. Its financial strength means that ABG can take time to
COO/CEO                                                       Andrew Salmon
                                                                                                          optimise recoveries. Other risks include reputation, regulation and compliance.
Arb. Latham
Group FD,                                                            James Cobb
Deputy CEO                                                                                            ►   Investment summary: ABG offers strong-franchise and continuing-business
Arb. Latham                                                                                               (normalised) profit growth. Its balance sheet strength gives it a number of wide-
                                                                                                          ranging options to develop organic and inorganic opportunities. The latter are
                                                      +44 20 7012 2400                                    likely to increase in uncertain times. Management has been innovative, but also
                                 www.arbuthnotgroup.com                                                   very conservative, in managing risk. Having a profitable, well-funded, well-
Key shareholders                                                                                          capitalised and strongly growing bank priced below book value is an anomaly.
Sir Henry Angest                                                                  56.1%
Liontrust                                                                          9.8%               Financial summary and valuation (forecasts under review post results)
Slater Investments                                                                 3.9%               Year-end Dec (£000)          2017      2018*      2019*      2020*     2021E*       2022E*
R Paston                                                                           3.6%               Operating income           54,616     67,905     72,465     72,500      85,010       95,039
Unicorn AM                                                                         3.3%               Total costs               -54,721    -64,982    -70,186    -71,419     -80,402      -87,005
M&G IM                                                                             3.2%               Cost:income ratio           100%        96%        97%        99%         95%          92%
                                                                                                      Total impairments            -394     -2,731       -867     -2,849      -2,725       -1,900
Diary                                                                                                 Reported PBT                2,534      6,780      7,011     -1,090       3,901        7,652
Mid-May’21                                                                         AGM                Adjusted PBT                3,186      4,388      5,800      8,161       3,901        7,652
                                                                                                      Statutory EPS (p)             43.9    -134.5       41.1        -8.9       36.0         41.9
                                                                                                      Adjusted EPS (p)              47.5      22.7       32.8         3.1       21.4         41.9
                                                                                                      Loans/deposits                75%       71%        77%        67%         75%          80%
                                                                                                      Equity/assets               12.8%       9.0%       8.0%       6.8%        7.4%         7.5%
                                                                                                      P/adjusted earnings (x)       24.2      50.7       35.1      368.7        53.6         27.5
                                                                                                      P/BV (x)                      0.75      0.90       0.85       0.91        0.83         0.82
Analyst
                                                                                                                                                        *IFRS9 basis; Source: Hardman & Co Research
Mark Thomas                                                      020 3693 7075
                                      mt@hardmanandco.com

February 2021                                                                                                                                                                                   13
The Monthly

Infrastructure
Daily BBGIB.L
  Line, BBGIB.L, Trade Price(Last), 30/04/2021, 179.400, -1.400, (-0.77%)
                                                                              02/05/2019 - 23/04/2021 (LON)
                                                                                                   Price
                                                                                                   GBp
                                                                                                  179.400
                                                                                                              BBGI GLOBAL INFRASTRUCTURE
                                                                                                    175

                                                                                                    170

                                                                                                              NAV and dividend growth continue
                                                                                                    165

                                                                                                    160

                                                                                                    155

                                                                                                    150

                                                                                                              BBGI is a diversified social infrastructure investment company, registered in Luxembourg,
                                                                                                    145

                                                                                                    140

                                                                                                              and a FTSE-250 constituent. Its portfolio consists of long-term and low-risk essential
                                                                                                    135

                                                                                                    130
                                                                                                    Auto
  J J
Q2 19
          A S
          Q3 19
                   O    N D
                       Q4 19
                                J    F M
                                    Q1 20
                                             A   M J
                                                 Q2 20
                                                          J   A S
                                                              Q3 20
                                                                       O     N D
                                                                            Q4 20
                                                                                    J   F M
                                                                                        Q1 21
                                                                                                A
                                                                                                              infrastructure investments, which deliver stable, predictable cashflows, with progressive
                                                               Source: Refinitiv                              dividend growth and attractive, sustainable returns. It focuses on enhancing the value of its
                                                                                                              investments, which are globally diversified within highly rated investment-grade countries.
Market data                                                                                                   Most of its investments are via Public, Private Partnerships (PPPs) or derivatives thereof.
EPIC/TKR                                                                BBGI                                  All of its investments are availability-based, not demand-based, supported by government-
Price (p)                                                                 175                                 backed revenues; hence, the cashflow line is very reliable.
12m High (p)                                                              179
12m Low (p)                                                               157
                                                                                                              ►   Background: Central to BBGI’s business are its 51 essential, social infrastructure
Shares (m)                                                                665
                                                                                                                  investments; they range from bridges in North America to a hospital facility in
Mkt Cap (£m)                                                           1,164
                                                                                                                  Australia. Crucially, BBGI’s equity investment portfolio comprises low-risk and
EV (£m)                                                                1,144
Country of listing                                                         UK
                                                                                                                  public-sector-financed, availability-based infrastructure investments.
Market                                                             FTSE-250,
                                                                member of LSE                                 ►   Operations: BBGI’s main operating jurisdictions are in North America,
                                                                                                                  specifically Canada, and in the UK. Revenues from virtually all of BBGI’s
                                                                                                                  investments are based on their availability, and not on the level of demand for
Description                                                                                                       them; hence, there is a bond-like predictability about future revenues.
BBGI Global Infrastructure (BBGI) has
a 51-strong investment portfolio,                                                                             ►   Valuation: BBGI has built up a very successful track record since its IPO in
mainly in the transport, health, justice
                                                                                                                  2011, with total shareholder returns averaging 11% p.a. It has consistently
and education sectors. The UK and
                                                                                                                  traded at a premium to NAV, and its shares are now trading at 27% above their
Canada are its key markets.
                                                                                                                  NAV; the shares are yielding 4.2% on a prospective basis.
Company information
Joint CEO                                                          Duncan Ball                                ►   Risks: All BBGI’s cashflows are from government or government-backed
Joint CEO                                                       Frank Schramm                                     bodies, thereby reducing the counterparty risk factor considerably. Owing to
Chairman                                                         Sarah Whitney                                    the absence of demand-based investments, the impact of COVID-19 on BBGI’s
CFO                                                             Michael Denny                                     finances and operations has been marginal.
                                                              +352 263479-1
                                                               www.bb-gi.com                                  ►   Investment summary: In the quest for reliable dividends, institutional and retail
                                                                                                                  investors may well focus on UK infrastructure investment companies, with their
Key shareholders                                                                                                  secure dividend profiles. The prospective sector yield is now just below 5%.
M&G plc                                                                                   9.42%                   BBGI, which is targeting a 7.33p per share dividend for 2021, is currently, as
Schroders                                                                                 8.96%                   mentioned, yielding 4.2%. Investors should also note that BBGI has recently
Newton Investment                                                                         8.46%                   integrated key ESG principles into its investment cycle.
Management
Investec Wealth &                                                                         5.01%
Investment
                                                                                                              Financial summary and valuation
Smith & Williamson                                                                        5.00%
                                                                                                              Year-end Dec (£m)                      2019       2020       2021E       2022E      2023E
Diary                                                                                                         Distributions from investments          64.0       72.8        79.4        85.7       91.7
30 Jun                                                                Half-year-end                           Operating costs                        -11.0      -18.7       -19.8       -21.0      -22.7
31 Dec                                                                Full-year-end                           Net operating cashflows                 53.0       54.1        59.5        64.7       70.2
                                                                                                              Equity investments                     -62.9      -59.2      -100.0      -110.0     -110.0
                                                                                                              Drawdown proceeds                       81.8       41.0        90.0       100.0      100.0
                                                                                                              Net proceeds from fund raise            73.9       54.2           0        84.0          0
                                                                                                              Dividends paid                         -40.8      -42.6       -46.5       -51.0      -53.6
                                                                                                              Dividend per share (p)                  7.00       7.18        7.33        7.48       7.65
                                                                                                              Dividend yield                          4.0%       4.1%        4.2%        4.3%       4.4%
                                                                                                              NAV per share (p)                      136.2      137.8       140.8       143.7      147.0
Analyst                                                                                                       Distributions from investments          64.0       72.8        79.4        85.7       91.7
Nigel Hawkins                                   020 3693 7075                                                                                                                Source: Hardman & Co Research
                                          nh@hardmanandco.com

February 2021                                                                                                                                                                                          14
The Monthly

Financials
Daily CLIG.L
  Line, CLIG.L, Trade Price(Last), 23/04/2021, 530, +1, (+0.19%)
                                                                            24/04/2019 - 23/04/2021 (LON)
                                                                                                    Price
                                                                                                            CITY OF LONDON INVESTMENT GROUP
                                                                                                    GBp
                                                                                                     540
                                                                                                    530
                                                                                                    510

                                                                                                            Another quarter of steady progress
                                                                                                    480

                                                                                                    450

                                                                                                    420

                                                                                                    390

                                                                                                    360

                                                                                                    330
                                                                                                            City of London has announced its trading update for 3Q’21. It has been a quarter
                                                                                                    300

                                                                                                    Auto
                                                                                                            of steady progress. Markets were supportive, albeit to a lesser degree than in the
M   J J
 Q2 19
           A S
           Q3 19
                     O    N D
                         Q4 19
                                  J    F M
                                      Q1 20
                                               A   M J
                                                   Q2 20
                                                            J   A S
                                                                Q3 20
                                                                        O    N D
                                                                            Q4 20
                                                                                    J   F M
                                                                                        Q1 21
                                                                                                A
                                                                                                            previous couple of quarters, with the MSCI EM Net TR Index increasing 2.3% and
                                                                Source: Refinitiv                           the MSCI ACWI ex US up 3.5%. Performance was also strong across all product
                                                                                                            areas, driven by good NAV performance, and partially offset by net outflows
Market data                                                                                                 across each area. FUM increased in all strategies other than Opportunistic Value
EPIC/TKR                                                                                   CLIG             and total FUM ticked up from $10.98bn to $11.06bn. City of London retains an
Price (p)                                                                                 540.0             active pipeline across all areas.
12m High (p)                                                                              556.0
12m Low (p)                                                                               390.0             ►   Operations: Revenue rates and expenses remain in line with the previous
Shares (m)                                                                                 50.7                 figures, giving a monthly run-rate for operating profit, pre profit share, of £3.3m.
Mkt Cap (£m)                                                                              273.7                 Progress has also been made in harmonising the financial and IT infrastructure
EV (£m)                                                                                   256.1                 in CLIM and KIM.
Country of listing                                                                           UK
Market                                                                                      LSE             ►   Estimates: With financial progress largely in line with our expectations, we have
                                                                                                                only made small changes to our earnings estimates. The net outflows and
                                                                                                                exchange rate movements have led to small downgrades, with our 2021E EPS
Description
                                                                                                                reduced by 0.6%, our 2022E EPS by 1.6% and 2023E EPS decreased by 1.5%.
City of London (CLIG) is an
investment manager, primarily using                                                                         ►   Valuation: Despite the recent good performance, the 2022E P/E of 13.1x
closed-ended funds to invest in
                                                                                                                remains at a discount to the peer group. The 2022E yield of 6.7% is attractive,
emerging and other markets.
                                                                                                                in our view, and should, at the very least, provide support for the shares in the
                                                                                                                current markets.
Company information
CEO                                                      Tom Griffith                                       ►   Risks: Although City of London has reduced its relative emerging markets
CFO                                                Deepranjan Agrawal                                           exposure, it is still 47% of assets. It has proved to be more robust than some other
Chairman                                                   Barry Aling                                          fund managers, aided by its good performance and strong client servicing. Market
                                                                                                                volatility remains a risk, although increasing diversification is also mitigating this.
                                                     +44 207 860 8346
                                                                www.citlon.com
                                                                                                            ►   Investment summary: Having shown robust performance in challenging market
Key shareholders                                                                                                conditions, City of London is now reaping the benefits in a more supportive
George Karpus                                                                            31.5%
                                                                                                                environment. The valuation remains reasonable. After a special dividend in
Barry Olliff                                                                              2.5%                  FY’19, a dividend increase in FY’20 and with the EPS boost from Karpus in
Directors & staff                                                                        11.9%                  2021, the prospects for future dividend increases look very good.
Hargreaves Lansdown                                                                       6.3%
Aberforth Partners                                                                        5.1%
Interactive Investor                                                                      3.6%
Diary
30 Jun                                                Year-end
13 Jul                                Pre-close trading update
                                                                                                            Financial summary and valuation
                                                                                                            Year-end Jun (£m)           2018        2019*       2020        2021E       2022E       2023E
                                                                                                            FUM ($bn)                    5.11        5.39        5.50        11.18       11.80       12.48
                                                                                                            Revenue                     33.93       31.93       33.26        54.21       64.01       67.39
                                                                                                            Statutory PTP               12.79       11.40        9.41        21.69       28.14       30.26
                                                                                                            Statutory EPS (p)            39.5        34.9        30.3         36.1        41.2        44.5
                                                                                                            Underlying EPS (p)           39.5        34.9        38.0         46.8        50.0        53.3
                                                                                                            DPS (p)                      27.0        27.0        30.0         33.0        36.0        39.0
                                                                                                            Special dividend                         13.5
                                                                                                            P/E (x)                      13.7        15.5        17.8         14.9        13.1        12.1
Analyst                                                                                                     Dividend yield               5.0%        7.5%        5.6%         6.1%        6.7%        7.2%
Brian Moretta                                                   020 3693 7075                                                *2019 figures include a special dividend of 13.5p; Source: Hardman & Co Research
                                      bm@hardmanandco.com

February 2021                                                                                                                                                                                             15
The Monthly

 Support Services
Daily FLTA.L
  Line, FLTA.L, Trade Price(Last), 07/01/2020, 166.0, -3.5, (-2.07%)
                                                                                      08/01/2019 - 06/01/2020 (LON)
                                                                                                             Price
                                                                                                             GBp
                                                                                                              235
                                                                                                                      FILTA GROUP
                                                                                                              230
                                                                                                              225
                                                                                                              220

                                                                                                                      Upbeat outlook
                                                                                                              215
                                                                                                              210
                                                                                                              205
                                                                                                              200
                                                                                                              195
                                                                                                              190
                                                                                                              185
                                                                                                              180

                                                                                                                      Filta’s business performed robustly during COVID-19, adding new clients and
                                                                                                              175
                                                                                                               170
                                                                                                              166.0
                                                                                                               165

                                                                                                                      becoming an important part of its clients’ processes. With business levels back to
                                                                                                              160
                                                                                                              155
                                                                                                              150
                                                                                                              145

 16   01 18 01
       Q1 2019
                   18   01   16 01 16  03
                                 Q2 2019
                                                17   01   16    01 16 02
                                                                 Q3 2019
                                                                           16   01   16   01 18 02
                                                                                          Q4 2019
                                                                                                      16 02
                                                                                                              Auto

                                                                                                                      70% of pre-COVID-19 levels and with its largest clients yet to reopen, Filta is
                                                                       Source: Refinitiv                              emerging from this fog stronger than ever. Assuming there is no reversion to
                                                                                                                      widescale lockdowns, our forecasts, which we left unchanged after the final
 Market data                                                                                                          results, should prove conservative.
 EPIC/TKR                                                                                          FLTA
 Price (p)                                                                                          143               ►   FY’20 results: Revenue was down by a third, and adjusted EBITDA came in at
 12m High (p)                                                                                       160                   £1.05m. The company ended the year with net debt of just £0.5m, showing the
 12m Low (p)                                                                                         60                   effectiveness of its cash management in a very tricky period. Overheads were
 Shares (m)                                                                                          29                   reduced by £1.4m, and efficiency gains were made throughout the business.
 Mkt Cap (£m)                                                                                        42
 EV (£m)                                                                                             41
 Free Float*                                                                                        33%               ►   2021 outlook: The US has been better than the UK, which has been better than
 Country of listing                                                                                  UK                   Europe (only 3% of business). We are forecasting a 22% pickup in revenue for 2021,
 Market                                                                                             AIM                   followed by 30% in 2022. Business is bouncing back strongly, with economic
                                         *As defined by AIM Rule 26                                                       stimulus and huge pent-up demand. Filta has shifted its FOG business in the UK to
                                                                                                                          a capital-light franchise model, and its Cyclone model is now well established.
 Description
 Filta Group (Filta) provides cooking oil                                                                             ►   Valuation: Our DCF-derived valuation delivers a central value of £49m, or
 filtration, fryer and drain management                                                                                   169p per share, and equates to a 10x 2023E EBITDA multiple.
 services in North America, the UK and
 Europe to commercial kitchens,
 primarily through franchisees.
                                                                                                                      ►   Risks: The clear risk for Filta is that COVID-19 returns aggressively and its
 Company information                                                                                                      customers are unable to stay open or reopen. In the UK-owned operations, the
 CEO                                                                      Jason Sayers                                    business is heavily weighted towards 20 large operations that are well positioned to
 CFO                                                                      Brian Hogan                                     survive. Its balance sheet is relatively strong, with cash balances and low net debt.
 Chairman                                                               Tim Worlledge
                                                               +44 1788 550100                                        ►   Investment summary: Filta is an attractive business, in our view, combining the
                                                                 www.filtaplc.com                                         capital-light franchise model in North America and Europe with company-
                                                                                                                          owned operations in the UK. As businesses continue to reopen, the focus on
 Key shareholders                                                                                                         cleanliness, efficiency and environmental friendliness is unlikely to be abated
 Directors                                                                                      66.4%                     and, with its FiltaFOG Cyclone product being specified for exclusive use in some
 Gresham House                                                                                  16.5%                     of the world’s largest restaurant chains, we believe it will continue to thrive.
 Cannacord Genuity                                                                               3.7%

                                                                                                                      Financial summary and valuation
 Diary
                                                                                                                      Year-end Dec (£000)             2017      2018       2019      2020     2021E     2022E
 Nov’21                                                                 Interim results                               Revenue                       11,547    14,213     24,923    16,402     20,000    26,000
                                                                                                                      EBITDA                         2,116     2,642      3,163     1,054      2,553     4,430
                                                                                                                      Underlying EBIT                2,059     1,941      1,504      -402      1,070     2,970
                                                                                                                      Reported EBIT                  1,699     1,782      1,208      -589      1,070     2,970
                                                                                                                      Underlying PTP                 1,968     1,900      1,233      -679        820     2,770
                                                                                                                      Statutory PTP                  1,608     1,742        936      -866        820     2,770
                                                                                                                      Underlying EPS (p)              5.05      5.39       2.40     -2.81       2.21      7.46
                                                                                                                      Statutory EPS (p)               3.85      4.88       1.39     -3.46       2.21      7.46
                                                                                                                      Net (debt)/cash                2,992     2,040     -2,094      -516        415     2,580
                                                                                                                      Shares issued (m)                 27        29         29        29         29        29
 Analyst                                                                                                              P/E (x)                         28.3      26.5       59.5     -50.8       64.7      19.2
                                                                                                                      EV/EBITDA (x)                   17.0      14.9       13.8      39.9       16.1        8.8
 Jason Streets                                           020 7194 7622
                                                                                                                                                                                  Source: Hardman & Co Research
                                                   js@hardmanandco.com

February 2021                                                                                                                                                                                               16
The Monthly

 Closed-Ended Investment Funds
Daily OCIO.L                                                         29/04/2019 - 23/04/2021 (LON)
                                                                                            Price
                                                                                                     OAKLEY CAPITAL INVESTMENTS LTD
  Line, OCIO.L, Trade Price(Last), 26/04/2021, 309.9, 0.0, (0.00%)
                                                                                            GBp
                                                                                           309.9

                                                                                                     THE MATERIALS CONTAINED HEREIN MAY NOT BE DISTRIBUTED, FORWARDED, TRANSMITTED
                                                                                            300

                                                                                            280

                                                                                            260      OR OTHERWISE MADE AVAILABLE, AND THEIR CONTENTS MAY NOT BE DISCLOSED, TO ANY US
                                                                                            240      PERSON OR IN, INTO OR FROM THE UNITED STATES, OR IN, INTO OR FROM ANY OTHER
                                                                                            220
                                                                                                     JURISDICTION OR TO ANY PARTY WHERE TO DO SO WOULD CONSTITUTE A VIOLATION OF THE
                                                                                            200

                                                                                            180
                                                                                                     RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION.
                                                                                            Auto

                                                                Source: Refinitiv                    OCI is invested in the Oakley Capital Funds, which are Europe-focused PE funds
                                                                                                     that aim to build portfolios of high-growth, medium-sized companies, primarily in
 Market data                                                                                         the technology, consumer and education sectors. In the past, OCI has also
 EPIC/TKR                                                               OCI                          selectively taken direct equity stakes in Oakley Capital (the investment adviser)
 Price (p)                                                              310                          portfolio companies and, on occasion, invested in the debt of portfolio companies.
 12m High (p)                                                           315
 12m Low (p)                                                            181
                                                                                                     OCI is a listed, liquid vehicle that aims to provide capital growth and dividends to its
 Shares (m)                                                          180.6
                                                                                                     investors, supported by the proceeds it receives from realisations of assets by the
 Mkt Cap (£m)                                                           560
 NAV p/sh (p)                                                           403
                                                                                                     Oakley Funds and interest payments received from debt investments.
 Disc. to NAV                                                          23%
 Country of listing                                                      UK                          OCI’s NAV has grown steadily in the past five years, with a CAGR NAV total return
 Market (UK)                                                Main Market SFS                          per share of 16% (as at 31 December 2020). Growth has been driven by the
 Description                                                                                         performance of the Oakley Funds. Funds II and III, which reflect the current
                                                                                                     investment approach, have returned an average gross IRR of 37% and 51%, and net
 Oakley Capital Investments (OCI) has
                                                                                                     IRR of 29% and 45%, respectively (as at 31 December 2020).
 generated market-beating returns
 from its concentrated, three-sector-
                                                                                                     Founded in 2002, Oakley Capital is a Europe-focused PE firm. It states “Oakley’s
 focused portfolio of private equity
 (PE) investments via Oakley Capital
                                                                                                     entrepreneurial heritage allows it to partner with strong management teams and
 (Oakley) PE funds. Oakley has a                                                                     become their preferred partner”, and it “seeks out complex deals outside
 proven model for sourcing                                                                           intermediated auctions” and “targets companies with sustainable structural growth
 investments, and an excellent track                                                                 dynamics and opportunity for M&A”.
 record of identifying resilient value
 opportunities and delivering superior                                                               Given the regulatory restrictions on distributing research on this company, the
 returns.                                                                                            monthly book entry for OCI can be accessed through our website, Hardman and Co
                                                                                                     Research. Our initiation report, When it rains gold, put out the bucket, published on 1
 Company information
                                                                                                     September 2020, our 3 December 2020 note, NAV: conservative, robust and with
 Chairman                                               Caroline Foulger                             growth upside, and our note 2020 results: sustained and sustainable NAV growth
 Ind. NED                                                  R Lightowler,                             published on 22 March 2021 can be found on the same site.
                                                                  F Beck
 NED                                                  P Dubens, S Porter
                                                                                                     OCI issued detailed results for the year ending December 2020 on 11 March 2021.
 Inv. Mgrs.                                               Oakley Capital
 Contact                                                 Steven Tredget
    investorrelations@oakleycapital.com

 Key shareholders
 Asset Value Investors                                                                14%
 Peter Dubens                                                                         10%
 Sarasin & City of London                                                              7%
 IM
 Barwon                                                                                  6%
 Lombard Odier & Fidelity                                                                5%
 Jon Wood & family                                                                       4%
 Hawksmoor                                                                               3%
 Diary                                                                                               [[
 18 May                                             Capital Markets day

Analyst
Mark Thomas                                                  020 3693 7075
                                    mt@hardmanandco.com

February 2021                                                                                                                                                                             17
The Monthly

Real Estate
Daily PCA.L
  Line, PCA.L, Trade Price(Last), 26/04/2021, 240, +4, (+1.68%)
                                                                       29/04/2019 - 23/04/2021 (LON)
                                                                                               Price
                                                                                               GBp
                                                                                                       PALACE CAPITAL
                                                                                                340

                                                                                               320

                                                                                                       Trading update assessment
                                                                                               300

                                                                                               280

                                                                                               260

                                                                                              240
                                                                                               240

                                                                                               220

                                                                                               200
                                                                                                       December 2020 quarter rents showed 92% received; as of the 14 April trading update,
                                                                                               180
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                                                                                                       82% of the rents due end-March under the monthly payment plans had been received
M J J
 Q2 19
        A S O
       Q3 2019
                N D J
               Q4 2019
                        F M A M J
                       Q1 2020 Q2 2020
                                       J  A S O N D J
                                         Q3 2020 Q4 2020
                                                          F M A
                                                         Q1 2021                                       – a good initial profile. Hudson Quarter (HQ) sales are progressing well into a robust
                                                                  Source: Refinitiv                    market, and the leisure assets have seen several new lettings. It is also encouraging to
                                                                                                       see ongoing small, non-core disposals at above book. In addition, cash and facility
Market data                                                                                            headroom are more than adequate, at £14.4m, and the company’s strategy and its
EPIC/TKR                                                                      PCA                      execution remain attractive after the test of COVID-19. The largest segment is
Price (p)                                                                      242                     regional offices, and there is a positive upside opportunity here for 2021, we believe.
12m High (p)                                                                   242
12m Low (p)                                                                    172
                                                                                                       ►   What’s in the shop window: Investors are rightly looking at dividends, and we
Shares (m)                                                                    45.9
                                                                                                           estimate 13p for 2023, with EPS of 24p. This includes nil for revaluation, but also
Mkt Cap (£m)                                                                110.1
                                                                                                           the 50% of HQ profits anticipated that year. HQ is not a one-off. Cash can be
EV (£m)                                                                     219.4
Country of listing                                                              UK
                                                                                                           reinvested. 2023 may be a bit above trend – but not by much.
Market                                                                   Main, LSE
                                                                                                       ►   HQ: Within a good UK-wide housing market backdrop, we believe PCA has
                                                                                                           adopted the right approach by selling smaller apartments first and retaining the
Description                                                                                                more expensive, larger ones for later phases. Forty are sold, six are under offer,
Palace Capital (PCA) is a real estate                                                                      and reservation rates in March and into April rose significantly.
investor, diversified by sector (office,
industrial) and location, excluding                                                                    ►   Valuation: The shares stand at a 7.5% EPRA earnings yield for FY’23E. The
London and with minimal exposure to
                                                                                                           prospective dividends yield more than the peer group. We anticipate growth
retail. There is an emphasis on city-
                                                                                                           and upgrades. EPRA EPS exclude HQ profits, but their recycling moves profits
centre locations. Development assets
                                                                                                           higher in the year to March 2023 – so FY’23 EPS is highly visible.
comprise 18.7% of assets.

Company information                                                                                    ►   Risks and upside: COVID-19 has fully demonstrated the difficult markets and,
Chairman                                                     Stanley Davis                                 indeed, many assets have short WAULTs. The regional office sector has good
CEO                                                            Neil Sinclair                               prospects, notwithstanding the short-term turbulence. The leisure assets have
CFO                                                       Stephen Silvester                                long WAULTs. Development may actually reduce risks through cash generation.
Exec. Dir.                                                    Richard Starr
                                       +44 20 3301 8330                                                ►   Investment case: The “total return” strategy includes developments and asset
                                   www.palacecapitalplc.com                                                enhancements boosting returns. Portfolio net initial yields are 5.9%. It should
                                                                                                           be noted that this includes the impact of voids, the significant nil-income
Key shareholders
                                                                                                           development assets and other costs. So, with strong income upside and
AXA                                                                                    7.7%                exposure to economic recovery, this is an attractive model, we believe.
Miton                                                                                  7.4%
J.O. Hambro                                                                            7.3%
Stanley Davis (Chairman)                                                               3.6%            Financial summary and valuation
                                                                                                       Year-end Mar (£m)                 2019         2020         2021E         2022E         2023E
Diary                                                                                                  Net income*                       16.43        18.76         14.40         14.10         15.30
Jun’21                                                                Final results                    Finance cost                      -3.74        -4.34         -3.60         -3.40         -3.30
Jul’21                                                                       AGM                       Declared profit                    6.43        -9.07         -1.84         12.20          8.00
                                                                                                       EPRA PBT (adj. pre-reval’n.)       8.61        10.14          6.80          6.70          8.00
                                                                                                       EPS reported (diluted, p)         11.26       -11.85         -4.01         20.04         23.97
                                                                                                       EPRA EPS (p)**                    16.54        30.24         14.81         14.60         17.43
                                                                                                       DPS (p)                           19.00        12.00         10.00         11.00         13.00
                                                                                                       Net cash/(debt)                  -96.50      -104.40       -111.80        -83.10        -79.20
                                                                                                       Dividend yield                     7.9%         5.0%          4.2%          4.6%          5.4%
                                                                                                       Price/EPRA NAV (x)                0.590        0.645         0.687         0.665         0.638
                                                                                                       EPRA NAV (p)                    406.60        372.50        348.60       360.80        376.00
Analyst                                                                                                LTV                             33.85%       37.41%        40.26%        32.80%        31.00%
                                                                                                                                                 *Post direct costs, **Diluted, pre share-based payments
Mike Foster                                                   020 3693 7075
                                                                                                                                                                         Source: Hardman & Co Research
                                             mf@hardmanandco.com

February 2021                                                                                                                                                                                        18
The Monthly

Closed-Ended Investments Funds
Daily PANI.L                                                                  29/04/2019 - 23/04/2021 (LON)
                                                                                                               PANTHEON INTERNATIONAL
  Line, PANI.L, Trade Price(Last), 26/04/2021, 2,648.88, -40.00, (-1.49%)                         Price
                                                                                                  GBp

                                                                                                               THE INFORMATION CONTAINED IN THIS REPORT IS RESTRICTED AND IS NOT FOR
                                                                                                    2,648.88
                                                                                                     2,600

                                                                                                               PUBLICATION, RELEASE OR DISTRIBUTION IN THE UNITED STATES OF AMERICA, CANADA,
                                                                                                    2,400

                                                                                                               AUSTRALIA (OTHER THAN TO PERSONS WHO ARE BOTH WHOLESALE CLIENTS AND
                                                                                                    2,200

                                                                                                    2,000

                                                                                                    1,800      PROFESSIONAL OR SOPHISTICATED INVESTORS IN AUSTRALIA), JAPAN, THE REPUBLIC OF
                                                                                                    1,600      SOUTH AFRICA OR ANY OTHER JURISDICTION WHERE ITS RELEASE, PUBLICATION OR
                                                                                                    1,400
                                                                                                               DISTRIBUTION IS OR MAY BE UNLAWFUL.
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M J J     A S      O   N D      J    F M     A   M J      J   A S     O     N D     J   F M     A
 Q2 19    Q3 19        Q4 19        Q1 20        Q2 20        Q3 20         Q4 20       Q1 21

                                                                Source: Refinitiv                              PIP is an investment trust that invests in a diversified portfolio of PE assets
                                                                                                               managed by third-party managers across the world. PIP is the longest-established
Market data                                                                                                    PE fund-of-funds on the London Stock Exchange, and has outperformed the FTSE
EPIC/TKR                         PIN                                                                           All-Share and MSCI World indices since its inception in 1987.
Price (p)                      2,680
12m High (p)                   2,785
12m Low (p)                    1,710                                                                           PIP is managed by Pantheon, one of the world’s foremost PE specialists. Founded in
Shares (m)                    54.089                                                                           1982, with assets under management (AUM) of $58.4bn (as at 30 September 2020),
Mkt Cap (£m)                   1,439                                                                           and a team of 105 investment professionals globally (total staff of 362 as at 31
NAV p/sh (p)*                3,274.4                                                                           March 2021), Pantheon is a recognised investment leader, with a strong track record
Discount to NAV*                 18%                                                                           of investing in PE funds over various market cycles in both the primary and
Country of listing                UK                                                                           secondary markets, as well as co-investments. As at 31 March 2021, it had more
Market         Premium equity closed-                                                                          than 470 advisory board seats.
(UK)          ended investment funds
 *Manager valuations: Dec’20 or later 97%
                                                                                                               PIP actively manages risk by the careful selection and purchase of high-quality PE
                                                                                                               assets in a diversified and balanced portfolio, across different investment stages
Description
                                                                                                               and vintages, and by investing in carefully selected funds operating in different
The investment objective of Pantheon
                                                                                                               regions of the world.
International Plc (PIP) is to maximise
capital growth by investing in a
                                                                                                               Given the regulatory restrictions on distributing research on this company, the
diversified portfolio of private equity
(PE) assets and directly in private
                                                                                                               monthly book entry for Pantheon can be accessed through our website, Hardman
companies.                                                                                                     and Co Research. Our initiation report, published on 6 September 2019, and our
                                                                                                               reports, i) History of value added to portfolio by holding Pantheon, published on 26
Company information                                                                                            November 2019, ii) 2020 interim results consistency in delivery, published on 2 March
Chairman                                              Sir Laurie Magnus                                        2020, iii) Positioned for sustained growth, published on 14 August 2020, an annual
Aud. Cte. Chr.                                             David Melvin                                        review, iv) Returns, resilience and responsibility, published on 9 October 2020, v) The
Sen. Ind. Dir.                                         Susannah Nicklin                                        real costs of public vs. PE ownership, published on 14 January 2021, and vi) Just look
Inv. Mgr.                                                      Pantheon                                        at PIP’s underlying company resilience published on 10 March 2021 can be found on
Manager                                                     Helen Steers                                       the same site.
Contact                                                    Vicki Bradley
                                                     +44 20 3356 1800                                          Pantheon issued its detailed results (to end-November) on 25 February 2021. Its
                                                                 www.piplc.com                                 latest monthly update is available on its website.

Key shareholders
Quilter                                                                                    9.40%
USS                                                                                        8.15%
Esperides SA Sicav-SIF                                                                     5.75%
APG Asset Mgt.                                                                             4.44%
Investec Wealth                                                                            4.37%
East Riding of Yorkshire Cl                                                                3.99%
Private Syndicate Pty                                                                      3.76%
Brewin Dolphin                                                                             3.45%

Diary
Mid-May’21                                                                          April NAV

Analyst
Mark Thomas                                                    020 3693 7075
                                      mt@hardmanandco.com

February 2021                                                                                                                                                                                      19
The Monthly

 Diversified Financial Services
Daily RECIV.L
  Line, RECIV.L, Trade Price(Last), 26/04/2021, 142.1112, +1.5000, (+1.06%)
                                                                              29/04/2019 - 23/04/2021 (LON)
                                                                                                  Price
                                                                                                              REAL ESTATE CREDIT INVESTMENTS
                                                                                                  GBp
                                                                                                  170

                                                                                                  160         THE MATERIALS CONTAINED HEREIN MAY NOT BE DISTRIBUTED, FORWARDED, TRANSMITTED
                                                                                                              OR OTHERWISE MADE AVAILABLE, AND THEIR CONTENTS MAY NOT BE DISCLOSED, TO ANY US
                                                                                                  150

                                                                                                  142.1112
                                                                                                   140

                                                                                                  130
                                                                                                              PERSON OR IN, INTO OR FROM THE UNITED STATES, AUSTRALIA, CANADA, JAPAN, SOUTH
                                                                                                              AFRICA OR IN, INTO OR FROM ANY OTHER JURISDICTION WHERE TO DO SO WOULD
                                                                                                  120

                                                                                                  110

                                                                                                  100
                                                                                                  Auto
                                                                                                              CONSTITUTE A VIOLATION OF THE RELEVANT LAWS OR REGULATIONS OF SUCH JURISDICTION.
M J    J   A S     O   N D     J    F M    A   M J     J   A S     O   N D        J   F M     A
 Q2 19     Q3 19       Q4 19       Q1 20       Q2 20       Q3 20       Q4 20          Q1 21

                                                              Source: Refinitiv                               RECI is a closed-ended investment company. To achieve its investment objective,
                                                                                                              the company invests, and will continue to invest, in real estate credit secured by
 Market data                                                                                                  commercial or residential properties in Western Europe, focusing primarily on the
 EPIC/TKR                         RECI                                                                        UK and France.
 Price (p)                      141.0
 12m High (p)                   147.5                                                                         Investments may take different forms but are likely to be:
 12m Low (p)                      94.4
 Shares (m)                     229.3
                                                                                                              ►    Secured real estate loans, debentures or any other forms of debt instruments
 Mkt Cap (£m)                      326
                                                                                                                   (together “Secured Debt”). Secured real estate loans are typically secured by
 NAV p/sh (p) (Mar)              151.2
                                                                                                                   mortgages over the property or charges over the shares of the property-owning
 Disc. to NAV                     6.7%
 Dividend yield                   8.5%
                                                                                                                   vehicle. Individual secured debt investments will have a weighted average life
 Country of listing                 UK                                                                             (WAL) profile ranging from six months to 15 years. Investments in secured debt
 Market         Premium equity closed-                                                                             will also be directly or indirectly secured by one or more commercial or residential
 (UK)                 ended inv. funds                                                                             properties, and will not exceed an LTV of 85% at the time of investment.
 Description                                                                                                  ►    Listed debt securities and securitised tranches of real estate-related debt
 Real Estate Credit Investments (RECI)                                                                             securities – for example, residential mortgage-backed securities and commercial
 is a closed-ended investment                                                                                      mortgage-backed securities (together “MBS”). For the avoidance of doubt, this
 company that aims to deliver a stable                                                                             does not include equity residual positions in MBS.
 quarterly dividend via a levered
 exposure to real estate credit
                                                                                                              ►    Other direct or indirect opportunities, including equity participations in real
 investments, primarily in the UK and
                                                                                                                   estate, except that no more than 20% of the total assets will be invested in
 France.
                                                                                                                   positions with an LTV in excess of 85% or in equity positions that are
 Company information                                                                                               uncollateralised. On specific transactions, the company may be granted equity
 Chairman                                                Bob Cowdell                                               positions as part of its loan terms. These positions will come as part of the
 NED                                                     Susie Farnon                                              company’s overall return on its investments, and may or may not provide extra
 NED                                                      John Hallam                                              profit to the company, depending on market conditions and the performance of
 NED                                                 Graham Harrison                                               the loan. These positions are deemed collateralised equity positions. All other
 NED                                                 Colleen McHugh                                                equity positions are deemed uncollateralised equity positions.
 Inv. Mgr.                                            Cheyne Capital
 Main contact                                            Richard Lang                                         RECI is externally managed by Cheyne Capital Management (UK) LLP, a UK
                                                   +44 207 968 7328                                           investment manager authorised and regulated by the FCA. As at 31 December
                                      www.recreditinvest.com                                                  2020, Cheyne had 157 employees, of which 32 were in the Real Estate Team, and
                                                                                                              AUM of $8.7bn, of which $3.7bn was managed by the Real Estate Team. Cheyne
 Key shareholders                                                                                             invests across the capital structure – from the senior debt to the equity positions. It
 Close Bros                                                                               8.55%               has expertise in the structuring, execution and management of securitisation
 AXA SA                                                                                   8.50%               transactions, involving a broad range of assets, including portfolios comprised of
 Premier Miton                                                                            8.09%
                                                                                                              traditional asset classes, such as commercial and residential mortgages, as well as
 Bank Leumi                                                                               7.82%
                                                                                                              mortgage-backed securities and the management of commercial real estate
 Fidelity                                                                                 7.59%
                                                                                                              portfolios, focused on Europe and the UK.
 Canaccord Genuity Group                                                                  7.36%
 Smith and Williamson                                                                     6.84%
                                                                                                              RECI gave a detailed market update and presentation on 27 April 2021.
 Diary
 Mid-May’21                                                        April factsheet                            Given the regulatory restrictions on distributing research on this company, the
                                                                                                              monthly book entry for RECI can be accessed through our website, Hardman and Co
                                                                                                              Research. Our initiation report, published on 28 August 2019, and our notes,
Analysts                                                                                                      Delivering on its promises (17 December 2019), Getting a balanced view on outlook (21
Mark Thomas                                                020 3693 7075                                      May 2020), Improving returns on new opportunities (14 September 2020), and
                                   mt@hardmanandco.com                                                        Portfolio repayments fund enhanced return pipeline (18 January 2021) can be found
Mike Foster                                                020 3693 7075                                      on the same site.
                                   mf@hardmanandco.com
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February 2021                                                                                                                                                                                       20
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