UK Edition
The abrupt conclusion of 14 years of ultra-loose monetary policy could spell disaster for small companies with large debt piles. Higher debt servicing costs, combined with a weakening economic outlook, could wipe out profits for many companies that have over-leveraged their balance sheets in an attempt to maximise returns over recent years.
Therefore ensuring the smaller companies that make up our Inheritance Tax Portfolio remain financially sound will become an increasingly central focus of this column.
Of course, Questor has always vastly favoured conservatively financed firms over their more precarious peers. This means our portfolio is well placed to overcome the effects of a rapidly tightening monetary policy.
Indeed, healthcare services provider Totally’s recent full-year results showed it has a net cash position of £13m and covered its net interest payments seven times. The company also reported a significant improvement in financial performance, with revenue and gross profit rising at a double-digit rate as the ongoing pandemic led to surging demand for healthcare services.
Totally’s solid financial position enabled it to make two acquisitions during the year that strengthen its long-term growth prospects. They provide access to growing demand for elective care and employee wellbeing services, while further diversifying the firm’s operations. Additional acquisitions are likely due to the company’s solid financial position.
Since being added to our Inheritance Tax Portfolio in January last year, Totally has generated a capital gain of 57pc. While it trades on a price-to-earnings ratio of 71, an annualised rise in underlying profit of 135pc over the past four years combined with its long-term growth prospects suggest it has further room to run. Hold.
Update: Crestchic
Power reliability equipment specialist Northbridge Industrial Services changed its name to Crestchic in June. The company subsequently released a trading statement that beat market expectations, which led to it announcing a rise in full-year profit guidance. This is the third such increase since the start of the year.
Of course, the company has benefited greatly from increased activity in the oil and gas sector over recent months. As a result, Questor retains a relatively cautious stance on its short-term prospects due to an increasingly downbeat global economic outlook that could have a detrimental impact on demand across the energy sector.
Encouragingly, Crestchic has experienced high demand from rising levels of data centre activity. It also has a sound balance sheet, with a net debt-to-equity ratio of just 13pc, meaning debt interest payments were covered seven times by operating profit last year. Meanwhile, it enjoyed some success in passing rising input costs on to its customers, while agreeing the sale of its Tasman business in the Middle East.
Due to an uncertain outlook for the oil and gas sector, we are not expecting its 38pc share price surge over the past month to be repeated soon. But it nevertheless remains a long-term holding following a 77pc share price gain since being added in April 2019.
Update: Michelmersh
Specialist brick manufacturer Michelmersh has also generated positive returns for our portfolio. It is up 8pc since being added in January 2018 despite falling out of favour with investors over the past year.
Understandably, they are concerned about its prospects in an era of rising interest rates that could have a detrimental impact on demand for, and supply of, new homes.
With a net cash position of £7m, the company is in a strong position to ride out potential industry weakness and make acquisitions. Moreover, its recent half-year trading update showed it grew revenue by 10pc year on year and was able to raise prices for its products last month.
Trading on a price-to-earnings ratio of around 15, Michelmersh is by no means cheap. But over the long run, favourable housing dynamics are ultimately set to provide more upbeat trading conditions. When combined with its capacity to overcome short-term risks, it remains a worthwhile holding in our portfolio.
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