Rockwood Strategic : Singers Report 2022

Initiation

For the exclusive use of Richard Staveley at Rockwood Strategic. Not for reproduction or redistribution.

Rockwood Strategic (RKW LN)	Corporate Client
Investment Funds	Current price* 1415.0p	Corporate

Engaged Value Investing

Over the last three years, RKW has delivered exceptional NAV TR (+58%) as outcomes from its focused, active & recovery oriented investment strategy outweighed the wider macro- environment. We summarise the strategy as invest, transform and exit. A review of its portfolio highlights that investee's accounting for c35% of NAV look to be migrating into the strategy'sthird phase (exit) and management is guiding that their estimates of fair value suggests at least

60% upside. Whilst timing is uncertain, that c35% of the portfolio is at or close to exit mode suggests that there is an opportunity for significant idiosyncratic upside - in the meantime, weexpect this potential to underpin the fund's NAV.

Strategy

RKW is a focused, value oriented, active UK microcap (mainly sub £100m mkt cap) investor. The strategy targets 2x money from individual investees over 3-5 years (15% IRR if held for five years). The fund is invested with a value and recovery mind-set. The manager, can and does, take significant stakes (>10%) in investees and seek board representation. RKW invests in companies where returns can be delivered, independent of the wider macro-environment as a result of operational, strategic or management change.

Performance

Over the three years to 31 August, the fund has returned 58% versus the Numis 1000 ex IC TR (N1000) +16.7% and the AIC UK Sm. Cos sector's return of 14.6%. RKW's NAV has been very strong (+3.8%) over the last year versus the N1000's return of -21.6%. One can easily attribute the recent performance to the maturity of key investees within the investment process. i.e. the upside from transformation (idiosyncratic risk) has outweighed the markets (systematic risk) general direction.

Portfolio

The portfolio is deliberately concentrated (up to 35 investees, top ten to account for at least 51% of NAV) to ensure that management has sufficient capacity to engage. The portfolio comprises seven core investees (Top 5 - 55% of NAV, single largest exposure c25% of NAV) and eight springboard/opportunity investments. We calculate the core investee's valuation multiple at 3.9x '23 est. EBITDA. At least two (c35%) investees are at or close to the third phase (exit) of RKW's strategy.

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Key data
Yield (%)			Nil
Pub NAV (23 Sept)			1,575.5p
Discount (%)			10%
Market cap (£m)			36.0
Enterprise Value (£m)		36.0
Shares in issue (m)			2.5
Next Event:		01/12/2022
		Interim results
	1m	3m	12m
Absolute %	1.4	3.3	-10.9
Rel. market %	8.5	4.2	-6.5

Share price chart

Manager

RKW is managed by Harwood Capital, an active smaller companies specialist. Harwood (£2.3bn AUM) is active in both the private and public markets including four investment trusts. RKW is differentiated from Harwood's other investment trusts by virtue of its focus on public markets and micro-cap investees. The lead portfolio manager, Richard Staveley started managing RKW in 2019 and since then he and the fund have moved to Harwood Capital.

Discount control, issuance and dividend

The board had taken the necessary authorities to repurchase shares and to issue new shares (at a premium to NAV). No shares have been repurchased since the fund reverted to an active investment policy. The board has expressed a desire to increase the fund's scale. The fund's board has adopted a policy of paying the minimum dividend permitted under the investment trust rules.

Valuation

Trading on a 10% discount versus an 11% average discount (12m and 3 years), RKW is trading in line with its history and tighter than the wider sector (13% current). The fund's rating may be attributable to its historic performance. As the market builds knowledge and confidence in the strategy and the trajectory of the investees, there is the potential for the discount to tighten further.

Contributing Analysts

Charles Murphy

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Paul Glover

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This document is a Marketing Communication and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to

any prohibition on dealing ahead of the dissemination of investment research. Please refer to important disclosures at the end of this document.

Rockwood Strategic | Initiation

For the exclusive use of Richard Staveley at Rockwood Strategic. Not for reproduction or redistribution.

Objective, Strategy and Portfolio

Rockwood Strategic (RKW) provides focused (up to 35 investees, currently 15), active, value oriented, UK microcap (mainly sub £100m mkt cap) stock specific equity exposure. The strategy targets 2x money from individual investees over 3-5 years (15% IRR if held for five years). The fund is invested with a value and recovery mindset and a focus on delivering a total, and not a relative, return that is independent of the wider macro-environment.

The portfolio manager, Richard Staveley, believes that value (as a strategy) will no longer be a terminal underperformer. He argues that the normalisation of interest rates has increased the value of tangible cash flows relative to the longer term (and less tangible) potential of growth investing. He also highlights that growth's dominance has culled the ranks of experienced value managers (such as the team at Harwood Capital) which has improved their competitive position.

The strategy is to invest in undervalued companies where RKW's management, led by Richard Staveley, has identified the potential to improve returns as a result of operational, strategic or management changes. Staveley estimates their universe at c1,000 companies, of which c300-400 are potentially credible investments and 50-60 (in addition to the portfolio) are actively monitored.

At its heart, RKW is a focused "recovery" style fund, where the concentrated approach allows de-risking via large stakes and active engagement rather than sit on the side-line and hope things get better, actually help drive, cajole and influence the speed and likelihood of recovery. This would be (a) a recovery in margins from depressed back to say "mean" (b) and in turn a recovery in valuation rating. The combination of the two drives the strong absolute return.

The portfolio comprises of up 10 core investees (c51-70% plus of the portfolio) plus a further 15-25 smaller positions (springboard and opportunity investments - split c50/50, 2-4% of NAV positions). Expanding on the smaller investments, Staveley highlighted that they enabled the fuller deployment of the fund's balance sheet and facilitated the establishment of core investments. Staveley categorises them as those whose potential (to become a core investee) is being evaluated (springboard investees) or more liquid opportunistic situations where the targeted return can be achieved but a large stake is not required to influence or generate change.

Once a core investee has been identified and a stake built, the team actively engages with the company to ensure the necessary changes occur. Activism is integral to their strategy. In their opinion, it is not enough to invest in a cheap company and hope that that the board/ management will make the necessary changes - proactive, constructive, engagement is required to ensure the change occurs. As part of the strategy, management can and does become directors of their investees. The Harwood team sits on four of their eight core investee's boards.

Key elements of each investment thesis include:

• How the Rockwood's management team will effectively engage with (influence the direction of) the investee; and
• The articulation of a take-private exit strategy (trade or private equity), including likely exit multiple and purchaser. The team expects c2/3rd's of their exits to occur via a corporate transaction and c1/3rd via the public market.

Discussing the exit process, Staveley noted that it could occur via bid (e.g. Augean -8.8x money multiple) or sale in the public market (e.g. RPS plc - 2.6x).

The team will not seek or target investments in privately held companies. However, they are permitted as part of a public-to-private transaction or as an investment in unlisted preferred equity or convertible debt in a public company.

Asked about how much AUM the strategy could handle, Staveley stated that they are comfortable up to £250m and would review the situation at this point.

Portfolio

The fund's current portfolio comprises seven Core investees and eight Springboard and Opportunity investees. Staveley expects the number of springboard and opportunities to grow overtime.

RKW's five largest investments (c55% of NAV) are summarised below; four of which fit the category of a core investment. The commonalties are as follows:

• An identifiable division with the potential for significant upside once the company's strategy has been appropriately re-focused; and/or
• A requirement for new management and/or the disposal of a problematic business line; and
• Sufficient influence to ensure that the necessary changes are made

Management teams often need encouragement and support to evolve a business, left to themselves the status quo can prevail. Staveley noted that they often need maximum influence during the exit process to ensure that all possibilities are fully considered.

In both examples where the manager has provided an estimate of upside (Crestchic and Centaur) they have chosen an exit multiple of 10x EV/EBITDA. Expanding he highlighted that these multiples reflect their expectation of what private equity or a trade buyer would pay for these businesses. A cursory review of the fund's largest holdings highlights a bias to Industrial and Media stocks. When challenged on this, Staveley

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Rockwood Strategic | Initiation

For the exclusive use of Richard Staveley at Rockwood Strategic. Not for reproduction or redistribution.

highlighted that the investees' end markets were highly diversified. The industrials exposures range include the power market, parts distribution and hydraulics. Similarly, the Media exposures ranges from global advertising, B2B in the marketing and legal service sectors and financial services.

A review of the progress made by core investees (in the light of their 3-5yr time horizon) highlights that Crestchic (5+years, 25.4% of NAV) and Centaur (3 years, 9.3% of NAV) both look to be migrating to the third phase of RKW's strategy.

Figure 1: Top Holdings

						Total
			Age in	Portfolio	Rockwood	Harwood	EV/est23
Core Holdings	Board Rep.	Ticker	2023	Wgt (%)	Stake (%)	Stake (%)	EBITDA (x)
Crestchic (Northbridge)	Yes	LOAD	7 years	25.4	15.3	24.1	6.0
Flowtech Fluidpower	Yes	FLO	3 years	10.3	5.8	26.0	7.4
Centaur Media*	Yes	CAU	3 years	9.3	5.7	29.8	5.0
M&C Saatchi	No	SAA	2 years	7.5	1.6	1.6	3.8
Pressure Technologies*	No	PRES	4 years	7.4	13.8	13.8	9.0
Smoove (ULS Tech)	No	SMV		6.4	6.6	8.9	EV/S 1x
Van Elle Holdings	No	VANL		5.9	6.4	6.4	3.2
Bonhill	Yes	BONH		2.5	19.1	19.1	2.3
Total				74.7			Wgt Av. 3.9x

Source: Rockwood Strategic, as of 31 Aug 2022. *Singer Capital Market is the broker to the company

Top 5 Investees

Crestchic (LOAD, 25.4% of NAV), Mkt Cap £53m, 15.3% Stake (24.1% Harwood Group), position initiated in 2016

Crestchic specialises in power reliability, it manufactures, sells and hires load-banks on a global basis. Loadbanks are used to test generators and critical power supplies. Crestchic principle sectors include Data Centres, Energy Transition and Critical Infrastructure. The company is the largest manufacture and renter of loadbanks outside the USA. The Company is expanding its US business, it had distribution centre in Philadelphia and has recently opened one in Texas and is planning a third. In addition to the US market, the company is focused on expanding its better established European operations and is exploring the potential of the middle east. Following a recent (2021) decision to refocused on its core business (give the trends around electrification) cash generation has improved, the company has focused on growing its US and European businesses and its manufacturing facility been expanded by c50%.

The Manager expects demand to remain robust and EBITDA to continue to grow. FY21 EBITDA was reported at £5.1m (prior to the disposal of discontinued operations). Harwood is forecasting FY 22 and 23 EBITDA at £11m and £12m respectively and believes that the business should be valued at 10x EBITDA versus its current EV of c£75m; implying c60% upside from current valuations.

Discussing Crestchic's evolution since he started managing RKW in 2019, Staveley highlighted the appointment of Stephen Yapp in 2020 and RKW's Nick Mills (assistant fund manager) as NEDs, an evolution in the management of the company, the introduction of a suitable LTIP for the management team and exiting the oil services business.

Reflecting the modus operandi of the strategy (buy, fix and exit via either the private or public markets) and reflecting on the state of the company, we would characterise Crestchic as having exited the fix stage of RKW's process.

Flowtech Fluidpower (FLO, 10.3% of NAV), Mkt Cap £72m, 5.8% stake (26% Harwood Group), position initiated in 2020

Primarily distributes Fluidpower* components to a diverse range of customers with a strong bias to parts used for repair or maintenance reasons. *the use of fluids under pressure to generate, control, and transmit power (includes hydraulic and pneumatic systems).

The company, an aggregator of fluid power specialists, is reporting subpar operating margins and has a stock-turn well below that targeted by management and achieved by peers. Staveley reports that management has recently established an ecommerce platform, is completing the integration of its acquisitions and is focused on improving margins and stock turn. Jamie Brooke, a member of RWK's Investment advisory group member, recently joined as NED. Flowtech's Chairman, Roger McDowell, was a NED at Augean Plc; a highly successful investment for RKW.

Flowtech is very much in the fix stage of the RKW process with at least 12 months until it migrates to the exit phase.

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Rockwood Strategic | Initiation

For the exclusive use of Richard Staveley at Rockwood Strategic. Not for reproduction or redistribution.

Centaur Media (CAU, 9.3% of NAV), Mkt Cap £66m, 5.7% stake (29.8% Harwood Group), position initiated in 2020

An international provider of business information, training and specialist consultancy. Its focus is on the paid provision of business intelligence, consultancy, training and lead generation.

New management was appointed in 2019 and adopted Margin Acceleration Plan 23 (MAP23) targeting 23% EBITDA margins & £45m of sales revenues by 2023. The company has been extensively restructured and digitised in the last few years with orientation to subscription based and premium content. A review of Centaur's management guidance (Interim results to 30 June 2022, published 20 July 2022) highlights an expectation that management will hit their MAP23 targets.

Reflecting on the state of the company and assuming Centaur hits its MAP23 targets, one could characterise Centaur as having exited the fix stage of RKW's process.

Singer Capital Market's is Centaur's broker and publishes research on the company. On 20th July 2022, SCM reiterated its Buy Rating with a headline of "H1'22: Continues to deliver" and a price target of 75p (current share price 44p, 26 September 2022)

M&C Saatchi (SAA, 7.5% of NAV), Mkt Cap £185m, 1.6% stake (1.6% Harwood Group), position initiated in late 2020

M&C Saatchi, the Global Advertising Company, had been in turmoil with the original Founders leaving, accounting errors and a poorly structured incentive scheme. The balance sheet has net cash and a new strategy to grow the business and improve margins has been unveiled. During COVID the business had no material client losses indicating the strength of their relationships. The fund invested in late 2020 when Management and Board changes started to take effect.

The investment in M&C Saatchi fits the team's Opportunistic category. The company was sufficiently undervalued that it offered the necessary 2x upside but because it had already initiated the changes required to deliver on its potential the fund didn't need to engender change.

Staveley observes that the progress through the fix stage has been disrupted by two bids (neither of which offer full value), they would be happy for the bids to fail and for the management team to complete its work.

Pressure Technologies (PRES, 7.4% of NAV), Mkt Cap £20.4m, 13.8% stake (13.8% Harwood Group), position initiated in early 2019

The company comprises two divisions Chesterfield Special Cylinders and Precision Machined Components (PMC). Chesterfield manufactures and services a range of end industries and customers including the Ministry of Defence and PMC manufactures high specification parts primarily for the oil & gas industry.

In 2020, the group undertook a series of management changes (new Chairman, new NED, new FD) and raised incremental capital to support the growth opportunity in hydrogen energy market.

The PMC division has suffered as result of COVID but should benefit from an improved oil & gas pricing environment resulting in higher activity levels. The Chesterfield business has a significant opportunity in the Hydrogen Economy; the business has the quality and specialist credentials. The end-market for Hydrogen storage, using their cylinders, could be significant with the potential for the company to become a key strategic supplier to the industry.

Staveley highlighted that there could be strategic value exiting the oil and gas industry in focusing the company on Chesterfield to capitalise on the secular growth offered by the energy transition.

Noticing that there still some strategic actions to be completed, one may conclude that Pressure Technologies is one step away from completing the fix stage of RKW's process.

Singer Capital Market's is Pressure Technologies' broker and publishes research on the company. On 27th September, SCM migrated its Rating from Buy to Hold with a headline of "Return to profitability now expected in FY23" and the price target was placed under review (current share price 35p, 11am, 27 September 2022)

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Rockwood Strategic | Initiation

For the exclusive use of Richard Staveley at Rockwood Strategic. Not for reproduction or redistribution.

Management Team & Manager

The fund's manager is Harwood Capital (£2.3bn AUM). Harwood specialises in active investment in smaller companies. See later, for additional information. On a day-to-day basis, the key personnel are Richard Staveley (Lead Fund Manager), Nicholas Mills (Assistant Fund Manager) and Christopher Mills (Advisory Company Member and CIO Harwood Capital LLP).

In addition, the team draws on a six strong (mainly external) team referred to as the Investment Advisory Group (IAG). The purpose of the IAG is to provide challenge to Staveley's investment thesis for core investments prior to investment. The team's job is to question not to decide, it is not an investment committee.

Figure 2: Harwood Investment Trusts

Fund	TNAV	Strategy
North Atlantic Smaller (NAS)	£750m	Investing in listed and unlisted smaller companies principally based in countries bordering the
		North Atlantic Ocean. NAS targets larger companies (up to £250m) than RKW and has greater
		exposure to private assets.
Oryx International Growth (OYX)	£225m	Small cap special situations and growth companies. The strategy targets listed and unquoted
		companies. Up to £250m mkt cap.
Odyssean (OIT)	£180m	A concentrated portfolio of well researched smaller companies, typically too small for inclusion
		in the FTSE 250. Constructive corporate engagement is a key part of Odyssean's approach. Up to
		£750m mkt cap.
Rockwood Strategic (RKW)	£40m	Valued oriented micro cap. Primarily up to £100m mkt cap.

Source: Harwood Capital

Asked about the potential for cross over and conflicts between the fund and Harwood's other strategies. Staveley highlighted that the Group provides substantive insights into the private SME markets without significant overlap and conflicts. The limited overlap (and conflicts) is a function of RKW's target market (sub £100m mkt cap) versus Oryx's and North Atlantic's £250m mkt cap ceiling and Odyssean's £750m ceiling.

That said, there are overlaps within the portfolio. Specifically, RKW's top three holdings are also owned by other clients of the Group.

Management team

Richard Staveley (Lead Fund Manager). Staveley has been managing UK Smaller company investments since 1999 and joined Gresham House plc in in 2019 to manage the fund. In May 2021, he left Gresham House and joined Harwood Capital in December 2021. Staveley sits on the boards of Bonhill Plc (BONH) and Centaur Plc (CAU).

Nicholas Mills (Assistant Fund Manager). Mills joined Harwood in 2019 after working at Gaballi Asset Management for 5 years. Mills currently sits on the board of Crestchic Plc (LOAD), Circassia Company Plc (CIR) and Hargreaves Services Plc (HSP).

Christopher Mills (Advisory Company Member and CIO Harwood Capital LLP). Mr Mills has been CEO and principal shareholder of Harwood since 2011. He is CEO of North Atlantic Smaller Companies Investment Trust (NAS LN) which he has managed since 1982 and Executive Director of Oryx International Growth (OIG) which he has managed since 1995. In addition, he is currently Chairman of EKF Diagnostics (EKF) and Renalytix AI (RENX).

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