The Schroder UK Public Private Trust could finally see a positive re-rating, having been "left behind" despite a rally in funds investing heavily into the Covid-19 tech and healthcare boom, according to analysts at Stifel.
Investors in the trust, formerly Woodford Patient Capital, have had a rough ride since the company floated on the stockmarket. Shares have lost 70% on their IPO price and 75% since their 119p peak five years ago, having become embroiled in the liquidity crisis at the ill-fated Woodford Investment Management.
Schroders took over the trust in December 2019, with fund buyers welcoming the move. Managers Ben Wicks and Tim Creed have been quick to outline their intentions as they look to turn the vehicle's fortunes around.
Despite that, the discount on SUPP has only recently started to narrow, tightening in to 33% as at 24 August according to Morningstar data, from around 45% at the start of the month.
This is despite funds investing in tech and healthcare, as SUPP heavily does - 70% of its portfolio and 88% of its NAV are allocated to the two sectors - largely trading close to or at a premium to NAV.
The market remains "rightly concerned", said Stifel analyst Iain Scouller, about the trust's debt facility, which needs to be replaced or extended before January, and leverage, which stands at a high 25%.
Further bear case arguments put forward by the trust's detractors include the concentrated nature of the portfolio, which Scouller admitted "suggests it has high-risk/high-reward characteristics"; the likelihood many of its holdings will need follow-on funding, which will need to be funded by realisations or drawing on its debt facility; and the inability of the board to control the discount with such high leverage.
However, Scouller has taken a "contrarian view", noting there are scenarios for a positive re-rating. These include realisations of investments, with the cash raised used to repay debt; the securing of a longer-term debt facility; and write ups of investments to reflect good earnings performance and higher valuations of comparable listed companies.
Scouller thinks the current share price, at around 30p, is implying a 20% to 25% haircut in the valuation of the whole portfolio, and/or implying a similar discount to the NAV to reflect the risks associated with leverage and the relatively short duration of the bank debt facility.
But, Scouller countered, "if we do start to see some positive newsflow on portfolio investments and realisations, we think there is scope for some recovery in the share price".
"We maintain a 'buy' recommendation and would argue that if we started to see some positive developments such as NAV growth or cash from realisations to reduce the debt, the shares could trade to a more typical private equity type discount of 15% to 20%, which based on the NAV of 46p at 31/03/20. This implies an increase in the share price to around 38p."