Bellevue Healthcare 26 September 2024
Disclaimer
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Bellevue Healthcare. The report 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 the dealing ahead of the dissemination of investment research.
Bellevue Healthcare (BBH) is designed to capture the best earnings growth potential in the long-term secular uptrend in healthcare demand and sophistication. Managers Paul Major and Brett Darke look to identify companies that are operationally geared to new developments and trends, specifically those companies that are providing solutions to the challenges faced by modern healthcare systems.
The portfolio is a concentrated, high-conviction proposition with a strong bias to mid-caps. This area of the market has been out of favour in the past couple of years as investors have preferred the safety of large caps, but the imminent rate-cutting cycle looks like it may be the signal for a change in fortunes. BBH’s relative Performance has been strong in recent months, while Paul and Brett report market behaviour is increasingly promising, with their portfolio quickly being bought on any down-day, in contrast to what was happening in 2022 and 2023. The managers say they are more optimistic about the immediate prospects for their portfolio than they have been for quite some time.
BBH shares look good value on a Discount of 8.8% at the time of writing, when comparing the rating to its five-year history. The rate-cutting cycle could see this discount look increasingly attractive, in our view, while the board has been very active with buybacks to support the rating and NAV per share and there is an annual redemption facility too.
The trust pays a dividend worth 3.5% of the NAV from capital, based on the NAV at the previous fiscal year’s end.
We think healthcare is a sector that should be highly attractive to investors seeking long-term growth. The structural drivers are clear: growing demand thanks to ageing populations, rising wealth, and supply-side advancements (better treatments becoming available). To this visibility must be added resilience: spending on healthcare is generally non-cyclical and so earnings streams should be consistent throughout the economic cycle.
BBH has the potential to maximise gains from these growth drivers, with the active, concentrated portfolio and a strong bias towards small and mid-caps. Stock selection is focussed on finding those companies most geared to the structural developments being forced on modern healthcare systems, meaning earnings growth potential could be magnified.
The shares currently trade on a c. 9% discount to NAV, which we find compelling. This is particularly so considering a US rate-cutting cycle now seems finally underway, which could boost the valuations of the high-growth stocks BBH holds. The portfolio saw a bounce in performance late last year when consensus formed that the interest rate cycle had peaked, and we think there is the potential for its areas of focus to come back into favour now the cuts have begun.
Bull
- High-growth potential with rate cuts potentially set to boost portfolio
- Specialist managers with long experience in the sector
- Strong commitment to managing the discount
Bear
- An active approach increases the potential for underperformance as well as overperformance
- Gearing increases downside risks as well as return potential
- Focus on a single sector and dominance by one country (the US) brings specific risks