Results analysis: BB Healthcare

• BB Healthcare (BBH) released its final results for the year ended 30 November 2021 on Monday this week. The trust delivered NAV total returns of 10.3% over the period, underperforming the MSCI World Healthcare Index total return (GBP) of 16.3%. Share price total returns over the period were slightly higher, at 11.4%.
• The board has proposed a final dividend of 3.015p per ordinary share in respect of the financial year ended 30 November 2021 and, if approved at the forthcoming AGM, this will bring the total dividend for this year up to 6.03p - ahead of the previous year’s. For the year ended 30 November 2022 the board is proposing a total dividend of 6.47p per ordinary share.
• Chairman Randeep Grewal said: “Though the company underperformed the index over the last financial year, over a five-year period the manager has delivered attractive returns that compare very favourably to its peer group.”
• The board also revealed that the investment manager, Bellevue Asset Management, would absorb the majority of marketing and investor relations costs going forward, which should have a positive impact on the trust’s OCR, which is already competitive at 1.08%.
• The board underlined its commitment to ESG investing, which has been greatly in focus during the year. A highly detailed analysis of the trust’s ESG position and strategy has been introduced to the company’s annual report. Full portfolio disclosure is also being introduced, allowing investors to see all of the trust’s holdings for the first time.

Kepler View

While BB Healthcare (BBH) has clearly had a difficult and frustrating year, our view is that the trust has been hit by the indiscriminate sell-off in markets we have experienced – especially felt amongst mid- and small-cap stocks to which BBH is largely exposed.

BBH’s exposure to mid- and small-caps marks it out from peers and the benchmark, but also explains the relative performance over the last six months or so. Over the long-term, mid- and small-cap companies are expected to grow faster than large ones, and the healthcare sector is no different.

However, at times, market sentiment can mean small- and mid-cap stocks can fall significantly faster than larger more liquid stocks – especially in liquidity driven markets. The managers are fighting these headwinds currently, but appear resolute in their belief that the historically strong returns delivered from their investment process will revert.

When we met the managers last month they told us it was their view that “history will look back on this moment as a fantastic relative opportunity for long-term healthcare investors”, and we note that the team – who have typically used gearing sparingly – have increased the level of gearing to c.10%, underlining their bullishness.

BBH offers a complimentary exposure to equity income investors, with an attractive level of dividend derived from capital, and an underlying exposure that is very different from typical income exposures to the healthcare sector.

While BBH has exhibited higher volatility than peers, the managers have used this extra risk well, and delivered attractive risk adjusted returns historically as demonstrated by the chart below.

With that in mind, investors who share the conviction of the manager in the medium to long term fundamental prospects of the portfolio companies may see the current discount level of c. 3% as an opportunity, given the long-term average premium to NAV that the shares have traded at historically. The attractiveness of the trust may also be enhanced by the accountability provided by the full portfolio disclosure, and the detailed ESG analysis which is now available in the annual report.

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