William Heathcoat Amory
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Updated 12 Jul 2022
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Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

  • Bellevue Healthcare (BBH) has reported its interim results for the six months to 31 May 2022, a period in which the board resolved to change the name from 'BB Healthcare Trust plc' to 'Bellevue Healthcare Trust plc'.

  • Over the period, the share price and NAV decreased 17.5% and 18.7% respectively. Including the final dividend for the financial year ended 2021, the company's shares delivered a total return of -16.1%. In comparison, the MSCI World Healthcare Index delivered a total return in sterling of +4.5%. Since inception, BBH has delivered a NAV total return of 79.3%, which is 15.5% behind the MSCI World Healthcare Index return of 94.8%.

  • As announced on 3 December 2021, the target dividend for the 2022 financial year is 6.47p. The directors are pleased to declare an interim dividend for the 2022 financial year of 3.235p per ordinary share which will again be funded from the company's distributable reserves.

  • At launch, the company committed to being fully invested. Recognising the current environment, the board has set a soft ceiling of 10% for the maximum net cash position. Maximum gearing remains at 20% of NAV and the managers still expect the long-term average gearing position to be mid-to-high single-digit percentage. The managers have been “gradually 'buying the dip' and increasing the gross exposure of the company by increasing the gearing. The leverage ratio stood at 11.5% as of May 2022”.

Kepler View

The managers are fundamental stock pickers, and pay little attention to benchmarks when constructing the portfolio. As a result, one might imagine that performance will deviate from indices. As of 31 May 2022, BBH’s portfolio consisted of 15.1% mega-cap companies and 8.5% large-cap companies. In contrast, the MSCI World Healthcare Index consisted of 76.2% mega-cap and 21.7% large-cap. This small-cap exposure has left the portfolio very much out of favour, which has contributed to the short-term underperformance relative to the healthcare index. This is a departure from the longer-term picture, as we illustrate in our February research note. Prior to 2022, on a rolling three-year basis, BBH has been consistently ahead of the index and therefore in line with its investment objective.

We think it instructive that the managers report that they are seeing a divergence between share prices and operating performance. As one might expect from stock pickers, the managers are reacting. The interims highlight that the team have been “taking advantage of the current weakness to re-establish some exposure to the dental sector…[and] added to our holdings in the diagnostics, healthcare technology, tools and services holdings”. This has been funded by sales of companies in “managed care and diversified therapeutics, which have held up well on a relative basis”. The total number of holdings has declined from 32 positions to 29.

portfolio breakdown

Source: BBH

With a dividend funded from capital, BBH offers a very 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. BBH’s exposure to mid and small caps marks it out from peers, not to mention the benchmark.

The managers observe that at times, “pockets of opportunity” emerge in stock markets “as stocks are 'dumped' often not due to their intrinsic worth but rather the forces unleashed by geopolitics and macro-economics”. They observe that “for most healthcare companies, energy is not a significant cost. Labour too is typically a relatively small percentage of the end-product sales price. Furthermore, the pandemic has led to a backlog of demand in many specialities”. The managers have been spending time trying to find “the 'inevitables': those companies that will grow revenues, margins and profits… in spite of any ongoing geopolitical and macro-economic uncertainties”.

Investors who share the conviction of the manager, and believe that the historically strong returns delivered from their investment process will revert, may see the current discount level of 4% as an opportunity, given the long-term average premium to NAV that the shares have traded at historically.

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