Recommended Rating Reaffirmed For ECP Emerging Growth Limited (ASX: ECP)

May 9, 2022

ECP Emerging Growth Limited (ASX: ECP), previously Barrack St. Investments Limited, listed on the ASX in August 2014, raising $16.0m through the issue of 16.0m shares at $1.00 per share. ECP provides exposure to a concentrated portfolio of ex-50 ASX-listed companies. The portfolio is managed by ECP Asset Management Limited (the “Manager”), an Australian based asset manager that was established in 2012. The Company’s objectives are to: (1) provide medium-to-long term capital growth and income through investing in a portfolio of small and mid-cap Australian companies; (2) preserve and enhance the NTA backing per share; and (3) provide shareholders a fully franked dividend, which over time, will grow
at a rate in excess of the rate of inflation. The Manager seeks to achieve these objectives through a high conviction portfolio comprising a minimum of 20 companies (typically 20-30 companies). The Company intends to be largely invested at all times with the Manager intending to have more than 90% of the Company’s capital invested at all times. The Company has a long-only mandate with the use of shorting and derivatives not permitted. The Manager has a disciplined investment process with investment selection based on fundamental, bottom-up, in-depth analysis with stock weightings based on the level of conviction in a stock adjusted for risk factors.

IIR has reaffirmed its Recommended rating for ECP Emerging Growth Limited (ASX: ECP). The Company has largely delivered on its investment objectives to date, with shareholders benefiting from a regular and growing fully franked dividend. The Manager has a disciplined investment process that has seen the portfolio outperform the broader market over medium-to-long term periods. Recent volatility in the
portfolio has seen the portfolio underperform over the 12-months to 31 March 2022 and highlights the additional risk associated with concentrated portfolios. Alignment of interest is strong with the CIO of the Manager, Dr. Emmanuel Pohl, being the largest shareholder of the Company, owning ~30% of the shares on issue. A key drawback of the Company is the limited liquidity with the Company having just 18.3m shares on issue and a small free float. We attribute the lack of liquidity as a key contributor to the discount to NTA that the Company has traded at throughout its history. The lack of liquidity is not as much an issue for long-term investors that have no intention of exiting the investment, however can be an issue for those seeking to enter or exit the stock in a timely manner. The recent Convertible Notes issue has enabled the Company to grow its asset base without diluting shareholders. We expect the interest component will be paid from cash reserves and dividends received, however capital gains may be required to satisfy the interest payments given the historical dividends generated by the portfolio. This may be detrimental to the broader portfolio in the event of market weakness post the deployment of the capital raised.

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