Scottish Mortgage: Broker warns on SpaceX concentration

Canaccord Genuity (TSX:CF, LSE:CF) has initiated coverage of Scottish Mortgage Investment Trust PLC (LSE:SMT) with a 'hold' rating, warning that SpaceX now dominates the portfolio to an uncomfortable degree.

Analyst Iain Scouller said the rocket company accounted for 28% of net assets at 30 June, once the trust's 8% balance sheet leverage is taken into account.

He suggested investors who now view their holding as outsized after strong share price gains could top-slice their positions.

The shares trade at 1446p against a net asset value of 1538p, a discount of about 6%.

Canaccord thinks a discount of 5% to 10% is reasonable given the risk and reward attached to private companies and the potential volatility from the large SpaceX position.

The trust has performed strongly, with the share price up 38% and net asset value up 36% over the year to 13 July.

SpaceX contributed 14.9% to absolute performance over the year to 31 March, just over half the 27.4% net asset value return.

Its valuation rose by £1.91 billion to £2.98 billion, equivalent to 79% of the £2.43 billion total increase in fair value across the private portfolio.

Almost all of that gain remains unrealised. The realised gain over the year was just £0.8 million.

Beneath the SpaceX number, the private portfolio was mixed, with 21 investments falling in value and only 14 rising.

Scouller scored the trust's 126-page accounts eight out of 10, praising improved disclosure on unlisted holdings following a Financial Reporting Council thematic review.

He would like to see a vintage year breakdown for private investments, more detail in regulatory announcements when valuations change, and industry classifications for each holding.

SpaceX is currently classified as an industrial rather than a technology company, which helped lift the industrials weighting to 29% from 17%.

Canaccord noted the trust applies a typical 10% illiquidity discount to unlisted valuations, and a further 10% for execution risk where a transaction has yet to close.

The cost of debt is low at 3.6%, up from 3.1%, helped by long-dated debentures issued in 2020 and 2021 at rates below 3%.

Gearing fell to 11% of net asset value from 13%.

Scottish Mortgage spent £3.1 billion buying back 318.6 million shares, or 22% of share capital, over the two years to 15 March 2026.

The board has reviewed the fee structure and rejected a performance fee, with the ongoing charge ratio at 0.33% of net assets.