Artemis Alpha has reported a -3.6% total return on net assets for the six month ended 31 October 2015. The FTSE All-Share Index declined by 5.7 per cent over the same period. The Chairman says the fall in the NAV was primarily due to changes in the valuation of its unquoted investments, a number of which raised additional capital to develop their businesses. Several of these fundraisings were done at prices below their carrying values, leading them to mark these investments to the level at which the new capital was raised. One of these received considerable attention in the press, when it was announced that BAE Systems was investing in Reaction Engines. They believe this is a significant development. Although the write-down in its valuation is painful, they believe the fundraising leaves Reaction Engines better placed to develop its rocket technology.
The Board has declared a first interim dividend of 1.40p per ordinary share (2014: 1.25p). This is an increase of 12% over the equivalent dividend last year.
The manager’s report says the strongest performers included Martinco, a lettings business, and Penna Consulting, a recruitment and personnel management company. Funded in Yeovil by the eponymous Richard Martin, Martinco has grown into one of the UK’s largest lettings networks through a combination of organic and acquisitive growth. It floated just under two years ago and used the capital to grow its franchised network in a highly fragmented market. Although its estate agency business is growing, it is predominantly a lettings company with high recurring revenues and strong cash generation. Although the share price has doubled in 2015, it still has a small market share in a sector where the prospects for growth are strong and which is ripe for consolidation.
Penna Consulting has also been an excellent performer over the last six months. Its business is equally split between outplacement and recruitment. Penna is the market leader in outplacement – it has contracts to help employees who have been made redundant, often by structural change, to find new jobs. The other side of its business is a more traditional recruitment business with customers in both the public and private sectors. It is seeing strong growth in both areas. Like Martinco, its share price has doubled over the last year but its prospects remain good.
The greatest positive contribution came from Mporium Group, which provides an e-commerce platform that allows consumers to browse, checkout and pay for goods using their smartphones. After two refinancings and the appointment of a new management team, it is on the cusp of delivering a revamped product. Other positive performances came from MJ Gleeson, a housebuilder focused on the north of England and Booker, a wholesaler and cash & carry group.
The continuing weakness in commodities has been negative for some of the portfolio’s oil & gas holdings. However, the Company’s exposure to this sector is well below historic levels, at 7.6 per cent of the portfolio. They wrote down the carrying values of three unquoted holdings: Starcount, Reaction Engines and Physiolab Technologies and there was also one valuation uplift.
Starcount was written down following the completion of a GBP5 million equity raising, a large part of which came from the management (Edwina Dunn and Clive Humby). The price of the issue was a reflection of its slower-than-expected progress in winning clients. They continue to believe that, despite the delays, Starcount is well placed to deliver substantial value in social media data for its clients.
Reaction Engines was written down to reflect the valuation implied by BAE Systems’ GBP20 million investment, for which it received a 20 per cent stake in the company. This investment represents a positive validation of Reaction Engines’ technology and will unlock further funding from the government, which was conditional on Reaction Engines partnering with a large aerospace company. So despite the write-down, this must be seen as a highly positive development.
The write-down in Physiolab Technologies, meanwhile, occurred as technical glitches delayed sales of its product, a thermal compression system. This resulted in a short-term cash-flow problem. The valuation that the existing investors proposed seemed appropriate given the product delays. However, they remain positive about the company’s potential. They believe its proprietary device, which helps to repair soft tissue through heating and cooling, is far superior to anything else on the market.
Oxford Nanopore Technologies raised further capital for the continued development of its business and this was done at a 40 per cent uplift. Theyalso took an opportunity to realise part of this holding in the period. Elsewhere among the Company’s unquoted holdings, they received the cash from Lynton Holding Asia (reported in a prior period). For now, they have used this to reduce the Company’s level of gearing.
ATS : Artemis Alpha bests benchmark despite write down of some unquoted holdings