River & Mercantile UK Micro Cap, managed by Philip Rodrigs (pictured) has announced its annual results for the period ended 30 September 2015. The trust, which was admitted to trading on the London Stock Exchange on 2 December 2014 having raised £50.6m, has during the ten months to 30 September 2015 grown its NAV to 110.36p, a total return of 12.6%. The compares against a total return of 7.8% provided by its benchmark, the Numis Smaller companies plus AIM Index.
During the reporting period, the company has been in the process of deploying the proceeds of its fundraising. Cash moved below 10% during calendar Q2 2015, which the managers consider to be fully invested. They say that they estimate that holding cash during this assessment phase whilst the Company’s benchmark rose led to a relative drag of around 2%. In terms of return attribution, they say that the greatest contribution to return in the period was from alpha generation, despite the 2% cash drag effect.
In terms of individual holdings, the largest contributor was Nationwide Accident Repair Services, which was subject to a takeover. This delivered a 54% return from a 5.8% stake acquired in this car repair firm at 65p. The managers say that it was acquired at a significant 22% discount to the then prevailing market price, secured by responding swiftly to the opportunity to assist Quindell plc in its objective of divesting non-core units. A recommended 100p cash offer for the business was received within a month of the purchase.
The managers say that an even higher return of 79% was achieved with Alkane Energy, an electricity generator in the UK. Shares were purchased at the equivalent of circa 0.55x book value of the generation assets and the offer from an infrastructure firm at circa 1x book value was accepted.
The managers say that the largest sector overweight, Technology, delivered considerable positive returns. The Largest holding Ideagen rose 39% after the Company backed a fund raise to enable an attractive acquisition to further extend the firm’s leadership in business-critical software for managing information flows. In addition, Trakm8 (A manufacturer of miniature telematics devices used to track both fleet vehicles and insured motorists) rose 30.5% following its purchase in July at 155p. The managers say that Strong growth looks set to continue as ‘Usage Based Insurance’ is set to increase. K3 Business Technologies provided a 31% return. The manager believes that investors increasingly appreciated the strong global position the firm has in software for clothing retailers built on a Microsoft platform. KBC Advanced Technologies, which provides software to the oil & gas secto, rose 40%. The managers say that a kneejerk sell off suffered by the shares in late 2014 as the price of oil collapsed presented an exceptional valuation opportunity.
Elsewhere, Finsbury Food enjoyed robust demand for its cakes and breads leading to strong profit growth which supported an attractive c4.5% dividend yield at purchase. NAHL Group, the firm helping individuals to access cost-effective legal services via their ‘Underdog’ brand, also benefited from a sharply rerated valuation as it moved through £100m market cap.
Premier Technical Services Group returned 63%. The managers say that rare skills justify strong margins and quality cash flows (it is a consolidator of complex support service providers such as lightning conductor installation specialists). STM group returned 56%. The managers say it is one of very few fully approved providers of international pension schemes and that Individuals migrating overseas are allowed to transfer their pension, with STM a specialist at handling the complexities efficiently.
In terms of detractors, three detracted by more than 1% although the managers say that unusually they all continue to merit an ongoing position in the portfolio. Shanta Gold ended the period down 42% from the average purchase price. The managers say that this was a particularly frustrating performance against a backdrop of the price of gold only dropping c7% over the period of ownership.
Blur Group closed 56% lower than the purchase price at the end of the period. The managers say that they remain of the view that Blur is a unique and valuable asset, and are heartened by the fact that these qualities are attracting high calibre individuals to assist in realising the very substantial opportunity. They say that they retain a modest position in what we consider to be one of the likeliest prospects amongst listed micro caps to become a UK internet ‘unicorn’ in due course.
Epistem has been the manager’s most frustrating holding. He believes that the positive news flow during the period should have seen Epistem be the top positive contributor but instead it suffered a 35% loss. The managers say that this is despite the shares rallying 42% immediately after the news that Indian regulatory approval had been confirmed, allowing the firm to launch its gene-detection technology into the market. The managers say that with dozens of potential applications for their ground-breaking tablet-sized Genedrive diagnostics device, this low cost gene detector has enormous commercial potential from detecting bio-hazards through to personalised medicine and life-saving diagnostics in tuberculosis, HIV, Hepatitis C and more. Epistem, in their view, is the epitome of a hidden gem in plain sight within the micro cap universe.
River & Mercantile UK Micro Cap gets off to a good start : RMMC