Artemis Alpha has published results for the year ended 30 April 2016. The Company’s net asset value per share fell by 6.1 per cent during the year on a total return basis. This compares with a fall of 5.7 per cent in the FTSE All-Share Index over the same period. Although the quoted investments were positive contributors to performance over the year, adding 0.3 per cent, overall performance was held back by a number of reductions in value in the unquoted investments amounting to 5.5 per cent of the net asset value. The total dividends for the year ended 30 April 2016 were 3.90p (2015: 3.55p), an increase of 9.9 per cent from 2015.
The Board says it remains acutely aware of the poor performance of the Company in recent years and the current level of the discount at which the shares trade to the underlying asset value. A sustained improvement in performance is needed to improve the rating of the shares and reduce the discount. With this in mind, the Board has recently reviewed the Company’s investment strategy with the fund managers. As a result, new guidelines and targets have been set, in particular for a reduction in the Company’s exposure to unquoted investments. This has been a challenging area for the fund managers in recent years and has accounted for much of the poor performance and, the Board believes, has been the principal contributor to the Company’s weaker share price rating.
The Board and fund managers have agreed that a priority is to reduce the Company’s exposure to unquoted holdings from its current level of 27.3 per cent to below 10 per cent over the next two years. The fund managers remain confident that value will be generated from these holdings and that a number of realisations can be achieved during this period. Whilst the objective is to reduce the exposure to unquoted companies, this will not be done at any price, and the exact timing cannot be predicted. Investments in new unquoted companies will only be made on an exceptional basis and then only once the investment has been formally considered and approved by the Board. Follow-on investments that will improve the prospects of the investee company – or preserve the Company’s economic interest in it – will be permitted and remain at the discretion of the fund managers.
When unquoted investments are realised, it is expected that the proceeds will be invested in quoted companies. In line with the Company’s wide investment remit, these could range from small cap stocks through to the largest companies of the FTSE 100. However, the Company’s strong bias to smaller and mid cap companies is expected to remain, as this is where our fund managers continue to find the most promising investment opportunities. Any significant exposure to large caps is likely to be tactical in nature and consist of ‘special situations’ – buying shares that are undervalued and out of favour. Our fund managers are active stock-pickers and are not influenced by movements in, or constituents of, an index.
Part of the Company’s investment objective is to provide a growing dividend stream and the Board will continue to target an annual rate of dividend growth of around 10 per cent. The reduction in exposure to unquoted investments and the subsequent reinvestment into quoted companies should improve the overall yield of the portfolio and support the dividend. That said, the Company has sizeable revenue reserves, providing further flexibility in managing the portfolio from a yield perspective. The dividend yield will not dictate the overall shape of the portfolio.
In the listed portfolio, the biggest positive contribution came from Skyepharma, which makes oral and inhalation drug delivery systems. It works in partnership with the major pharmaceutical companies who market and sell its products. The royalty payments from Flutiform, its most important product, increased substantially as it gained approval in several new countries. A proposal to merge with Vectura was put to shareholders in March and subsequently agreed. Vectura’s business is in respiratory related products and the two businesses are complementary. We believe combining them will bring benefits of scale and allow the resulting business to develop the next generation of devices more rapidly.
Another notable contribution came from Penna Consulting, a recruitment and outplacement specialist, which was bought by Adecco. Penna was benefiting from strong growth in both of its divisions and its roster of longstanding blue-chip customers made it an attractive acquisition for Adecco, which is looking to increase its position in the UK market. The offer price of 365p was four times the cost of the Company’s initial investment.
Helped by ultra-low interest rates and government initiatives, the housebuilding sector performed strongly. In the portfolio, the prime beneficiary was MJ Gleeson. It consists of two main divisions: homes and strategic land. The homes division specialises in low-cost housing, predominantly in the north of England where demand is strong and competition limited. Its skill in securing land at favourable prices enables it to achieve industry-leading margins. It has ambitious plans to expand geographically and to increase annual sales from below 1,000 units to 3,000 units. The strategic land division should benefit from the relaxation of the planning regulations as the government tries to increase the number of houses being built. The final strong contributor in the listed portfolio was Mporium (formerly MoPowered). Its e-commerce platform allows consumers to browse, checkout and pay for goods using their smartphones. This is the fastest growing area of online retailing. After the arrival of the new management team and two refinancings, prospects are good as we eagerly await news of the revamped product – and contract wins.
On the negative side, the biggest detractors in the listed portfolio were Gaming Realms, Pittards and GLI Finance. Gaming Realms, an online operator of social gaming and gambling businesses, made a sizeable acquisition despite the profitability of its core business remaining unproven. This has weighed on the share price and we have gradually reduced our position.
Pittards, meanwhile, has proven a frustrating investment because we believe there is considerable unfulfilled potential in the business. A company with a 200-year history, it produces leather for manufacturers throughout the world. Its main tannery is in Yeovil but it also has a tannery and three factories in Ethiopia, where it makes gloves using its own leather. There has been a significant amount of change in this business: a new chairman is overseeing a strategic review and new money has been raised, enabling the company to buy the freehold of its tannery in Yeovil. Although global leather markets remain subdued, we believe the opportunities for Pittards to add to its customer list remain compelling. The high levels of operational gearing mean that any meaningful sales growth – or even a recovery to historic levels – would lead to a very substantial increase in profits. The shares are valued at a discount to net assets and, with a new chairman and finance director now in place, we are optimistic about its prospects over the next couple of years.
GLI Finance, which invests in a number of online lending platforms, performed disappointingly. As with Pittards, there have been a number of significant changes over the last year as there were problems that needed addressing. In essence, the company had invested in too many online platforms which failed to achieve scalability and were too widely spread for management to control. A new chief executive has been appointed and he has started rationalising the portfolio and focusing on those platforms that have a clear pathway to scale and profitability. As part of this process a strategic investor has injected new capital to shore up the balance sheet. With its more focused approach and stronger balance sheet, we believe the company is well-placed to take advantage of the growth opportunities in this part of the alternative finance area.
Oxford Nanopore Technologies and Rated People raised new capital at a premium to the previous carrying values, enabling their valuations to be revised higher. This, however, was more than offset by the write-downs in Starcount, Reaction Engines, Physiolab Technologies and Maison Seven.
The valuation of Starcount was written down earlier in the financial year following a GBP5 million equity issue funded mainly by its management team: Edwina Dunn and Clive Humby, best known as founders of the highly successful Tesco Clubcard. The new money was invested at a relatively low price to reflect the company’s slower than expected progress in winning clients. We still believe that the innovative way of using social media analysis will add significant value to its clients. If it can land one significant client we feel more will follow.
We wrote down our carrying value of Reaction Engines, despite the encouraging news that BAE Systems had decided to invest GBP20 million in the company, although this came at a discount to the previous funding round. BAE’s investment is a positive validation of the company’s technology and has also enabled it to access further grant funding from the government. The company has appointed a highly qualified chief executive, Mark Thomas, from Rolls Royce. Technology to support space transport is developing rapidly at the moment and Reaction Engines believes there may be many other applications for its unique technology.
Physiolab Technologies, a medical device company that enables soft tissue to be repaired using hot and cold compression, suffered a series of technical glitches that led to delays in getting its product to market. This resulted in cashflow problems. While the lower valuation of the fund-raising reflected these delays, we are hopeful that the company can start to convert the many expressions of interest into actual sales.
The final, and most disappointing, detractor was Maison Seven, which sells women’s fashion online. Although the business was growing its revenues, it was performing well below its own budget. In a very competitive market it was clear that it would need substantial additional investment merely to break even. Having supported the company financially through the Christmas trading period, the shareholders decided to put the business into administration following very disappointing sales and the investment was written off.
The negative impact of these four investments was a 5.5 per cent reduction in the Company’s net asset value.
ATS : Artemis Alpha will cut exposure to unquoteds