Dunedin Enterprise has announced its annual results for the year ended 31 December 2016. During the period, the company provided an NAV total return of 2.7% and a share price total return of 0.0%. The company says that, in comparison, the return on the FTSE Small Cap (ex Investment Companies) Index returned 12.5%. The company says that it made realisations of £31.7m, and new investment of £31.2m, in the year, and that it exited Steeper (supplier of prosthetic devices) post year end. In addition to its interim dividend of 16p paid in May 2016, it is proposing a final dividend of 17.5p per share for the year ended 31 December 2016. The share price at 17 March 2017 of 322p stood at a discount of 36% to the net asset value of 503.3p per share. The company proposes to put in place a B share scheme as it believes this to be an efficient way of returning capital to shareholders (see below).
The company says that the proceeds received to date on its investment in Steeper represent a return of 1.9 times the original investment and an uplift of £5m on the valuation at 30 September 2016. The uplift on this transaction is reflected in the net asset value at 31 December 2016. In view of the outstanding undrawn commitments, the Board has decided to retain the majority of the proceeds of this realisation. Further details of this transaction appear below.
In May 2016, shareholders gave their approval for the Company to be placed into wind-down and it was concluded that the best way to maximise value for shareholders would be to implement a plan that allows the Company’s investments to be realised in an orderly manner over a period of time and cash to be returned to shareholders progressively. The majority of the Company’s assets, or some 80%, are managed by Dunedin LLP by way of limited partnership interests in Dunedin’s funds. One of these funds is still actively investing and so the company is obliged to follow its commitment by funding future capital calls made by that fund. The other 20% of the Company’s assets are invested in private equity funds managed by external parties. The majority of these comprise the holdings in Innova/5 and Realza, which invest in Eastern Europe and Spain respectively.
In terms of portfolio activity, the company says that there were two new investments during the year. An investment of £7.0m was made in Alpha Financial Markets which provides specialist consultancy services to asset and wealth managers and their third party administrators. An investment of £4.2m was also made in Kingsbridge Risk Solutions. The company says that Kingsbridge is the UK’s leading provider of insurance services to contractors and independent professionals. Follow-on investments were also made into Premier Hytemp and EV.
The company says that trading performance of its portfolio continues to be mixed and in some cases disappointing. Unrealised value increases of £18.7m were offset by value decreases of £17.3m. Valuation uplifts were achieved by Blackrock, Kee Safety and U-POL. The company says that each of these businesses is trading well as a result of growth, achieved both organically and by acquisition. The two European funds, Realza and Innova/5, each generated valuation uplifts as a result of the performance of their underlying portfolios and beneficial exchange rate movements.
The company says that the most significant valuation reductions in the year to 31 December 2016 were at Formaplex, EV, Hawksford, Pyroguard and Red. It comments that trading at Formaplex was impacted by the move to a new factory and costs associated with developing new product lines. The low oil price has continued to affect adversely trading at EV despite a significant cost reduction programme undertaken by the company. An aborted sale process at Hawksford affected the winning of new business during the year. A new CEO has been appointed to re-focus the business. Pyroguard suffered production problems at its French factory which have now been resolved. Finally, the sales mix at Red negatively impacted maintainable profits. The Manager says that it is fully involved with each of these portfolio companies, implementing changes to their management and operating strategy in order to return value to these investments.
In March 2017 the Company made an investment of £5.9m in Forensic Risk Alliance through the Dunedin Buyout Fund III LP. FRA is an international consultancy business that provides forensic accounting, data analytics and e-discovery expertise to help businesses manage risk in an increasingly regulated global environment.
The Company had outstanding commitments to limited partnership funds of £36.9m at 31 December 2016. This consisted of £33.5m to Dunedin managed funds and £3.4m to the European funds. However, assuming these funds are held to maturity, the managers say that it t is estimated that approximately £20m of this total commitment will be drawn over the remaining life of the funds.
The investment period of Dunedin Buyout Fund III which accounts for £26.2m of the total Dunedin managed undrawn commitment, closes in November 2017, although funds may be drawn down for new investments after this date in circumstances where a proposed investment is at an advanced stage at that date. Although the investment periods of all other Dunedin managed funds have expired, funds can still be drawn down for follow-on investments and operating expenses of the fund.
Innova/5 accounts for £2.6m of the European funds’ undrawn commitments. Although the investment period of this fund closed in December 2016, the manager was in an advanced stage on three potential transactions at that time and it is anticipated that there will be a drawdown to fund at least one of these investments in early 2017. As Realza’s investment period has expired it can only draw down for follow-on investments and operating expenses.
As at 31 December 2016 the Company held cash and near cash balances of £2.6m (the majority of which is held in AAA rated money market funds or by its wholly owned subsidiary, Dunedin Funds of Funds LP). The Company has a revolving credit facility with Lloyds of £20m which was undrawn at 31 December 2016 and is available until 31 May 2018. The Board and the Manager say that they remain satisfied with the balance between cash resources and outstanding commitments given the expected rate of new investment and potential realisations of existing investments.
The Board says that proposals for the adoption of a B Share Scheme will be posted to shareholders with the Annual Report and will be available on the Company’s website. Shareholders will be asked to vote on these proposals at a General Meeting which will follow immediately after the Annual General Meeting.
After consulting with its advisers, the Board says that it believes that this Scheme offers a fair and efficient way of returning capital to shareholders. It says that a B share offers certain cost and other advantages over a tender offer, but that it will keep under review its relative advantages over time. Unlike a tender offer, shareholders would not be given a choice as to whether or not to participate in a return of capital. The Board says that it believes that it is prudent and cost-effective to put the Scheme in place as soon as possible, but that shareholders should not conclude from this that returns of capital are likely in the near term.
Dunedin Enterprise proposes a B share scheme : DNE