Artemis Alpha outperforms in year of transition – Artemis Alpha Trust has reported its results for the year ended 30 April 2018. It was a reasonable period for the trust, the NAV return was 11.0% on a total return basis, compared with an 8.2% increase in the All-Share Index. The share price return was 13.2%. Dividends for the year total 4.75p per share (2017: 4.30p), an increase of 10.4%. There is also a special dividend of 1.6p.
The trust has been shaken up a bit in recent months with a new investment policy, the introduction of triennial tender offers in place of five-yearly continuation votes and a change in the manager line-up wit Adrian Paterson retiring and Kartik Kumar being made a co-manager alongside John Dodd. The board also scrapped the performance fee and introduced a new tiered base fee.
Within the unquoted portfolio, which is being run down, MBA Polymers, Oxford Nanopore Technologies and substantially all the company’s wine holdings were sold, with Oxford Sciences Innovation and Buried Hill Energy (Cyprus) being realised shortly after the year end . The agreed sale of Metapack was also announced after the period end, with completion likely to take place in August.
Extract from the manager’s report
“In the listed portfolio, the biggest positive contribution came from Plus500. The share price of this online trading platform increased by nearly 200 per cent. This was primarily the result of the dissipation of earlier excessive concerns over the negative impact of regulatory changes on the industry. Furthermore, the company demonstrated its strong capabilities in digital marketing, by taking advantage of increased trader appetite (a response both to market volatility and the sensationalism surrounding cryptocurrencies) to acquire significant numbers of new customers. Plus500 has a low-cost and capital-light operating model, which enabled it to pay out dividends of over GBP1.20 per share in the period, a yield of about 8 per cent.
The Company has significant holdings in a number of fund management companies. Once again, the best performer among these was Liontrust, which continued to demonstrate strong investment performance and thereby increase its assets under management. By 31 March 2018, assets under management had grown to GBP10.5bn, with net inflows of over GBP1bn in the prior 12 months. The sustainable investment funds acquired from Alliance Trust now stand at over GBP3bn (GBP2.5bn at time of purchase), resulting in increased diversification away from its core UK equity offering. The recent launch of a global strategic bond fund and the hiring of another investment team represent a further broadening of its product range.
Polar Capital performed strongly over the year, thanks to good inflows and excellent fund performance. The new chief executive has wasted no time in closing down some of the weaker funds, although the company already has a diverse asset base, he has also signalled his intention to grow into the institutional market, to which its exposure is currently limited.
A new investment in this area was Premier Asset Management, a predominately multi-asset fund business with, once again, excellent long-term performance and strong inflows. We also increased our holding in Miton Group, a smaller fund management group with GBP4bn of funds under management. This company is at an earlier stage in its life cycle than either Liontrust or Polar but it has a clear pathway to doubling its size. Profit expectations have been upgraded three times over the past 12 months and, with a substantial amount of cash on the balance sheet, it trades on a significant (and in our view undeserved) discount to its peer group.
Rocket Internet had a very encouraging year as its two largest investments both in the online food and retail delivery areas – Hello Fresh and Delivery Hero – executed successful flotations. This means that the vast majority of its share price is now accounted for by its two listed holdings and cash. The increase in Rocket Internet’s value over the year only seems to reflect the increase in value of its listed assets, placing no value on a large number of private investments which we believe have significant potential.
Elsewhere, our position in Tesco performed strongly, as its results provided the market with increased confidence about the sustainability of its recovery. Profits in the UK and Ireland increased by over 30% to GBP1.1bn and indebtedness (debt and pension liabilities) decreased from GBP9.2bn to GBP5.3bn. In December, the Competition and Markets Authority also gave final clearance for its merger with Booker (a holding in the Company’s portfolio for many years).
This has at least two clear positive developments for Tesco: firstly, the scope for it to utilise its excess space to supplement Booker’s network to create new revenue opportunities in a capital-efficient manner and, secondly, the appointment of Charles Wilson, Booker’s CEO to Tesco’s management team. He has a good record of focusing on customers and capital allocation.
On the negative side, returns from Hurricane Energy were disappointing. To some extent, however, this could be ascribed to a temporary loss of momentum following its stellar performance in the previous 12 months. In fact, we remain optimistic about its prospects. Hurricane Energy recently confirmed that it is on budget and on schedule to produce oil in the first quarter of 2019.
Other disappointments included Vectura Group. There were delays in the launch of new products and some softening in demand for existing products, notably for Flutiform, its asthma treatment. We believe the current share price is underpinned by its balance sheet and royalties from its existing products, placing little value on its pipeline of new products.
Attraqt Group, which provides search and merchandising solutions to online retailers, downgraded profit expectations for the year and parted company with its chief executive. His replacement, Luke McKeever, comes with an excellent reputation and we believe his appointment could enable the business to take advantage of its market-leading position.
Finally, Mporium was a laggard over the period as it attempts to generate revenues from an unique technology that enables advertisers, and agencies they work with, to identify and prioritise ‘micro-moments’ – times when customer intent and engagement are at their highest. Take-up has been slow to date and we shall be watching progress closely over the next six months.
Unquoted investments
As noted above, the overall performance of the unquoted holdings acted as a drag on performance. The underlying progress being made by many of the businesses, however, was far from universally disappointing. Their overall value decreased by 3.8 per cent and total realisations over the year were GBP1.7m, including substantially all of our wine holdings and the complete disposal of Oxford Nanopore Technologies.
The strongest performance came from Reaction Engines, a space technology company. It has developed a lightweight heat exchanger that could enable a vehicle to enter space without the need for a rocket launch. The recent positive development was the news that the company raised GBP26.5m at a 60 per cent premium to our previous carrying value. This fund raising was supported by a number of institutions, as well as by three strategic investors: existing investor BAE Systems, along with new investors Boeing and Rolls Royce. The money is earmarked to accelerate development of its core technology and adjacent applications. It was encouraging to see these blue-chip strategic investors participating in this funding round.
There was also strong performance from Metapack, a software company that manages home delivery solutions for online retailers. Recurring revenues grew by nearly 20 per cent in a year and the company went from loss-making to generating an encouraging level of profits.
Holdings that did suffer negative developments included Lamp Group and Claremont Alpha. Lamp Group had higher than expected losses on its legacy insurance business, resulting in a liquidity squeeze. Claremont Alpha suffered from a decline in value of its Taiwan property that is located on an offshore island largely due to a worsening of cross-border relations and a decline in Chinese tourist numbers. Our valuations were reduced accordingly.
Following our year-end, we had a series of updates from URICA Ltd that eventually led to the company being put into liquidation. Earlier in the year, URICA had been a victim of fraud in its French business that had affected a number of lenders in the industry. In subsequent months, the company worked on recovering losses whilst exploring new opportunities to license its technology to third-party finance providers. During discussions relating to a possible fundraising, it became apparent that the company’s lender was seeking unacceptable conditions. As a consequence, we did not consider it to be in the Company’s best interests to provide additional funding for URICA’s immediate liquidity requirements.
The impairment of URICA was an unexpected and disappointing outcome given progress that had been made in realising value from the unlisted portfolio following the year end. This included the disposal of Oxford Sciences Innovation and Buried Hill Energy (Cyprus). More recently, we were pleased to announce the agreed sale of Metapack at a significant premium to carrying value. The transaction will take place in August and will bring our unquoted exposure to approximately 12.1 per cent. The proceeds from our disposals have been used to eliminate gearing and bring the Company in to a net cash position, which will allow us greater flexibility to implement our revised approach when suitable investment opportunities arise.”
ATS : Artemis Alpha outperforms in year of transition