Last minute reversal leaves Independent in negative territory – over the year to 30 November 2018, the trust produced a net asset value total return of -10.8%, following a steep fall from a high point reached only a few weeks previously. Over the same period, the All-Share Index and the World Index would have produced total returns of -1.5% and 6.0% respectively. The result weighed upon the rating of the shares, which moved from a premium of 7.2% at 30 November 2017 to a discount of 1.2% at 30 November 2018, producing a share price total return of -17.9%.
Earnings per share for the year were 10.53p (9.2p in 2017). The have declared a total regular dividend of 7p (6p in 2017) and, in addition, are proposing a special dividend of 3p (2p in 2017).
Extract from managing director’s report
“After the successes of the previous year, our technology and telecommunications holdings had a difficult time in the year under review: a stake worth GBP79m (adjusted for the reclassification of our computer games holdings) at 30 November 2017 had fallen in value to GBP72.7m at 30 November 2018 despite net purchases of GBP4.4m. Most of this decline can be attributed to our investment in Alfa Financial Software, which suffered from a combination of softer market conditions and rescheduling of client contracts. We have not sold out of Alfa because we believe its business to be fundamentally sound. Blue Prism and FDM were both affected by the general derating of technology stocks, while our new purchases, Seeing Machines and Zoo Digital, also fared poorly. In the case of Seeing Machines the problem was that of translating a great technology into a commercially profitable product, while Zoo Digital was temporarily hurt by a reorganization at an important client. Both companies still appear to have considerable potential. Herald was another, albeit minor, victim of the change in sentiment towards technology stocks, while Gamma Communications and Kainos both delivered strong performances.
The reclassification of our computer games companies has led to our travel and leisure stake becoming the second most important in the portfolio: after net purchases of GBP7.7m, it rose in value from GBP43.3m to GBP50.3m. The performance of the games companies marred an otherwise good showing: the Frontier Developments share price fell sharply when it became clear that sales of its Jurassic World Evolution game, although good, would not match the most optimistic expectations. The fall in the price of Codemasters is attributable to the disappointing launch of a new franchise, although the impact of this on its overall results was outweighed by the strength of its existing franchises. Among our more traditional holdings, good showings from Gym Group and Hollywood Bowl easily offset the effect of a modest decline in the share price of On The Beach. All three companies produced good results, with those from On The Beach remarkable for having been achieved in difficult market conditions.
Our big housing stake had a very tough year: worth GBP59.4m at 30 November 2017, it had fallen in value to GBP41.3m by 30 November 2018, after net sales of GBP0.7m. This reflects a clear deterioration in the industry’s immediate outlook: hesitancy at the upper end of the market, already evident a year ago, has intensified and shown recent signs of spreading to the lower end of the market. Making precise predictions about the housing market is, in our view, a fools’ game, but a market decline on the scale that appears to be discounted in sector share prices seems improbable to us, even in the event of a hard Brexit. The balance sheet strength of all our holdings, in contrast to the situation in 2008, leaves us confident that all will survive even the most severe of housing recessions without the need for further equity financing. We sold McCarthy and Stone, which appeared particularly vulnerable to price pressure at the higher end of the market, but we currently intend to persevere with our other holdings on the basis of the considerable long term potential we see in their current valuations. An investment in the housing finance company, Urban Exposure, was sold when it became clear that forecasts made at the time of its flotation would not be met.
It was a mixed year for our business services holdings. Midwich continued to trade well and saw its shares perform resiliently. Eddie Stobart Logistics also delivered a satisfactory trading performance, but its shares suffered a sharp derating. Our new holding, the innovative conference call company Loop Up, traded strongly, but saw its share price fall heavily towards the end of the period as part of the general derating of high growth companies. Overall, the value of our business services holdings rose from GBP25.9m at 30 November 2017 to GBP29.1m at 30 November 2018 after a single purchase amounting to GBP5.8m.
Retailing has once again been a problem area for us. The optimism we expressed a year ago as to the resilience of Footasylum and Quiz, the two clothing retailers we bought in 2017, in a tough trading environment has proved misplaced. We sold Footasylum at a big loss, but have held onto Quiz, which remains profitable and has a strong balance sheet. We also sold out of our old favourite Dunelm as it appeared to struggle with the migration of retail business to the internet. Subsequent results from the company suggest that, not for the first time, we have underestimated the quality of its management. Motorpoint traded well and was rewarded with a good share price performance, while Joules also traded well but saw its shares derated. This was also true of our one new purchase, the discount retailer The Works.co.uk. Overall, a stake worth GBP31.7m at 30 November 2017 had fallen in value to GBP16.8m by 30 November 2018 after net sales of GBP5.6m.
Elsewhere in the portfolio, both Fever-Tree and Ashtead produced strong results during the year only to see their share prices fall. The Polar Capital Insurance Fund benefited from the strength of the dollar. Our new energy holding, the shale oil producer Concho Resources, registered a marginal sterling loss between purchase and our year end, but the oilfield services company RPC fell sharply as its business was affected by oil transportation problems in the Permian Basin. NAHL, Medica and Luceco all produced disappointing results and were punished accordingly. The last named was sold at a considerable loss.”
IIT : Last minute reversal leaves Independent in negative territory
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