River and Mercantile Micro Cap reports on rollercoaster year – For River and Mercantile Micro Cap, the year to the end of September 2018 was another great one in performance terms. Its NAV return was 24.9%, considerably ahead of the 3.0% return posted by its benchmark. The growth of the company allowed it to give money back to investors. £15m was handed back in December 2017 and £12m in July 2018. Since the year end, however, the shine has come off growth stocks and smaller companies and the share price has dropped about 15%. This leaves the company trading on a discount of about 5%.
The year under review also included the abrupt departure of the previous manager, which we reported here. This triggered a sharp fall and then gradual recovery in the share price.
Extract from the manager’s report
“Keystone Law and Boku were both introduced to the portfolio through IPO in the last quarter of 2017. They have both been phenomenal performers, up 178.86% and 190.68% respectively. Blue Prism was again a top contributor, gaining 79.13% over the year. Frontier Developments successfully launched its new game, Jurassic World Evolution, and continued to outperform expectations with its two previous game franchises, Planet Coaster and Elite Dangerous. The stock was a key contributor despite being just 22.70% YoY as substantial sales were made through the summer at higher prices. Diversified Gas and Oil is the leading consolidator of traditional gas assets in the Appalachian Basin. Economies of scale and density accrue to the company, driving improving returns, through the acquisition of assets that are seen as non-core with vendors’ focus switching to shale opportunities. Acquired assets have typically been underinvested and are purchased at attractive 3-4x cashflow multiples. Commodity prices are hedged for 75% of forecast production on a rolling three year basis, reducing the risks of short term commodity price volatility.
FairFX is a profitable and high growth digital banking services business which is, through the acquisition of CardOne last year, disrupting the lucrative business banking market. The business has since added to its capability in travel currency and international payments for both retail and business clients through the acquisition of City Forex, which was previously the company’s partner for their travel currency business.
Finally, Clearstar recovered from very depressed levels given the delivery of its maiden profits. The securing of a debt facility eased concerns of an equity raise to strengthen the balance sheet.
The most significant drag on performance was the negative 1.2% contribution from Allergy Therapeutics. Allergy Therapeutics is a speciality pharmaceutical company focused on the research and development of allergy vaccines that deal with the underlying cause and not just the symptoms of allergies. The company’s vaccine technology provides the only ultra-short course hay fever treatment free of toxic aluminium in the European market. It offers convenience with far fewer injections than the market average, supporting increased adherence and is the foundation of the group’s well-established commercial position in Europe. At the current valuation, a successful US market entry, where it has the potential to be the first player to launch an ultra-short course allergy vaccine in the largest allergy market, offers significant upside potential. Another lever of upside potential is the ability to leverage its vaccine technology in various other allergy products already in clinical and pre-clinical development (e.g. peanut allergy vaccine).”
RMMC : River and Mercantile Micro Cap reports on rollercoaster year