Something has to change at Jupiter UK Growth – During the twelve months to 30 June 2019 the total return on the net asset value of the company’s shares was -11.9% and, as the discount widened, the share price return was -15.4%. This compares with the total return on the company’s benchmark, the All-Share Index, of 0.6%. The dividend has been upped from 7p to 8.5p.
Extract from the manager’s report – Thomas Cook! why?
“PureTech Health was the largest stock specific contributor. The biopharmaceutical company, which specialises in the nervous, immune, and gastrointestinal systems, performed strongly off the back of a number of positive developments, including the announcement of a collaboration with Swiss drug giant Roche and the successful FDA approval of its Gelesis weight management product and a number of other promising developments in its pipeline of innovative healthcare projects.
Another winner was credit reporting agency Experian, which outperformed the market after delivering strong numbers and an accelerating growth trend off the back of some exciting new products. Other positives included one of the company’s overseas holdings, Ferrari. Shares of the Italian luxury car maker showed strong momentum with positive results and the launch of a new hybrid supercar underpinning a forecast 10% jump in its profits for 2019.
The largest stock specific detractor from the company’s relative returns was Thomas Cook, with its stock price declining almost 90% over the 12 months. The holiday operator issued several profit warnings and announced that it would suspend its dividend, with last summer’s heatwave, reduced demand for winter getaways and Brexit uncertainty all contributing to lower sales. We had hoped that the company would be able to realise significant value for its airline business and/or its Scandinavian operations following the receipt of multiple bids in May. This would have enabled the group to reduce its sizeable debt burden and allow shareholders to retain ownership of a tour operator business with significant scope for improved profitability through self-help and if market conditions improved. However, as market conditions for airlines and tour operators worsened through the summer, and the valuation multiples of the bidders themselves deteriorated, these bids were withdrawn or reduced in value and the amount of funding Thomas Cook needed to fund itself increased significantly. The company attempted a recapitalisation with Fosun (its largest shareholder) injecting a large amount of new capital and banks and bondholders converting debt into equity, but this was ultimately not deliverable and the company was placed into liquidation in September. Following the termination of the airline sale process in July, we reduced our position size significantly over August and September (from 5.6m shares to 2.1m), such that the company’s exposure at the time of its liquidation was just 0.16% of NAV.
Another negative was Sirius Minerals. The fertilizer developer raised $425m of new equity in May as part of a larger funding package for the construction of its polyhalite mine in Yorkshire and this created some short- term pressure on the share price as the new equity issuance was digested. Further share price decline has followed since the end of our financial year resulting in a material reduction in value, with the company postponing the $500m bond that would have unlocked the final elements of the funding package. Sirius has almost GBP120m of cash on its balance sheet and is slowing down construction while it considers its strategic options. This will focus on reducing the overall cost of the project, rescheduling certain elements of the project to reduce the perceived risks and considering a variety of alternative financing solutions.
Other negatives included Dixons Carphone. The company suffered a cybersecurity breach in June 2018, and subsequently cut its dividend. It reported a loss for the year ending April 2019 due to slower sales of mobile phones with lengthy contracts and onerous leases. ITV also weakened as the broadcaster blamed Brexit-related uncertainty for a decline in its ad revenues.”
Board frustrated – 34.3% underperformance
The board said “It has now been more than three years since shareholders approved the change in the company’s investment policy to focus on UK growth and recovery investment opportunities and we appointed Steve Davies as our fund manager. These past three years have been a challenging period for active investors in general, and in particular for those, such as our fund manager, who focus to a considerable extent on cyclical, domestically facing UK equities.
As a board we review and debate the company’s progress both in absolute terms and relative to its benchmark and peers. We are conscious that the company has not achieved the performance that we had hoped for over the past three years. This is the result of both the unfavourable macro factors noted above and stock specific issues within the portfolio. In my interim statement I expressed the board’s frustration at the poor investment performance of the company and regrettably this underperformance has continued in the second half of the year.
Since April 2016, when the new mandate was introduced, the company has generated a total negative return, including reinvested dividends, of -0.3%. As a result, the company has underperformed our benchmark index by 34.3% as at 30 September 2019. Having expressed our growing concerns to the investment adviser Jupiter Asset Management in a number of meetings over the past year, in the absence of any improvement we have come to the conclusion that our strategy is not working and needs to be changed.”
Next steps
The board is investigating a range of options including a new manager/strategy provided by Jupiter and moving to an external manager. After buying back £20.3m worth of shares over the past three years, the trust isn’t very big – net assets of £53.8m at the end of June – and this restricts its appeal to a new manager.
JUKG : Something has to change at Jupiter UK Growth