Impax Environmental Markets (IEM) has released its interim report for the six months to 30 June 2024. The company’s NAV total return was -0.5% while shares fell 2.3%, trailing the benchmark index which delivered a return of 12.2%. The net revenue return for the period was £8.6m, compared with £9.1m earned in the same period last year. The second interim dividend for the 2023 financial year, of 2.9 pence per ordinary share, was declared on 2 February 2024 and paid on 15 March 2024. The aggregate dividend for 2023 was 4.6 pence, an increase of 15% from 4.0 pence for the previous year. The discount was 9.6%.
Chiarman Glen Suarez noted that short-term underperformance is not unusual given the nature of IEM’s investment philosophy and approach, particularly in periods of interest rate uncertainty. He added that the recent weakness has unfortunately weighed on longer term returns, although these still remain solid. Over five years to 30 June 2024, the annualised performance of the share price and NAV are 5.6% and 8.0% respectively, compared to 10.9% for MSCI ACWI. Over ten years, the annualised returns are 10.7% for the share price and 10.6% for the NAV versus 11.8% for MSCI ACWI.
Discussing the performance and the outlook, portfolio manager Jon Forster added:
“Despite robust global equity returns, the underlying dynamics were more complex. Resilient economic data and company earnings competed with softer U.S. employment data and weaker consumer spending. As a result, markets readjusted fitfully to “higher-for-longer” interest rates. Geopolitical tensions have added an additional layer of volatility.
“Against this backdrop, IEM’s market cap bias proved to be a headwind. IEM invests in companies that generate at least 50% of their revenues from environmental markets. These tend to be mid and small-caps that are less accessible to IEM’s shareholders and in which the manager believes it has an information advantage. However, small and mid-cap companies have suffered disproportionately from the “higher-for-longer” interest rate environment, underperforming their large-cap counterparts by over 8% during the period.
“This is reflected in IEM’s relative valuation, which derated over the six months to June 30, 2024. At the end of last year, the portfolio traded at a price-to-next-twelve-month-earnings (PE) multiple of 20.7x, a 26% premium to the MSCI ACWI. That multiple has seen little change, but the premium has fallen to approximately 16%, as the MSCI ACWI PE has risen faster. While the market has become more expensive, the company’s portfolio has not, even as its forward-looking earnings growth data remain higher.
“The effect is exacerbated by the market’s willingness to pay up for a handful of mega-cap technology names outside of IEM’s investable universe. Weakness in Tesla has reduced returns from the wider ‘Magnificent Seven’ group. Despite this, not holding AI chip designer Nvidia, along with Apple, Microsoft, Amazon, Meta, and Alphabet, accounts for a -5.7% drag on relative performance. The performance of the FTSE ET100, which we also consider against portfolio returns, was similarly dominated by names such as Schneider Electric, Tokyo Electron, and TSMC, all of which are many times larger than IEM’s biggest holdings.
“Yet performance within the portfolio has been encouraging. Earnings growth has been above that of the broader market, with notable positives from natural ingredients companies that weakened performance last year. At the same time, areas of the portfolio that have delivered consistently strong returns—such as U.S. construction, digital infrastructure, and electrical grids—continued to do so.
“IEM is also starting to see the benefits of M&A as market participants acknowledge the disconnect between holdings’ long-term growth prospects and their low valuations. Stericycle and Terna Energy have both been subject to takeover bids at double-digit premiums during the period.
“Pockets of weakness continue to be driven by temporary headwinds such as inventory destocking in solar, bioprocessing, and some select industrial stocks. At the time of writing, Independent Power Producers (IPPs) are demonstrating how swiftly these can reverse. With purchasing manager indices (PMIs) now in expansion territory, and industrial companies’ management increasingly confident of improving demand, there are reasons for cautious optimism across the portfolio.”
IEM : Challenging start to the year but optimism remains for Impax Environmental Markets
