UIL has published results for the 12 months ended 30 June 2024. Highlights are:

• Net asset value total return of -15.3% (2023: -20.6%)
• Share price total return of -24.8% (2023: -18.5%)
• Revenue earnings per ordinary share of 10.15p (2023: 6.68p)
• Dividends per ordinary share of 8.00p (2023: 8.00p)
• Discount widened to 36.9% (2023: 27.5%)
• Gearing 73.6% (2023: 83.5%)
• NAV total return since inception in 2003 is 6.5% per annum on average

Clearly these figures are not great. The chairman says “While we have a number of potentially exciting investments within the portfolio, such as the merged Waverton Investment Management Group  and London & Capital Group, and Diraq Pty Ltd, our quantum computing investment, we recognise that recent poor investment performance has resulted in UIL not having the scale to build up a sufficiently diversified portfolio. In addition, the liquidity of the ordinary shares on the market, given the significant major shareholder ownership, is problematic while our general investment mandate does not provide the focused offering which the investor base in the UK now prefers.

“Given this, the logical conclusion is to work towards taking the company private and cancelling its stock exchange listings following the redemption of the 2028 ZDP shares.

“The investment managers and majority shareholder both recognise this and have combined to put forward proposals, which the board supports, to manage UIL over the next four years with a view to realising sufficient investments to enable the redemption of the ZDP shares and provide an opportunity for the UIL minority shareholders to exit.

“To facilitate this, it is the intention to simplify the platform structures. This is likely to result in merging the Somers and Zeta investment vehicles into UIL, thereby consolidating the investments of Somers and Zeta with those of UIL. Such proposals will increase UIL’s asset base, although the external minority interests in UIL will decrease as a percentage of the shares in issue, owing to the UIL majority shareholder’s current shareholding in Somers and Zeta. It is proposed that these consolidations will be implemented at NAV to NAV.

“It is UIL’s current intention, in the absence of unforeseen circumstances, to maintain the annual dividend at 8.00p, payable quarterly.

“Furthermore, it is UIL’s aim to provide each year, through a cost effective mechanism, the opportunity for minority shareholders to exit a significant proportion of their shares at a discount to NAV of approximately 20%. Starting in the second half of 2025, this will provide liquidity for minority shareholders before the 2028 privatisation and, in addition, UIL plans to continue to buy back ordinary shares and ZDP shares in the market. It is hoped that these steps will lead to improved liquidity in UIL’s shares, provide improved choice for ordinary shareholders to exit, whilst maintaining an income yield to 2028, for those shareholders who prefer regular income. It also provides improved asset cover for the outstanding ZDP shareholders.

“As a first step, UIL and General Provincial Life Pension Fund Limited who together hold 95.0% of the outstanding share capital in Zeta, have formally notified Zeta on 12 July 2024 that they are considering acquiring the shares in Zeta that they do not currently own, by compulsory acquisition in accordance with s103 of the Companies Act 1981 of Bermuda. It is contemplated that such offer would be at or near Zeta’s NAV at the time the offer is made.”

[UIL has always been a complicated beast given its capital structure (with multiple zero dividend preference share issues) and its network of sometimes interconnected public and private businesses across a range of sectors. We never felt that it was doing a good job of explaining that to investors. Going private seems like a sensible move as long as minority investors are treated fairly along the way – to be clear, a cash exit at a 20% discount does not constitute fair treatment in our book.]

Discount

The board says that it is disappointed to see the ordinary shares discount to NAV widen to 36.9% at the end of the year (30 June 2023: 27.5%). It says that this is partially explained by the focus of applying cash resources to the repayment of the outstanding bank loans and planning for the 2024 ZDP shares redemption (at the end of this month). Consequently, no buybacks were undertaken in the year ended 30 June 2024.

Since the year ended 30 June 2024, the company has bought back a modest amount of ZDP shares and ordinary shares.

The manager says that “The need to repay UIL’s bank debt of £37.5m during the year to 30 June 2024 created continued pressure on substantial portfolio realisations in difficult markets. Consequently, this has been a difficult year for the company to navigate.”

The investment portfolio reduced from £308.3m to £238.8m, with the reduction comprising £28.2m from losses on investments and £41.3m being net proceeds of portfolio sales.

Extracts from the manager’s report

UEM and Zeta’s share price discounts to NAV widened and now represent a £13.3m reduction to the underlying valuations.

Somers’ valuation was largely unchanged in the year to 30 June 2024, being up by 0.4%. However, Somers distributed material dividends to its shareholders and adding these back, Somers’ total return was 8.9% for the year. Within Somers’ portfolio a significant transaction completed on 28 June 2024, when Waverton merged its business with London & Capital creating a £19.3bn wealth and asset management business. This is a transformative transaction for Waverton and we remain excited about its prospects. The combined business has the scale, capability and momentum to significantly outperform the market. As part of the merger, Somers reduced its investment in Waverton by two thirds and now owns an 18.0% interest in the enlarged wealth and asset management group. The cash released from the transaction allowed Somers to repay its debt and distribute dividends to its shareholders and UIL received £9.2m. In addition, UIL sold 302,000 of its Somers shares at fair value to a fellow shareholder, Union Mutual Pension Fund Limited (“UMPF”). During the year, Waverton gained in value for a total return of 9.9%.

Within the Somers portfolio, Resimac Group Limited (“Resimac”) largely stood still with its share price declining by 2.3% which was more than offset by dividend distributions of 8.5%. It should be noted that UIL holds a direct investment in Resimac, which continues to be in UIL’s top ten investments, in addition to Somers’ investment in Resimac.

Zeta’s NAV per share decreased by 22.8% over the year and its share price declined by 18.0%. This is mainly due to the collapse in nickel prices, the consequent valuation decline of Panoramic Resources Limited which entered administration, and the share price decline of 61.9% at Alliance Nickel Limited. Together these two investments contributed losses of AUD 48.9m in the year to Zeta.

Hudbay Minerals gained £2.5m in the year and Zeta took the opportunity to profitably exit its holding realising £23.3m. Zeta used the funds to buy back shares from shareholders and UIL successfully tendered 8.2% of its holding realising £4.7m for UIL.

UEM’s NAV total return over the twelve months was up 7.6%. However, UEM’s share price discount widened over the year from 14.0% to 18.6% reducing the total returns to UIL to 2.5%. UIL reduced its shareholding in UEM selling nearly half of its holding, realising £19.8m given the need for UIL to repay its bank loan.

The valuation of Allectus Quantum Holdings Limited (“Allectus Quantum”) was flat over the year. Its sole investment is Diraq, a next generation quantum computing company. Diraq continues to meet its milestones including raising external funding in these challenging markets. Globally there is significant interest in quantum computing from the technology industry, investors and governments. Diraq is seen as an industry leader and its valuation remains modest relative to its market position, competitors and the amount of patents and intellectual property owned.

Allectus Capital Limited’s (“Allectus Capital”) valuation reduced by 40.9% due to write downs which mirrored sharp declines in peer group multiple valuations.

West Hamilton, a listed Bermuda property developer, completed the sale of its major asset in Bermuda. It used the proceeds to reduce its debt and to fund a significant distribution to its shareholders of which UIL’s share was £8.4m.

The Market Limited continues to underwhelm and its share price decline of 48.3% during the year to 30 June 2024 was reflective. However, it has a strong Australian digital footprint and good brand positioning in Gumtree, Carsguide and Autotrader, with over AUD 2.0bn in annual transactions on its platforms, but unlocking of this ecommerce platform value will be challenging.

UIL sold Permanent Investments Limited, which held 16.7% in Littlepay, to Somers. It should be noted that UIL on a look through basis holds 19.8% of Littlepay as at 30 June 2024.

Carebook Technologies Inc (“Carebook”) and WT Financial Group Limited (“WT Financial”) entered into the top ten holdings due to the sale of Littlepay and reduced valuation of Arria NLG Limited.

As we have highlighted before, within the Somers’ portfolio is an investment in AK Jensen Group Limited (“AKJ”) which comprises a platform for both traditional hedge funds and hedge funds trading digital assets. In addition, AKJ has issued tokens, a crypto currency, which have been sold to investors and hedge fund managers in the crypto platform. Valuing the token is difficult as few metrics allow comparability and the industry has not settled on a methodology we can readily adopt. While investors and hedge fund managers on the AKJ platform are buying AKJ tokens at EUR 0.37 the volume held by Somers would likely see a discount driven by lower liquidity opportunities and reduced fee discount benefits held by these hedge fund managers. Somers holds 75.0m AKJ tokens directly and holds further AKJ Tokens indirectly through its investments in AKJ group companies who in turn hold AKJ Tokens in treasury. Somers values these tokens at EUR 0.185 per token. Each EUR 0.05 represents £5.7m swing in valuation for Somers and £2.3m for UIL. Further details on AKJ can be found on their website and note 29 to the accounts.

UTL : UIL thinking of going private after bout of poor performance