River UK Micro Cap (RMMC) has published its annual report for the year ended 30 September 2024, during which it provided NAV and share price total returns of 14.9% and 22.5% respectively, outperforming its Numis Smaller Companies plus AIM ex Investment Trusts benchmark, which returned 14.1%. RMMC’s chairman, John Blowers, says that the last 12 months have been satisfying for RMMC on a number of levels, while acknowledging that some of the more bullish expectations set out earlier in the year have not been fulfilled.
RMMC’s manager, George Ensor, says that, after a prolonged period of subdued performance for UK financial markets, large and small, and the UK economy, there is a breadth of data that supports fiscal and monetary easing and an improvement in economic growth. He thinks that this is a great backdrop for small, and therefore micro-cap, future equity performance adding that, following a period of extreme underperformance over the last three years, smaller companies have started to outperform, which he adds is a critical lead indicator for RMMC’s own performance.
The manager has provided commentary for all positions that impacted relative performance by at least one percentage point:
Renold (+2.4ppts) is a manufacturer of highly engineered industrial chains typically used in demanding environments in a broad range of end markets. Renold reported strong results through the period that raised market confidence in the group’s ability to achieve sustainable double-digit margins underpinned by a highly engineered, relatively low cost but performance critical chain product and strong operating efficiencies. Robust cash conversion and deleveraging provides a solid foundation for inorganic growth which is key to driving the group’s ambitions to consolidate a highly fragmented industry with high switching costs. With margins having recovered compared to the long-term track record and supported by both the organic and inorganic opportunity on which the company has begun to execute, we transitioned the investment case from Recovery to Growth in the period.
Science in Sport (+1.5ppts) is a manufacturer and distributor of performance nutrition products for athletes through their SiS and PhD brands. Whilst the industry is growing, it is highly competitive, which is a particularly relevant comment for direct-to-consumer (“DTC”) ecommerce operations. Science in Sport distribute through DTC and via both online and offline retailers. The strategy under the prior management team was to invest in marketing to drive aggressive topline growth and, like many DTC businesses, acquiring users online became unprofitable which, alongside required capex investments, left the balance sheet overleveraged. The new management team reset commercial relationships, exiting unprofitable revenues and focussed on cash generation and profit. The balance sheet has been recapitalised through an equity raise in which we participated. Whilst we maintain our Growth investment case, these are key catalysts for improved operating and share price momentum that we look for in Recovery investment cases.
Serabi Gold (+1.3ppts) is a Brazilian gold exploration and production business which has struggled over the last few years given increasing costs and inconsistent operational performance. The acquisition of a second asset, Coringa, also put significant pressure on the balance sheet. Operational performance has improved as Coringa has contributed to gold production and we expect this contribution to accelerate over the next two years. A combination of strong gold prices and weakness in the Brazilian Real has delivered a substantial turnaround in financial performance and free cash generation.
Venture Life (+1.2ppts) has executed a value accretive buy-andbuild strategy of self-care brands. Acquisitive strategies have had a tough time over the last few years as they are dependent on both a sensible market valuation for their equity and, typically, demand for equity that can be tapped to fund acquisitions. These two aspects have been absent for the last three years and so Venture Life sensibly focussed on organic growth and cash generation to pay down debt. Whilst not without challenge, the higher margin Brands division is delivering good organic growth which we do not believe is recognised in the valuation.
Windward’s (+1.1ppts) software-as-a-service solution (“SaaS”), underpinned by a unique and defensible AI based process provides high payback maritime data insights primarily to government and commercial customers. Post our initial purchase, Windward has issued several strong market updates which have driven mid-to-high teens consensus sales upgrades over the period. This accelerates the group’s path to breakeven, with sustained profitability expected from next year which derisks our investment case. We share further comments on the investment case in the section on activity below.
Supreme (+1.0ppts) outperformed consensus expectations driven primarily by its core vaping business. Although the UK government announced a proposed disposable vape ban during the period, we believe the group is well prepared with its alternative forms of vaping (e.g. refillable pod system). Supreme deployed its strong balance sheet to acquire Clearly Drinks, a brand owner and manufacturer of specialised canned and bottledat-source spring water, which was well received by the market. We think it is an attractive deal from both a strategic and financial perspective. It helps diversify the group’s revenues with pro-forma non-vaping sales accounting for 40% of group sales. Supreme paid an attractive multiple of earnings and the deal is earnings enhancing before any potential synergies are considered. Clearly Drinks’ manufacturing capacity appears to be well invested with significant free capacity. We expect strong synergy potential; for example, selling Clearly Drinks products to Supreme’s already established customer relationships or developing Supreme’s emergent activity in wellness and energy drinks.
Mergers and acquisitions (“M&A”) were also a driver of performance with both City Pub Group (+1.4 ppts) and Shanta Gold (+1.1 ppts) being acquired in the period.
Mind Gym (-1.1ppts) provides behavioural science solutions to corporates that are proven to deliver business improvements through a focus on addressing a number of universal human capital challenges. Mind Gym issued a profit warning at its interim trading update in October 2023 and fell short of market expectations at its subsequent trading update in April 2024 which was primarily due to a weaker than expected macro environment. Balance sheet and liquidity constraints resulted in the company paring back selected longterm growth investments. Given depressed margins, a depressed share price and a change of chief executive officer (“CEO”), we transitioned the position to a Recovery investment case (versus Growth previously). The valuation opportunity is compelling at 0.3x sales versus a 5-year average of 1.8x and a mid-term 15-20% margin target; however, we reduced our holding in the period to less than 0.5% of NAV at the period end, indicative of our concerns about the achievability of the company’s medium-term targets.
Manolete (-1.2ppts) is a litigation funding business which acquires cases from insolvency practitioners in return for a share of any profitable outcome. Manolete moved back into profits in their full year results to March 2024 and reported progress for the first five months of their current financial year that show net cash receipts are tracking ahead again. This reported progress is at odds with the share price performance which has been poor. The shares trade at a small premium to book value which is a significant discount to the long-term priceto-book multiple and an attractive opportunity if the company returns to historic levels of growth and return-on-equity. We have a small position (1.2% of NAV) at the end of the period and will wait for a clear improvement in momentum before looking to add to our position.
Ten Lifestyle’s (-1.6ppts) technology enabled concierge proposition aids their corporate customer, typically financial services, with retention – and therefore lifetime value – of high value customers. The company – which prides itself on an exceptional track record of contract retention – lost a large (c.5.5% of revenue) long-standing contract with Coutts following the leadership changes at the private bank. The company has since been awarded a new contract with an American financial services firm which is larger than the lost contract but did come with a need to raise capital to fund the working capital requirements as this contract ramps up. We participated in the fund raise and we believe our Growth investment case remains intact.
Inspecs (-1.8ppts) is a vertically integrated eyewear solutions provider with a focus on mid-market brands that offers its customers unrivalled supply chain transparency and product quality underpinned by its own manufacturing. Inspecs issued a full-year trading update in January 2024 that confirmed the group’s focus on margin recovery through extracting operational efficiencies is driving margins in the right direction, however earnings were below expectations due to weaker than expected sales growth. Soft European consumer demand notably in Germany and the loss of sales to GrandVision following its acquisition by Essilor Luxottica were key factors. At interim results, the company revealed that revenue and earnings – which were lower YOY – had benefited from elevated levels of ordering in the comparable period as retailers secured inventory post-Covid, which was not flagged in the prior year. Despite this, management held guidance, implying a stronger than usual second half weighting. Valuation remains compelling at seventimes 2025 consensus earnings, on margins well below management’s long-term target.
