Doceo’s Weekly 360 – the week’s news and views in the words of the companies and the professionals
A unique mandate
Fourth Annual Report from fintech investor Augmentum Fintech (AUGM). Chairman Neil England wrote: “The Company’s portfolio of investments has again performed very well with an increase in Net Asset Value (NAV) per share after performance fee of 19.0%. However, the share price and total shareholder return do not reflect the strong performance of the portfolio and have been influenced by the global mark down of listed technology stocks and associated market sentiment.”
Winterflood noted: “NAV per share +19.0% to 155.2p. Share price total return was -16.4%. Available cash of £60.6m at present following exit from interactive investor (£42.8m of proceeds)…The Board has decided to retain bulk of proceeds for investment and limited buybacks.”
Numis is positive: “Augmentum has a unique mandate among London-listed funds and appears well-placed to exploit the rapid growth potential among European fintech companies, which are seeking to disrupt the business models of traditional banking and financial services…we believe that the fund is an attractive long-term investment, albeit that the early-stage nature of the companies means that it may not always be a smooth ride for investors. The portfolio appears to be performing strongly and the fund has benefitted from recent realisations including the sale of interactive investor to abrdn and a significant uplift to Grover.”
Liberum wrote: “We estimate a gross portfolio return of 27% in the year. The top 10 holdings are growing at an average of 96% YoY and have an average 17 months cash runway or are profitable…The shares currently trade on a 32% discount to NAV (narrower end of the peer group range). NAV reductions are likely in upcoming reporting periods, but AUGM’s ability to support portfolio companies has improved significantly following the sale of interactive investor.”
Quote of the week#1
“…uncertain times drive innovation…” AUGM CEO Tim Levene
Fully invested
JPMorgan Global Core Real Assets (JARA)Chairman John Scott had this to say in his full year statement: “the Company has developed significantly from when I wrote to shareholders last year. It is now fully invested, it has achieved its initial dividend targets and its assets have seen no material disruption or lasting impact from the COVID-19 pandemic…The Company’s objective is to provide shareholders with both stable income and capital appreciation through exposure to a globally diversified portfolio of ‘core real assets’, by which we mean physical and financial assets that offer reliable, highly forecastable, long term cash flows. These are focused on unlisted assets held in private funds investing in the global infrastructure, real estate and transportation sectors, alongside a more liquid element of the portfolio investing directly in listed real assets.”
And according to the investment managers, JARA is delivering: “During the financial year JARA’s portfolio of investments achieved its full weighted allocation and this, coupled with the positive returns in each and every one of the underlying strategies, resulted in an NAV total return in GBP of +12.9%.”
Winterflood noted: “The portfolio is unhedged and the 4% sterling decline against the US$ was a significant contributor to returns. Underlying sleeves contribution to total return: US Private Real Estate (+2.9%), Asia-Pacific Real Estate (+1.7%), Private Infrastructure (+1.5%), Transport (+1.7%), Liquid Real Assets (+4.3%). 4p dividend was declared for the year, the Board intends to maintain the current dividend level for FY22/23.”
Quote of the week#2
“Fundamentals have taken a back seat since January” – abrdn China Investment Company (ACIC) Chairman Mark Hadsley-Chaplin.
In Harmony
Maiden half-year results from BESS (battery energy storage systems) investor Harmony Energy Income Trust (HEIT). ChairmanNorman Crighton wrote: “We have made a strong start to life as a listed Company, delivering excellent progress across our portfolio with our entire Seed Portfolio now under construction and the first project targeting commercial operations in November 2022. Alongside this, revenue projections have increased 17% helping to deliver a 8.85% increase in NAV across the period…We now have 213.5 MW / 427 MWh of projects fully contracted and under construction and our portfolio is diversified across five projects. The Company is laying a foundation for portfolio expansion into 2023 and beyond, taking advantage of the continuing growth opportunity in the battery market and delivering attractive returns to Shareholders whilst supporting the country’s transition to net zero.”
Winterflood commented: “Drivers: (i) +17% uplift in revenue projections; and (ii) asset revaluations as projects progressed from ‘shovel ready’ to ‘under construction’. ‘Shovel-ready’ projects are valued using a discount rate of 10.75%, reducing to 10.50% for projects ‘under construction’. All five seed projects have signed EPC contracts with Tesla and now under construction and benefit from 15 year RPI-linked capacity market contracts. 2/5 projects will be operational by the end of 2022, a further two by spring 2023 and the fifth asset by October 2023…1p dividend declared for the period and on track to pay a 2p dividend in 2022. Targeting 8p dividend for 2023.”
Numis wrote: “Interim results contain little new information but flag the pipeline which is expected to become available before the end of this year. In anticipation, HEIT has signed a debt facility. The business is currently differentiated from the two more established battery funds by its relationship with Tesla, focus on 2-hour batteries, as well as having a portfolio which is currently in construction. In contrast, both Gresham House Energy Storage (GRID) and Gore Street (GSF) have revenue generating assets underpinning their dividend targets.”
Lesson of the week
“Occasionally I am invited to lecture university students on valuation. During one such lecture, I pointed out how relatively small changes in discount rates and growth assumptions can have dramatic effects on the presumptive valuation of a company. For example: an innocuous sounding move in the growth rate from 3% to 2% and a ‘small’ increase in the discount rate from 5% to 6% leads to a halving of the valuation of a hypothetical company (using the Gordon Growth Model).” Bellevue Healthcare (BBH) Chairman Randeep Grewal
Valuations look more compelling
Half-year report from abrdn China Investment Company (ACIC). Mark Hadsley-Chaplin kicked off his chairman’s statement with the following: “This is the first report of the Company as an investor in Chinese equities since shareholders approved the change of mandate in October 2021. It has been a testing period for most equity markets, but China has been particularly challenging. While the Board recognises that this is not the most auspicious start, it remains confident in the long-term prospects for China and for an investment trust investing therein remain strong. The net asset value (“NAV”) total return of the Company for the six month period ended 30 April 2022 was -21.5%. This return is behind the return from the reference index, the MSCI China All Shares Index (in Sterling terms), of -16.8%.”
In terms of the outlook, the Chairman had this to say: “…the rhetoric from Beijing suggests a strong commitment to reviving the nation’s flagging economy. In addition, after a sharp sell-off, company valuations look more compelling than they have for some time. Your Investment Managers will continue to monitor the situation very closely for investment opportunities that arise from Beijing’s shift to a more pro-growth stance.”
Winterflood wrote: “Underperformance attributed to market rotation from growth to value, with allocations to Renewable Energy, Technology and Healthcare detracted as well as underweight to Energy and large state-owned banks. Merger with Aberdeen New Thai completed on 9 November 2021…”
Numis is positive: “abrdn China (£290m market cap) was created through the merger of Aberdeen Emerging Markets and Aberdeen New Thai in Q4 2021 with an All-China approach, investing in both onshore China companies and those with operations in China. It is managed by abrdn’s dedicated 13-member China team, led by Nicholas Yeo, who has over 20 years’ experience investing in Chinese equities. It has been a volatile period for Chinese equities of late, as regulatory uncertainty and more recently, Covid-19 lockdowns have impacted market sentiment. This, along with a rotation towards ‘value’ names has presented obvious headwinds; however, performance since 30 April has been strong in both absolute and relative terms. We acknowledge that investing in China is not without risk, however in our view it warrants a dedicated allocation in investors’ portfolios and we think that abrdn China looks attractive on a 15% discount.”
Quote of the week#3
“The extent to which markets have already discounted these extraordinary conditions is, as always, a fundamentally important but imponderable question.” Duncan Budge Chairman of Artemis Alpha Trust (ATS)
Our eclectic portfolio
Artemis Alpha Trust (ATS)Chairman Duncan Budge opened his full year statement with the following: “Your Company’s Net Asset Value per share fell by 21.9% and the share price by 24.8% over the year ended 30 April 2022 (on a total return basis). In comparison the benchmark FTSE All-Share Index rose by 8.7%.” But as the Chairman explains: “Although the FTSE All-Share Index is our formal benchmark, a significant proportion of the companies in the portfolio are relatively small and form part of the FTSE 250 Index which declined by 5.9% over the year. As we have reminded shareholders in the past, the portfolio bears little relationship to the FTSE All-Share and the stock-selection is not constrained by it. As the last two years have shown, short- term performance is likely to bear very little resemblance to the benchmark, but our aim remains to out-perform it over the long term.”
The Chairman continues: “Just as the stock selection added significant value last year, it detracted during the year under review…Our eclectic portfolio, relatively concentrated as it is in the ‘consumer discretionary’ sector, has proved vulnerable to the down-turn…However, our Investment Manager remains confident of the intrinsic value and potential returns from our portfolio and has, accordingly, made only limited changes…believing that carefully researched, individual companies offer the best prospect for delivering returns for shareholders over the long term.”
Winterflood wrote: “Exposure to consumer discretionary stocks, an underweight to larger cap stocks and in particular mining, commodities and oil/gas companies detracted from relative performance. Earnings per share increased 6.3% to 6.3p (FY22: 5.9p). Total dividends of 5.6p declared for the year, representing a 5.7% increase on the previous year and ahead of CPI increase in the previous year of 1.5%. Net gearing was 9.4%.”
Quote of the week#4
“The bear market valley we are in looks different to, and perhaps more daunting than others…” ATS fund managers John Dodd and Kartik Kumar
Four reasons to be positive
Randeep Grewal Chairman of Bellevue Healthcare (BBH)provided shareholders with four reasons to be positive despite a challenging H1 which resulted in a -16.1% fall in share price total return and an 18.7% drop in NAV compared to the MSCI World Healthcare Index total return (GBP) of 4.5%.
Reason#1: “There are a number of characteristics of certain healthcare stocks that make them particularly interesting at the current time. For most healthcare companies, energy is not a significant cost. Labour too is typically a relatively small percentage of the end product sales price.”
Reason#2: “the pandemic has led to a backlog of demand in many specialities.”
Reason#3: “the characteristics of healthcare (seldom a discretionary purchase) makes the growth rate (for many, but not all, healthcare companies) less sensitive to macro-economics (growth is often more dependent on achieving FDA approval or roll-out of innovative solutions). An increase in the discount rate can also be considered to be an increase in the long term investor return expectations (as long as the company performs).”
Reason#4: “…innovation in healthcare – due to the simple fact that many Western economies are facing shortages of doctors and nurses…I suspect going forward there will be multiple innovations across healthcare to improve efficiency – another area of opportunity for the fund.”
Winterflood noted: “Underperformance attributed to small and mid-cap bias, which suffered from market risk aversion theme. Interim dividend of 3.235p per share declared, in line with target for FY22 of 6.47p per share.”
JPM is positive: “Although BBH has given back a significant amount of relative performance, on a rolling five year basis it is still performing better than its closest peers in the investment trust sector…Despite weak relative NAV performance and the shares trading at a narrower discount than peers, we continue to prefer BBH vs its peers due to a combination of its strategy, a management team we rate highly, robust discount control, and an attractive fee structure which lacks a performance fee compared to peers that do have performance fees. We remain Overweight.”
Nautical reference of the week
“The Company has rowed through stormy and tranquil seas since its inception in 1995…” Oryx Intl Growth (OIG) Investment Managers Report
This time will be no different
Last year’s 86.59% NAV increase at Oryx International Growth (OIG) was always going to be a tough act to follow, as Chairman Nigel Cayzer explains: “After last year’s excellent result with the NAV increasing 86.59% to £16.42, it was inevitable that markets would see a correction, particularly in the light of the investment headwinds that we saw in the last six months of the financial year which included rising inflation, a correction in the bond markets and the Ukrainian war. I am therefore pleased to report that the fall in NAV was limited to 4.57%, with the year end NAV amounting to £15.67 per share…The focus on only investing in companies that have good balance sheets, excellent prospects and experienced management has seen us through turbulent stock market conditions in the past and I am certain that this time will be no different.”
The Investment Managers added: “…portfolio primarily hampered by a reversal in the bond market sentiment towards the biotech and healthcare sectors, which had driven much of the outperformance in 2021. It is unfortunate to announce a loss of value for shareholders, though important to note the relative positive result against the comparable indexes which fell well over 10%.”
Winterflood added: “54 holdings at 31 March, with top ten representing 55.9% of net assets. Listed investments accounted for 91% of net assets, with 4% in unlisted investments and 5% in cash.”
And in case you missed it…
Here’s our latest Insights article: “The £81bn jackpot and the investment trusts with the biggest shares”