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River & Mercantile UK Micro Cap describes stunning year

River & Mercantile UK Micro Cap describes stunning year – The NAV total return of the River & Mercantile UK Micro Cap portfolio for the year ended 30 September 2017 was 45.30%, which compares with the total return of 21.26% posted by the benchmark index. Therefore the NAV per share closed at 183.42p, compared to 126.24p a year ago. The share price performance over the period was even stronger at +63.1%.

At the time of the original placing, the Portfolio Manager advised the Board that, under normal circumstance, it believed a NAV in the region of GBP100 million would best position the Company to take advantage of a portfolio of Micro-Cap companies. Accordingly, the Directors stated that they would intend to operate a redemption mechanism, from time to time, pursuant to which shares may be redeemed compulsorily so as to return the NAV back to around GBP100 million. A GBP15m compulsory partial redemption on 9 June 2017 was followed by a second capital return after the company’s financial year end.

The manager reports that “This past year has seen a number of the portfolio’s tiny Micro-Cap firms achieve transformational increases in earnings power and market appreciation. Many of these are Unique firms where the product or service is unrivalled. In addition several holdings are benefiting from the inexorable tide of Digitisation including some in the specialist area of Big Data. The top contributor enjoys all three of these features which help to explain Blue Prism‘s 251.8% increase in value. Very strong accelerating demand propelled the shares during the period as firms rapidly embrace Digitisation of their workforce and are choosing Blue Prism’s industry leading ‘Software Robots’. In an ideal world all IT systems would be integrated seamlessly, but the daunting technical challenge means that disparate systems need vast armies of staff to perform basic tasks. Advanced artificial intelligence allows a software program to emulate human actions, reducing errors and releasing staff to perform more productive tasks. Whilst early stage, Blue Prism could be at the forefront of a seismic shift in productivity and this is attracting international attention. Closing the period at around GBP625m market cap Blue Prism is no longer micro. However, it is important to fully realise the potential of the original investment so, whilst significant profits have already been banked and recycled into new Micro-Cap holdings, the position remains significant. 

When sizing positions it is pleasing when the largest holding at the beginning of the period under review delivers. Taptica International soared 170.4% as shares continue to keep pace with the very strong growth that the company reported from its global mobile marketing business. Remarkable progress has been achieved since adding to the holding alongside a company buyback at 65p a year ago, but there remains very significant potential even though a 341% gain was banked for a portion of the holding during March. Gains have reached 523% as at the end of this period. 

However, the award for the biggest gainer in the portfolio this year goes to Frontier Developments which rocketed a massive 442.6%. This computer game franchise owner teased and finally revealed the identity of its third property to much excitement – Jurassic World Evolution. Fusing already developed specialisms with this huge brand has led to speculation of multi-million unit sales when the game launches coincident with the new movie next summer. Meanwhile the firm’s existing Elite Dangerous and Planet Coaster franchises drove stronger than expected performance which attracted a valuable partnership with Chinese giant Tencent. 

In fourth place was the star of the first half, MaxCyte Inc, which ended with a gain of 191.2%. This was apparently catalysed by being awarded the deserved accolade of ‘Best Technology’ at the October 2016 AiM Awards. The firm’s patents and knowhow around the ground breaking and Unique science of Flow Electroporation technology led to a major endorsement implied by the licensing of their technology by CRISPR Therapeutics. Flow electroporation allows large scale injection of drugs into human cells – for example a patient’s own blood – which could create a whole new class of cures for cancer and other diseases. 

Big Data is the key underpinning to Microgen‘s success as it possesses a globally unrivalled data processing engine which some of the largest firms in the world are requiring to augment the insufficient capability of the likes of Oracle. This converted into repeated announcements of stronger than expected profits. Concentrated exposure to the core themes prompted the exit for gains in period of 104.3% for a broadly 3-fold increase during ownership. Fellow Big Data play D4T4 Solutions remains in the portfolio with pent up potential following a gain of just 15.8% this year. 

The micro end of the market is well known for its innovative technology companies and also, less favourably in recent years, its high exposure to commodities. However, great value is apparent in the sector justifying an expansion in the allocation to the oil and gas sector in particular. SDX Energy’s fund raise to buy Circle Oil from administration was enthusiastically backed this period for a 73.8% gain as there is significant opportunity to generate cash from fields in Egypt and Morocco. However, even as oil enjoyed a stronger year, gold ended the period lower and this took its toll on Shanta Gold. More important was the collateral damage felt from the dispute between the Tanzanian Government and fellow local producer Acacia. Financial constraints from tax changes and general uncertainty explain the 70% fall in this otherwise attractive high grade gold miner, more than fully reversing its top three contribution last year.

Alongside SDX two other new entrants during the period joined the +1% club. Alpha FX enjoyed a stunning debut, up +144.4%. Their collaborative approach to helping firms manage FX bodes well for growth. Meanwhile LoopUp Group rang up gains of 81.5%. Ongoing strong sales growth of its genuinely simple to use conference calling service finally attracted attention. However, some of this growth is due to favourable currency moves so a stake similar to the initial investment value was sold to moderate the risk that the perception of growth moderates in future. Amongst stocks exiting the portfolio was Constellation Healthcare Technologies for a total gain of around 60% including +26.6% this period which was gratefully secured by selling out shortly after a take-over offer was secured. Similarly it was also good to bank lifetime gains of c.120% for Premier Technical Solutions Group which had rallied to a full valuation thanks to strong growth in tower window cleaning cradles. However, this may prove heavily cyclical as Brexit bites so the period return of 65.8% was secured. This was one of several reductions in UK domestic cyclical exposure during the year to a very low level compared to the benchmark. 

Concluding with longer tenured holdings, biotech firm Allergy Therapeutics advanced 69.2% on strong profit growth in Europe and commencement of key drug trials. Compliance software stalwart Ideagen continued its anchor role in the portfolio with another 49.1% leap. Inspired Energy continues to help firms manage their energy costs and expansion into Ireland was met with a 45% gain. Financial planning oriented IFA firm AFH Financial finally executed on its acquisition strategy and was rewarded with a 56.4% pop. Finally the only other faller to detract more than 1% was telematics device maker Trakm8 down 58.5%. Shares have been retained at a modest weight on the premise that the main issue is a hiatus awaiting the culmination of development efforts to launch a significantly enhanced next generation device.”

RMMC : River & Mercantile UK Micro Cap describes stunning year

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