Half-year Report

RNS Number : 6032J

Miton UK MicroCap Trust plc

14 December 2022

 

14 December 2022

Miton UK MicroCap Trust plc

( the "Company" or the "Trust")

REPORT AND ACCOUNTS FOR THE HALF YEAR ENDED 31 OCTOBER 2022

The Directors present the Half Year Report of the Company for the half year ended 31 October 2022.

The Miton UK MicroCap Trust plc is an investment trust listed on the London Stock Exchange under the ticker code MINI. The Board, which consists of four independent directors, appoints the Investment Manager and oversees all aspects of the Trust.

The Board sets the Trust's objective which is to deliver an attractive investment return for shareholders over the longer term. In contrast to many others, the Miton UK MicroCap Trust plc has an ambition to deliver attractive returns even at times when the mainstream stock market returns are less buoyant. Hence, its portfolio principally invests in UK-quoted microcap companies, defined as those with market capitalisations of less than £150m.

Global markets fell significantly before rallying in September and October 2022. It is not unusual for microcap share prices to lag the recovery of the large caps. Hence, the Trust's total return NAV (including dividend income) fell by 29.0% over the half year which compares with a total return on the Numis 1000 Index (the aggregate return of the smallest 2% of the UK stock market) of -19.5%. Between April 2015 when the Trust was launched and October 2022, its NAV total return was 34.3% which compares with a Numis 1000 total return of 31.3%.

Results for the Half Year to 31 October 2022

· Over the half year, the Ordinary share NAV fell from 91.05p on 30 April 2022 to 64.55p on 31 October 2022, a fall of 29.0% (including re-invested dividend).

· The Ordinary share price moved from 86.50p at the end of April 2022 to 59.00p at the end of October 2022, a decrease of 31.8% (including re-invested dividend).

· A profit of £67,000 in the half year to 1 October 2022 has been credited to revenue reserves.

· Redemption requests of 13.38% of the Company issued share capital were received and accepted, with the redeemed shares cancelled.

Summary of the results

	Half Year to 31 October 2022	Year ended 30 April 2022
Total net assets attributable to equity shareholders (£,000)	61,092	99,475
NAV per Ordinary Share*	64.55p	91.05p
Share price (mid)	59.00p	86.50p
Discount to NAV	(8.60)%	(5.00)%
Investment income	£0.5m	£1.0m
Revenue return per Ordinary Share	0.07p	0.15p
Total return per Ordinary Share*	(27.90)p	13.77p)
Ongoing Charges* #	1.75%	1.41%
Ordinary Shares in issue	94,638,561	109,253,560

* Alternative Performance Measure ('APM'). Details provided in the Glossary on pages 31 to 33.
# The ongoing charges are calculated in accordance with AIC guidelines.

Chairman's Statement

The report covers the half year to 31 October 2022, a period when inflationary pressures remained persistent, and asset valuations around the world declined significantly.

NAV return and index comparators

Between the March 2020 stock market low and the May 2021 peak, the Company's NAV rose 191% from 37.3p to 107.5p. Since May 2021, it has fallen from 107.5p to 64.55p at 31 October, a decline of 40.0%. Specifically, over the half year period of this report, the Trust's NAV declined by 29.0%, as during the October stock market recovery microcap share prices did not participate to any meaningful degree. By way of comparison, the total return on the Numis 1000 Index (the aggregate return of the smallest 2% of the UK stock market) was down 19.5% over the half year. Aside from the reasons which are covered in the Investment Manager's Report, I believe that another reason behind this underperformance was that the largest stocks in the Numis 1000 have market capitalisations of up to £600m whereas the vast majority of the stocks which we tend to hold are market capitalised at under £150m.

Returns since the Trust was first listed in April 2015

Over the seven and a half years since issue, the NAV of the Trust has risen from 49.0p at issue to circa 64.55p now in capital terms (up 31.7%). The Numis All Share Index is only up 0.6% in price terms, but with dividend income it is up 33.4%, whereas the total return of the Numis 1000 Index is 31.3%. Generally, MINI has only paid small dividends over the period, so its NAV total return is 34.3%, similar to its capital gain.

Trust valuation relative to its NAV and Redemptions

Although the Trust's share price went to a premium to its NAV briefly in May 2021, it has subsequently fallen behind its daily NAV. Since issue it has been around 4.2% below its NAV on average, and over the half year since April 2022 the average discount has been about 7.0%. Because most other UK smallcap trusts do not have an annual redemption mechanism they can stand at considerably greater discounts.

In the Trust's voluntary redemption facility in June 2022, a total of 14,614,999 shares were redeemed, representing 13.38% of the Trust's equity. The Board proposes the next voluntary redemption opportunity will be in November 2023. Since the Trust's shares have not traded at a premium to NAV in the half year under review we were unable to issue more shares, as we have a policy of not tapping out shares unless this exercise is carried out at above a 1% premium to NAV, which covers the cost of the exercise and ensures that the practice enhances value for our existing shareholders.

After deliberating the consequences of adopting a 31 October 2023 Redemption Point as announced in the recent Annual Report and Accounts, which would have included having to account for two separate pools of assets if the Redemption Pool route was followed with a consequent cost implication, your Board has decided to move the Redemption Point to 2 November 2023. To remind those who decide to elect to redeem at par, a facility which we offer shareholders once each year, the redemption process can take some time depending upon the size of the redemption request. If the requests to redeem represent only a small percentage of the Company's outstanding share capital then proceeds may be received within a couple of weeks. However, in recent years, after two sizeable requests, the proceeds were not received by shareholders for some three months.

Board Changes

I am sorry to report that, as previously foreshadowed, we are losing Jan Etherden, one of our founding non-executive directors, on 15 December 2022. Jan's diligence and hard work over the seven and a half years that the Trust has been in existence has been exemplary. We thank Jan very much for her peerless contributions over this time and we wish her every success in the future. She will be much missed.

Following an extensive search by a firm of well-respected search consultants, the Board interviewed a very strong short list on 29 November 2022 and I am happy to report that Louise Bonham has accepted our invitation to join the board on 15 December 2022. Louise, whose background is mostly in property, is a chartered accountant by training and is a Fellow of the Institute of Chartered Accountants of England and Wales. Louise cut her teeth with Deloitte and Deutsche Bank. She has held a wide range of senior appointments, including at CBRE and Cushman & Wakefield. The plan is that she will understudy Peter Dicks, Chair of the Audit Committee, before taking over from him in that role in the latter half of 2024.

Environmental, Social and Governance (ESG) issues

Your Company's Manager follows Premier Miton's responsible investing policy, which is to integrate Environmental, Social and Governance responsibility into the investment process, and to engage with investee companies in order to deliver improved outcomes for all stakeholders. At the same time it takes an active approach to voting on company resolutions at annual general meetings of investee companies. Premier Miton has been a signatory of the UN Principles for Responsible Investment since January 2020, an organisation which encourages and supports its signatories to incorporate ESG factors into investment and ownership decisions. Premier Miton has adopted a banned weapons exclusion policy and utilises third party data to maintain a list of such companies.

Whilst Premier Miton does not specifically exclude any other companies or sectors for ESG reasons, its active investment approach ensures that in many of the Premier Miton funds and investment trusts the exposure to so called 'controversial companies' is often low.

The Directors attend a 'Kick the Tyres' session with the Manager at least one day each year, where we also meet a couple of investee companies. We are struck by the diligence and thoroughness of the Manager's approach to questioning the directors of these companies. In particular, the Managers are especially interested in the matter of client service and those investee companies who can demonstrate detailed knowledge as to how their employees engage with companies will find themselves with a better chance of securing our investment.

The ongoing conflict in Ukraine continues to keep inflationary pressures elevated. The prospects for economic growth in the UK have been impacted by the badly received mini-budget delivered by Kwasi Kwarteng on 23 September 2022, coupled with what looks like the beginning of a wage price spiral, which may result in stagflation. Against this difficult backdrop it is worth emphasising that the Managers choose companies where growth is not overly reliant on the general health of the UK economy. In part, this is due to the relative immaturity of the companies and/or their markets. In addition, despite being defined as microcaps, portfolio holdings are often established players in their respective niches and have grown or operate internationally. Overall, therefore, the overseas activities of companies are material to the Trust, further reducing the dependency on the success or otherwise of the UK economy.

Given the challenges ahead, UK-quoted microcaps would appear to have the advantage even if they were standing at similar valuations to the majors. As it is, they are so overlooked that their Price to Book valuations are almost half of those of the UK stock market as a whole, and a mere fraction of those of the largest international stock markets. It is very rare to find stocks with such attractive prospects standing on valuations that are so far below others.

Prospects

During 2022, global equity valuations have fallen considerably, and in the case of growth stocks from very elevated levels. Whilst UK equity asset valuations have reflected the global trend, generally they started at more modest levels, so UK valuations overall currently stand at even more attractive levels. During Brexit, UK microcaps tended to be overlooked, and since November 2021 have remained out of the limelight suffering a steady downward trend. As I write, it is a source of some comfort to see glimmers of life in our microcap stocks. Your Company's NAV hit its nadir during the half year at 64.02p on 25 October 2022, since which date it has climbed steadily to 68.76p on 25 November 2022. Naturally, the NAV progression has been helped by the recent equity rally, which may or may not turn out to be a bear market bounce. Although our stocks are cheap and some might postulate that they are ripe for takeover, I know that it is the Managers' view that, in general terms, the companies in our universe are too small for larger corporates to be bothered going through a great deal of due diligence that a takeover involves. It is more likely that some of our holdings will be able to pick up distressed assets from the receiver or when those companies are in desperate straits. We would rather not lose our well chosen companies to takeovers when their valuations are so depressed.

The UK stock market, which has a high proportion of stocks generating a cash surplus, is distinct from most other global markets. With the constraint on capital that comes with inflation, the relative strength of UK quoted company balance sheets should be a considerable advantage, especially compared to those with substantial debt burdens. Furthermore, if economic conditions remain unsettled, quoted companies can often rescue many of the jobs in the over-indebted, but otherwise viable businesses by acquiring them debt-free from the receivers given that this yields the full cash payback on their prior investment.

Thank you for your patience in holding the Company's shares. We are hopeful that the current period will prove to be rather more rewarding.

Ashe Windham

Chairman

13 December 2022

Investment Managers Report

Gervais Williams and Martin Turner came together as a team in April 2011 and are responsible for the day-to-day management of the Trust's portfolio.

Gervais Williams

Gervais joined Miton in March 2011 and is Head of Equities at Premier Miton. He has been an equity fund manager since 1985, including 17 years at Gartmore. He was named Fund Manager of the Year by What Investment? in 2014. Gervais is also a board member of the Quoted Companies Alliance and a member of the AIM Advisory Council.

Martin Turner

Martin joined Miton in May 2011. He and Gervais have had a close working relationship since 2004, with complementary expertise that led them to back a series of successful companies. Martin qualified as a Chartered Accountant with Arthur Anderson and had senior roles and extensive experience at Merrill Lynch and Collins Stewart.

In light of the declining NAV over the half year, to what degree have the prospects of various portfolio holdings deteriorated?

After the substantial outperformance of quoted microcaps in the year to April 2021, the share prices of UK-quoted microcaps peaked in May 2021 because microcap capital raisings exceeded the scale of capital available. During 2022, inflationary pressures have persisted, and with fewer investors buying microcaps, their share prices have declined further. As highlighted on page 1, the NAV of the Trust declined by 29.0% over the half year, which compares with a decline of 19.5% for the Extended Numis 1000 Index over the same period.

Overall, despite such weak share prices over the half year, the prospects for most of the Trust's holdings have not deteriorated. There were, however, some relatively isolated examples where prospects did deteriorate, such as Pressure Technologies, Quadrise Fuel and Lamprell, and these holdings have been sold. Collectively, these three investments detracted 2.1% from the portfolio returns in the period.

Elsewhere, whilst numerous other portfolio stocks continued to report good progress, even modest profit taking was sufficient to drive down their share prices considerably. Saietta Group for example, raised £23m of new capital in August from investors to fund a major contract with a US business and accelerate its transition to a fully integrated e-drive supplier with a substantial US business. Yet as institutional demand was satiated, even modest sellers thereafter drove its share price down from the 138p placing price to just 72p at the end of October. Over the half year, the Trust's holding in Saietta detracted 1.1% from returns, despite its prospects having improved over the period.

The reduction in portfolio valuations can be illustrated via the Price to Book metric - which is a company's share price divided by its asset value per share. The bar chart on page 9 of the Half Year Report published today illustrates how this valuation metric has fluctuated over recent periods. Portfolio ratios below one are most unusual, especially for a portfolio of stocks with attractive prospects.

What has influenced the Trust's NAV since it first listed in April 2015?

Whilst the period since April 2015 has witnessed reasonable corporate expansion, various events have led to investors being more cautious about the UK's prospects. These included the Brexit vote encompassing the period when Parliament was politically gridlocked, and the UK could have suffered an unmanaged chaotic exit from the EU. In addition, the global pandemic and an overconfident mini-budget were also of concern. Overall, most UK stock market indices have hardly appreciated over the period. Indeed, their overall return has been principally driven by the value of the dividend income they have generated over the years.

It was always anticipated that the return on Miton UK MicroCap Trust plc would be principally generated by capital appreciation, as the true potential of portfolio holdings was recognised. Whilst some of these successes might start to generate dividend payments, often their valuations have risen to such an extent that they are sold and the capital reallocated to other, overlooked microcaps.

Whilst the Trust's NAV has appreciated ahead of that of the comparative indices since issue, its overall returns are not dissimilar as it has not generated such significant dividends. With the unusually low valuations of portfolio holdings outlined previously, there appears to be ample scope for the Trust's portfolio to generate considerable capital appreciation from here, over time.

As interest rate rises suppress demand, which stocks are best able to sustain profit margins, when others are cutting prices to hold on to customers?

During globalisation, inflationary pressures were subdued principally due to abundant imports of low-cost goods that typically exceeded demand. During these decades, central banks were able to inject extra demand when economic growth slowed, normally through reducing interest rates or more recently via financial stimulus in the form of Quantitative Easing.

With the global pandemic and the reduced availability of energy following the Ukrainian invasion, global economic supply has been compromised. The net effect is that demand has exceeded supply, which has led to inflation. To bring this mismatch back into balance, central banks have raised interest rates to choke off demand.

Suppressed demand represents a major business challenge, as there are fewer sales to go around. Hence, when demand declines, it often sparks price wars that drive down profit margins. The outcome is that corporate profitability often comes under pressure, with the over-levered at risk of insolvency.

In our view, businesses with poor customer service are often the most vulnerable in these circumstances. Conversely, companies delivering not only good, but outstanding levels of customer service tend to retain their customers even when others are offering similar services at lower prices.

With this in mind, the Manager questions management teams closely about whether they collect data on customer service, which helps them identify those that are delivering outstanding customer service. Whilst such companies may not be immune to wider economic trends, it is anticipated that they will have greater resilience than others.

With the stock market setback, does Premier Miton remain well-resourced so it can continue to deliver for the Trust's investors in the future?

The Trust's Board initially appointed Miton Group as Manager when it was listed in April 2015. In November 2019, Miton Group merged with Premier Asset Management to form Premier Miton Group plc. As with Miton Group plc, Premier Miton Group plc is an independent, UK listed fund management company, wholly focused on delivering attractive outcomes for investors.

Listed companies have the advantage of access to institutional capital, and hence, as a group they are often less indebted than some of the equivalent private companies. In the case of Premier Miton, at the end of September 2022, the plc had net cash and no debt.

Although Premier Miton's revenues have declined with markets, stockbroking analysts continue to forecast that it will remain profitable and cash generative. Despite the decline in stock markets, Premier Miton remains well-placed to resource its fund managers fully, so that they remain unconstrained in overseeing client portfolios and have the best possible opportunity to continue adding value through active management over the coming years.

What are the prospects for the Trust?

During 2022, inflation was persistent and valuations fell considerably. Even prior to this year, with the uncertainties of Brexit, the valuation of UK equities was already relatively undemanding. Following the share price weakness in 2022, UK microcaps have fallen to what we consider to be exceptionally attractive valuations. The trend in the Price/Book valuation of the Trust's portfolio is shown on a previous graph on page 9 of the Half Year Report published today. On this metric, after the setback this year, it is now considerably below the valuation of comparative indices, which in turn are standing on relatively low valuations versus international comparatives.

As inflationary pressures peak, investors are starting to look forward to a time when asset values stop falling. Indeed, some are starting to look across the recessionary valley in earnings, to an improving trend some quarters hence.

In our view, the prospects for global recovery still range between a recession that may persist for longer than expected to a scenario where inflationary pressures may have been conquered. Either way, with elevated energy prices and the cost of mortgages rising, in our view consumers, governments and corporates will become much more price sensitive in their purchases and moderate their consumption rate. This implies that profit margins will come under pressure which coupled with limited global growth, will hinder earnings growth.

Whilst this period could be challenging for all businesses, those with over-levered balance sheets, or those making persistent losses, will be at risk of bankruptcy. In contrast, quoted companies tend to have relatively strong balance sheets. Better still, they have the potential to acquire overindebted, but otherwise viable businesses from the receiver, debt-free, at distressed valuations. In our view, these transactions will actively improve the potential for these companies to generate surplus cash at a time when most others are short of capital.

Since mainstream stocks will typically be large compared to the scale of any acquisitions, in general they will only deliver incremental improvements. In contrast, the scale of these acquisitions will often be very significant relative to quoted microcaps, and consequently some will have the potential to generate transformational returns.

In short, in terms of the price/book metric, many UK-quoted microcaps are currently s tanding at unusually low valuations. And yet, even if economic conditions remain challenging, prospects are expected to be superior to many others. Furthermore, if they make acquisitions at distressed valuations, their returns may be substantially better. Overall, whilst markets might remain volatile for quite some time, in our view the prospects for the Trust's strategy have never been better.

Gervais Williams and Martin Turner

13 December 2022

Portfolio Information

Rank	Company	Sector & Main activity	Valuation £'000	% of net assets	Yield* %
1	MTI Wireless Edge	Technology	1,824	3.0	4.7
2	Frontier Ip Group	Industrials	1,598	2.6	-
3	YU Group	Utilities	1,253	2.1	-
4	Totally	Health Care	1,239	2.0	3.0
5	Kistos	Energy	1,231	2.0	-
6	Afritin Mining	Basic Materials	1,208	2.0	-
7	Trufun	Financials	1,160	1.9	-
8	HEIQ	Basic Materials	1,121	1.8	-
9	Corero Network Security	Technology	1,104	1.8	-
10	Braemar	Industrials	1,025	1.7	3.5
Top 10 investments			12,763	20.9
11	Eneraqua Technologies	Industrials	1,019	1.7	0.3
12	Zoo Digital Group	Technology	982	1.6	-
13	Centralnic Group	Technology	961	1.6	-
14	Accrol Group Holdings	Consumer Staples	918	1.5	-
15	Cyanconnode Holdings	Telecommunications	897	1.5	-
16	CT Automative Group	Consumer Discretionary	884	1.4	-
17	Aferian	Telecommunications	846	1.4	3.5
18	Capital Limited	Basic Materials	792	1.3	3.3
19	Van Elle Holdings	Industrials	790	1.3	2.4
20	Atlantic Lithium	Basic Materials	764	1.2	-
Top 20 investments			21,616	35.4
21	Supreme	Consumer Staples	757	1.2	5.5
22	Cleantech Lithium	Basic Materials	750	1.2	-
23	Futura Medical	Health Care	749	1.2	-
24	Zinc Media Group	Consumer Discretionary	730	1.2	-
25	Marwyn Value Investors	Financials	727	1.2	10.1
26	Kinovo	Industrials	716	1.2	-
27	Saietta Group	Consumer Discretionary	686	1.1	-
28	Touchstone Exploration	Energy	678	1.1	-
29	Elemental Altus Royalties	Basic Materials	668	1.1	-
30	Jubilee Metals Group	Basic Materials	663	1.1	-
Top 30 investments
Balance held in 104 equity investments			28,740	47.0
Total equity investments			27,578	452.2
Listed Put Option			56,318	92.2
	UKX - December 2023 5,700 Put		615	1.0
Other net current assets			4,149	6.8
Net Assets			61,092	100.0

* Source: Refinitiv. Based on historical yields and therefore not representative of future yields. Includes special dividends where known.

FURTHER INFORMATION

Miton UK MicroCap Trust plc's report and accounts for the half year ended 31 October 2022 will be available today on   https://www.mitonukmicrocaptrust.com/documents/

It will also be submitted shortly in full unedited text to the Financial Conduct Authority's National Storage Mechanism and will be available for inspection at   data.fca.org.uk/#/nsm/nationalstoragemechanism  in accordance with DTR 6.3.5(1A) of the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.

Enquiries:

Miton UK MicroCap Trust plc
Gervais Williams, Martin Turner, Claire Long	Tel: [phone]
Peel Hunt LLP (Broker)
Liz Yong, Luke Simpson, Huw Jeremy		Tel: [phone]

ISIN: GB00BWFGQ085

LEI: 21380048Q8UABVMAG916

 

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