REG-Menhaden Resource Efficiency PLC: Half Year Report and Company Update
16/09/2024 13:15
Menhaden Resource Efficiency PLC
Half Year Report and Company Update
LEI: 2138004NTCUZTHFWXS17
16 September 2024
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Company Update
The Company publishes below its Half Year Report to 30 June 2024, within which
the Board announces that it proposes to carry out, together with its advisers,
a formal review of the options available to it in order to address the issues
facing the Company prior to its continuation vote in 2025. Further details are
provided below in the Chairman’s Statement of the Half Year Report.
For further information, please contact:
Paul Griggs
Frostrow Capital LLP (Company Secretary)
Tel: 0203 170 8733
David Benda / Matt Goss
Deutsche Numis
Tel: 0207 260 1000
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Half Year Report
for the six months ended 30 June 2024
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Financial Highlights
Menhaden Resource Efficiency PLC (the “Company”) is an investment trust.
Its shares are listed on the premium segment of the Official List and traded
on the main market of the London Stock Exchange.
The Company’s investment objective is to generate long-term shareholder
returns, predominantly in the form of capital growth, by investing in
businesses and opportunities that are demonstrably delivering or benefiting
significantly from the efficient use of energy and resources irrespective of
their size, location or stage of development.
We are a high conviction long term patient capital investment.
Performance As at As at
30 June 2024 31 December 2023
Total net assets £135,156,000 £126,679,000
Net asset value (“NAV”) per share 171.0p 160.3p
Share price 102.5p 100.8p
Share price discount to the NAV per share ^ 40.1% 37.2%
Total returns Six months to Year to
30 June 2024 31 December 2023
NAV per share ^ 7.2% 23.8%
Share price ^ 2.6% 13.6%
RPI + 3% 3.7% 8.4%
Six months to Year to
30 June 2024 31 December 2023
Annualised ongoing charges ratio ^ 1.7% 1.7%
^ Alternative Performance Measure. Please refer to the Glossary on page 21 for
definitions of these terms and the basis of their calculation.
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Chairman’s Statement Strategic Context
Menhaden resource efficiency was founded in 2015 on the belief that, with
insatiable demand for higher living standards on a finite planet, some
companies enabling the cleaner and more efficient delivery of basic societal
needs and key infrastructure, such as energy, water, digital services, mass
transportation, or mitigating environmental risks like pollution and climate
change, will grow earnings faster than the global economy over the long
term.
The global demand for energy and other resources continues to rise in the
developed and developing world. The International Monetary Fund believes that
financial markets are underpricing climate related risks and the World
Meteorological Association believes that 2024 could be the hottest year ever
recorded. Accordingly, the need for numerous business sectors to progressively
reduce their use of fossil fuels and greenhouse gas emissions by 2050 in line
with the Paris Agreement has never been so critical.
Consequently, our investment thesis to invest in high quality businesses that
both enjoy strong market positions and are demonstrably delivering or
significantly benefitting from the efficient use of energy and resources is
now even more relevant.
Our aim is to provide shareholders with exposure to this investment
opportunity. The Company invests in a well-researched concentrated portfolio
of companies providing solutions to today’s societal needs. The Board
believes this approach can deliver superior risk-adjusted returns over the
long-term.
Financial Performance
The performance of our investment portfolio has been encouraging over the
first half of 2024. Between 31 December 2023 and 30 June 2024 the
Company’s total net assets increased from £126.7 million to
£135.2 million. The NAV per share increased from 160.3p at 31 December 2023
to 171.0p at 30 June 2024, giving an NAV per share total return of 7.2%. The
Company’s share price over the same period rose from 100.8p per share to
102.5p, giving a share price total return of 2.6%. These metrics compare with
a return over the six months of our primary performance comparator RPI+3% per
annum, of 3.7%. Regrettably our share price performance remains below our
RPI+3% benchmark over the last three years and since inception.
Safran, which develops and manufactures more fuel efficient engines for
aircraft, and the portfolio’s digital technology stocks, led by Alphabet,
made the greatest positive contributions to performance in the period. VINCI
and Airbus were the largest detractors.
The most significant changes to the portfolio in the period were completion
of the new US$17.5 million co-investment with KKR in Avantus, one of the
leading solar and storage developers in the United States, as discussed in our
last annual report, and contributions in accordance with our capital
commitment to TCI Real Estate Partners Fund IV, which has a focus on
developing best in class energy efficient buildings. These investments
represented 10.2% and 6.7%, respectively, of net assets at 30 June 2024.
Partial sales of our technology and aviation focused quoted equities were
undertaken to help fund these, locking in some gains.
Environmental Performance
Our Portfolio Manager actively monitors the energy and resource efficiency of
our investments in line with the carbon disclosure project and the Science
Based Targets initiative. The focus of our Portfolio Manager’s engagement
with our quoted investee companies has been on their alignment with the Paris
Agreement to reduce global warming, deforestation and biodiversity loss. The
aim is to encourage them to adopt and use best practice environmental
solutions and define pathways to reduce their GHG emissions and preserve
tropical rain forests, together with associated biodiversity. Some positive
progress is being made, which is welcomed. Further corporate engagement is
planned where little or no progress is being made. At the end of 2023, the FCA
introduced new Sustainability Disclosure Regulations. The Board is working
with our AIFM, Frostrow Capital, and our Portfolio Manager on the
implementation of the anti-green washing rules, which came into effect on 31
May 2024, and is assessing the appropriateness (or otherwise) of applying a
sustainability label for the Company from 2 December 2024.
Share Price Discount
For a number of reasons significant share price discounts are currently
reflected across the majority of the UK investment trust sector. Accordingly,
the share price discount to the Company’s NAV per share continues to be a
metric that concerns the Board, which it monitors extremely closely. At the
end of June our share price stood at a 40.1% discount to the NAV per share.
The Board’s actions to help mitigate this share price discount are described
below.
We have not previously favoured share buy backs for mitigation of the share
price discount and remain of the view that share buybacks are not usually in
the best interest of shareholders as they reduce the size of the Company and
increase the ongoing charges ratio. However, the Board does recognize that
buybacks are accretive to NAV per share, may help to temper share price
volatility and send a signal to the market about our confidence in the
underlying value of the assets in the investment portfolio.
Thus during 2023 we undertook a modest programme of share buybacks. While this
exercise resulted in no discernible effect on the discount at the time, with
the discount continuing to widen the Board took the decision in June 2024 to
recommence the programme. This continues to be in effect and the Board hopes
that it might help to stabilise the share price. The financial efficacy of
the programme will be reviewed in 2025. Alongside this we are continuing our
marketing and communication efforts to try stimulate demand by informing
potential investors of the inherent value in the Company’s assets and
shares. Plus our Portfolio Manager’s total focus in maintaining and
improving our investment return and share price performance.
Continuation
The Company was established with an unlimited life, however, the Company’s
Articles of Association provide that a continuation resolution be put to
shareholders as an ordinary resolution at the annual general meeting of the
Company every five years, with the next continuation vote due to be put to
shareholders at the AGM to be held in July 2025.
The Board is conscious of the challenges facing the listed investment company
sector, many of which are also faced by the Company at this time.
Notwithstanding its good net asset value performance, at its current size the
Company’s secondary market liquidity is relatively low and it has been
unable to attract attention and demand from investors, which has led to the
Company’s shares trading at a material discount to the Company’s net asset
value per share.
In this context the Board is proposing to undertake, together with its
advisers, a formal review of the options available to it in order to address
the issues facing the Company. The Board will update shareholders once it has
an outcome from its review ahead of the forthcoming AGM.
Dividend
In line with previous practice the Board has not declared an interim dividend
in respect of this half year. As shareholders will be aware a dividend of 0.9p
per share was recommended in respect of the year to 31 December 2023 and,
following shareholder approval in June 2024, was paid in July 2024.
The Company’s dividend policy is that the Company will pay a dividend as a
minimum to maintain investment trust status. While income generation is not
part of the Company’s investment objective the Board recognizes that
dividends are an important shareholder benefit. The Board currently expects
to recommend the payment of a final dividend in respect of the full year to
31 December 2024, which will be subject to a shareholder resolution at our
2025 AGM, currently scheduled for 3 July 2025.
The Board
As announced to the market in June, Sir Ian Cheshire retired from the Board of
the Company on 12 September 2024 after nine years’ service on the Board. Sir
Ian was Chairman of the Company from its launch in 2015 until stepping down
from that role on 16 May 2023, since when he continued to serve as a
non-executive Director until his retirement. I would like to take this
opportunity, on behalf of the Board, to thank Sir Ian for his leadership and
wisdom during his tenure. A recruitment process for a new Board member is
ongoing as at the date of this report.
Outlook
Financial markets have generally been resilient so far in 2024, and while the
Board hopes for an upturn for both quoted equities and private investment
opportunities; numerous global macro factors continue to influence financial
markets and investor sentiment. These include the impact of continuing wars in
Ukraine and Gaza; tension between the USA and China over trade and tariffs;
general energy and resource price volatility; and increasing climate change.
The Board considers the Company’s portfolio to be well placed for further
capital growth because of its quality and the defensive and inflation
resistant properties of many of the holdings. Moreover, the Board continues to
remain convinced of the validity of the premise that the world and all
businesses need to be more energy and resource efficient and the Company’s
investment thesis should accordingly provide long-term benefits for our
investors.
Further Information
Our Portfolio Manager’s report, starting on page 8 provides further details
about our investments and their contribution to the Company’s performance
during the period. The Company’s most recent 2023 annual environmental
impact report and monthly factsheets can be found on our website
www.menhaden.com. Our 2024 annual report and environmental impact report will
be published in mid-2025.
Howard Pearce
Chairman
16 September 2024
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Investment Themes
Theme Description
Clean energy Companies involved in the production and transmission of power from clean sources such as solar or wind.
Industrial emissions reduction Companies focused on improving energy efficiency (e.g. in buildings or manufacturing processes) or creating emissions reduction products or services.
Sustainable infrastructure and transportation Companies in the infrastructure and transport sectors helping to reduce harmful emissions.
Water and waste management Companies with products or services that enable reductions in usage/volumes and/or smarter ways to manage water and waste.
Digitalisation Companies that facilitate reduced resource consumption through digital technology.
Reporting Companies providing the means for environmental reporting and evaluation.
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Portfolio as at 30 June 2024
Investment Country Fair Value % of net assets
£’000
Alphabet United States 17,715 13.1
Safran France 14,222 10.5
Avantus* United States 13,844 10.2
Microsoft United States 13,430 10.0
Airbus France 12,397 9.2
VINCI France 9,842 7.3
TCI Real Estate Partners Fund IV* United States 9,110 6.7
Canadian Pacific Kanas City Canada 8,653 6.4
Canadian National Railway Canada 7,569 5.6
Amazon United States 6,577 4.9
Ten largest investments 113,359 83.9
Ocean Wilsons Bermuda 4,644 3.4
John Laing* UK 4,589 3.4
TCI Real Estate Partners Fund III* United States 1,237 0.9
Waste Management United States 1,063 0.8
ASML Netherlands 736 0.5
Union Pacific United States 716 0.5
KLA United States 652 0.5
LAM Research United States 421 0.3
Total investments 127,417 94.3
Other net assets (including cash) 7,739 5.7
Total net assets 135,156 100.0
* Unquoted
Investment Business Description Theme
Alphabet Delivers a range of internet-based products and services for users and advertisers, which are powered by renewable energy with the group being the largest corporate buyer of renewable power worldwide D igitalisation
Safran Designs, manufactures and services next generation aircraft engines which offer significant fuel efficiency savings Industrial emissions reduction
Avantus* Premier solar and storage developer in the US, with one of the largest development pipelines across California and the Southwest. Clean energy
Microsoft Provides cloud infrastructure and software services which deliver energy efficiency savings for customers versus legacy solutions D igitalisation
Airbus D esigns, manufactures and services next generation aircraft engines which offer significant fuel efficiency savings Sustainable infrastructure and transportation
VINCI Owns and operates fuel-efficient freight railways in Canada and the USA Sustainable infrastructure and transportation
TCI Real Estate Partners Fund IV* Invests in energy-efficient real estate projects Sustainable infrastructure and transportation
Canadian Pacific Kanas City Owns and operates fuel-efficient freight railways in Canada and the USA Sustainable infrastructure and transportation
Canadian National Railway Operates rail freight services across North America, which represent the most environmentally friendly way to transport freight over land Sustainable infrastructure and transportation
Amazon An energy efficient ecommerce and cloud computing business aiming to use only renewable energy by 2030 D igitalisation
Ocean Wilsons Operates ports and provides ( lower climate impact) maritime services in Brazil Sustainable infrastructure and transportation
John Laing Portfolio of mostly renewable rail and social infrastructure assets Sustainable infrastructure and transportation
TCI Real Estate Partners Fund III Invests in energy-efficient real estate projects Sustainable infrastructure and transportation
Waste Management Provides waste management and environmental services in North America Water and waste management
ASML Develops, manufactures and services advanced lithography systems used to produce more energy efficient semiconductor chips D igitalisation
Union Pacific Provides fuel-efficient rail freight services across the USA Sustainable infrastructure and transportation
KLA Develops, manufactures and services inspection and metrology equipment used to increase the efficiency of semiconductor manufacturing D igitalisation
LAM Research Develops, manufactures and services etching and deposition equipment used to produce more energy efficient semiconductor chips D igitalisation
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Portfolio Manager’s Review
Performance
During the first half of 2024, the Company’s NAV per share increased from
160.3p to 171.0p. This represents a total return of 7.2% and compares to the
benchmark return of 3.7%. The Company’s shares traded at a 40.1% discount to
NAV as at 30 June 2024. The contributions to the NAV per share total return
over the period are summarised below:
Asset Category 30 June Return
2024 Contribution
NAV % %
Quoted Equities 73.0 8.2
Private Investments 21.3 1.5
FX Hedges - (0.2)
Cash and cash equivalents 6.5 -
Expenses (including accruals) (0.8) (2.3)
Dividend Paid (0.6)
Net Assets 100.0
Net Return 6.6
Impact of dividend reinvestment 0.6
Total Return 7.2
Resource efficiency remains a critical focus for businesses and governments
worldwide. Disclosures on environmental impacts are surging, with nearly
25,000 organisations disclosing data through CDP in 2023. Companies included
in this data disclosure account for two-thirds of global equity market value.
We believe that investing in businesses benefitting from the efficient use
of energy and resources remains more relevant than ever.
We continue to pair this with a strict focus on quality and valuation. This
preference for businesses which benefit from barriers to entry, and which
trade at reasonable valuations, has led us to invest primarily within the
sustainable infrastructure and transportation and digitalisation themes, and
has mainly been expressed in quoted equities where we believe the return
relative to risk has been more favourable. More recently, we are starting to
see more value in some of the private positions, such that the Company’s
unlisted exposure at 30 June 2024 was 21.3%, with commitments of a further
£13 million.
Investment performance was led by the portfolio’s digitalisation holdings
(Microsoft, Alphabet and Amazon). Safran also performed strongly, buoyed by
the sustained strong demand for travel. Airbus and VINCI were the main
detractors, with the former struggling with supply chain issues and the latter
negatively affected by perceived risks stemming from the recent French
elections. The private portfolio performed in line with expectations, with the
fourth fund of the TCI Real Estate Partners strategy ramping up capital
deployment and the third fund distributing the proceeds from the repayment of
one its remaining loans in February.
We started the year with a high cash balance, following the completion of the
sale of X-ELIO in November 2023. We deployed a portion of the cash, equivalent
to 5.8% of NAV, across the portfolio’s existing quoted equity holdings in
January. With valuations appearing stretched, we opted to realise some
profits on our largest public equity positions in March and May. We executed
sales equivalent to 11.6% of NAV in aggregate. A portion of these proceeds
helped to fund our latest co-investment with KKR in United States solar
developer, Avantus. The transaction completed in late July. We believe this
deal was highly opportunistic and we expect to earn significantly higher
returns than in public equity markets.
Quoted Equities
Quoted equities represented 73.0% of total NAV at 30 June 2024, and delivered
a total return of 11.7% over the period, adding 8.2% to the NAV per share.
Investment Increase/ Contribution
(Decrease) % to NAV %
Alphabet 30.4 3.5
Safran 23.8 2.3
Microsoft 18.9 2.0
Amazon 27.2 1.5
Ocean Wilsons 7.5 0.3
ASML 41.4 0.2
KLA 41.8 0.2
Waste Management 19.1 0.1
LAM Research 36.0 0.1
Canadian Pacific Kansas City (0.4) 0.0
Union Pacific (7.9) (0.0)
Canadian National Railway (6.0) (0.3)
Airbus 2.1 (0.6)
VINCI (13.5) (1.2)
Note: Percentage increase/(decrease) for individual holdings is calculated on
their local currency and based over the holding period if bought or sold
during the year.
Alphabet delivers everyday digital services to billions of people on a
sustainable basis, with targets for net-zero emissions and 24/7 carbon-free
energy by 2030. Google is the market leader in search. This business continues
to exhibit healthy growth and we remain optimistic on its prospects. Ecommerce
remains a small portion of total retail sales and artificial intelligence is
opening new use cases for search. We believe Google is well placed to serve
these new queries, manage their cost and ultimately monetise them. Whilst
there is some uncertainty over future returns on the current spending on
infrastructure to support the growing use of artificial intelligence, we
believe that the management team can manage the pace of investment and allow
the business to grow into any excess capacity if needed. Alphabet lost the
antitrust case brought by the US Department of Justice concerning Google
Search in August. The company intends to appeal this ruling. The process to
reach a resolution is likely to be long. In our view Google has the best
search product providing the best user experience and we believe most users
will continue to use Google. We await further information on proposed
remedies.
French aircraft engine manufacturer Safran continues to lead the way towards
the decarbonisation of the commercial passenger aviation sector. Renewal of
the existing fleet with the latest generation of aircraft powered by
Safran’s LEAP engine should reduce the carbon emissions per passenger mile
by 1-2% per year over the next 15 years. The Science Based Targets Initiative
(SBTi) also independently validated the company’s targets to reduce scope 1
and 2 emissions by 50% by 2030 and scope 3 emissions by 42.5% per available
seat kilometre by 2035. Passenger traffic remains strong this year, whilst
the delivery of new aircraft to airlines remains constrained by supply chain
and regulatory issues. These dynamics benefit Safran by translating into
robust demand for spare parts due to high utilisation rates on the existing
CFM engine fleet and low retirements.
Microsoft is the key technology partner for enterprise and its software
products are ubiquitous. More than 95% of Fortune 500 companies are customers
of the Azure cloud business and four out of every five use Office 365. The
company strives to ensure its technology infrastructure is fully sustainable,
aiming to operate on carbon-free energy everywhere, at all times, by 2030.
Microsoft continues to invest heavily to support the increasing use of
artificial intelligence. The company faces the same concerns as Alphabet over
the level of future returns on this spending. That said, Azure continues to
grow rapidly, with an increasing contribution from artificial intelligence
services. We expect management to manage the pace of investment as needed. The
rollout of Microsoft 365 Copilot continues and should help to sustain healthy
revenue growth for Office 365 even as growth in users slows down.
Amazon aims to make both ecommerce and cloud computing sustainable, with goals
to only use renewable energy by 2030 and then operate on a net zero carbon
basis by 2040. The company’s carbon intensity declined 13% from 2022 to
2023, with total emissions decreasing by 3% on an absolute basis and 100% of
electricity consumed attributable to renewable energy sources. Profitability
and free cash flow generation have further improved this year. The retail
business continues to benefit from growing services revenues and the switch
to a regional fulfilment model in the United States. Chief Executive Officer
Jassy believes there is still more room to reduce costs. AWS’s revenue
growth has reaccelerated on a year-over-year basis, with the business buoyed
by demand for new artificial intelligence services. AWS’ Generative AI
business is said to have already hit a multibillion dollar annual run rate.
Capital investment continues to increase, with the company spending on servers
and infrastructure to support growing artificial intelligence workloads in
line with peers, Alphabet and Microsoft.
Holding company, Ocean Wilsons, comprises a controlling interest in publicly
listed Brazilian port operator, Wilson Sons, and a diversified investment
portfolio. Wilson Sons’ port infrastructure and maritime services facilitate
moving freight by sea, which is more than 40% less carbon intensive than rail
and more than 80% less than trucking across Brazil. The company’s asset base
is very difficult to replicate and is exposed to growth in Brazil’s
international trade. Wilson Sons is now firmly back on its pre-pandemic
growth trajectory, with new shipping routes helping to drive container volume
growth this year. The subsidiary’s strong financial performance has enabled
Ocean Wilsons to raise its annual dividend by more than 20% in US dollars.
Ocean Wilsons’ strategic review of its stake in Wilson Sons remains ongoing.
The company confirmed that it was in discussions with I Squared Capital
Advisors regarding a potential sale in late August. We believe that the
company could unlock significant value, with the shares trading at more than
a 35% discount to NAV.
The semiconductor industry appears on the cusp of an upswing driven by
artificial intelligence. We expect wafer fabrication equipment spending to
post strong growth on a year-over-year basis in 2025. This should benefit the
semiconductor capital equipment companies in the portfolio, ASML, Lam Research
and KLA. Each company dominates its respective niche in the value chain and
plays a critical role in helping the wider industry both maximise
semiconductor production from finite resources and develop and produce more
advanced and energy efficient chips. We believe the fundamental drivers of
semiconductor demand remain as clear as ever: cloud computing, artificial
intelligence, 5G, the Internet of Things (IoT) and the digitalisation of the
automotive industry. Semiconductor manufacturers’ capital intensity also
continues to increase. We expect all these companies to have very bright
futures.
Waste Management provides essential services and supports customers in
reducing their carbon footprints through effective handling and recycling of
waste. The company benefits from a high proportion of annuity-like revenue
streams, with the cost of its services representing a very small portion
(circa 0.5%) of customers’ total expenses. The recently announced
acquisition of Stericycle sees Waste Management enter the medical waste
services space. We believe the combination of cost synergies and secular
revenue growth should translate into good returns. The takeover is expected to
close by the end of this year. Internal growth investments in new automated
recycling facilities and renewable natural gas plants at landfill sites
continue, with five of the latter set to start up later this year.
The subdued North American freight environment has provided a challenging
backdrop for the company’s freight railroad holdings: Canadian National
Railway, Canadian Pacific Kansas City and Union Pacific. Rail retains a
significant cost advantage over trucks on longer haul routes and no one is
building railroads today. Rail remains the most environmentally friendly way
of transporting freight over land, with current locomotives four times more
fuel efficient than trucking on a per unit basis. Canadian National Railway
and Canadian Pacific Kansas City have been contending with an ongoing labour
dispute with two divisions from the Teamsters Canada Rail Conference (TRCR).
The ensuing uncertainty over transit times has seen customers opt to send
volumes via the west coast of the United States. This dynamic led to Canadian
National Railway downgrading its current fiscal year outlook. Following both
companies’ decision to proceed with lockouts of TCRC employees in late
August, Canada Industrial Relations Board ordered both companies to enter
binding arbitration processes and for there to be no further labour stoppages.
Once resolved, we believe the volumes will return. Canadian Pacific is
continuing to execute on the integration of Kansas City. Carload volumes have
been negatively affected by the shedding of low margin business at the end of
last year. We expect to see more evidence of the benefits from the merger in
2025. Chief Executive Officer at Union Pacific, Jim Vena, saw in his first
year anniversary, with the company’s operational and productivity metrics
moving in the right direction. We expect these to translate into better
financial performance going forwards.
European aircraft manufacturer, Airbus, is poised to be a major beneficiary
of airlines’ fleet renewal requirements and the need for the global
aviation sector to decarbonise. By upgrading to Airbus’ latest generation
aircraft, customers can reduce carbon emissions by 20-30%. Airbus’ aircraft
are also certified to operate on 50% sustainable aviation fuel (SAF), with a
target to reach 100% by the end of the decade. Airbus plans to reduce scope 1
and 2 emissions by 63% by 2030 and reduce scope 3 emissions by 46% by 2035.
The company is focused on ramping A320 production. This program is sold out
until 2029. The supply chain has remained challenging, with engine deliveries
remaining a key bottleneck. The management team downgraded the published
outlook in June, with expectations for deliveries this year reduced by 4% to
770 and the A320 ramp up to 75 per month pushed back by one year into 2027. We
believe these are temporary setbacks. Deliveries of aircraft should increase
from 735 in 2023 to more than 1,000 annually in the coming years and underpin
significant earnings growth. This profile is well supported by the current
backlog of nearly 8,600 aircraft.
French infrastructure group, VINCI, builds and operates critical
infrastructure ready for the transition to a net-zero world. The company plans
to reduce scope 1 and 2 emissions by 40% and scope 3 emissions by 20% by 2030,
including using low carbon concrete for 90% of its needs. The shares were
negatively affected by the announcement of France’s snap national elections
in June and are still recovering. This was due to concerns that a change in
government could lead to the nationalisation of French motorways. Following
the election results, we view this scenario as very unlikely. The company is
also appealing against the imposition of the new French motorway tax, with the
Constitutional Council of France reviewing its legality. The pace of capital
deployment has stepped up, with recent deals including stakes in Edinburgh and
Budapest airports and NW Parkway, Denver. These transactions serve to extend
the concession portfolio’s weighted average life and further diversify the
group away from France. The Cobra IS division also launched new solar
developments in Spain in the first half of the year, in addition to the
existing projects under construction in Brazil and Spain.
Private Investments
Our portfolio of private investments represented 21.3% of the total NAV as at
30 June 2024, and delivered a total return of 6.9% over the period, adding
1.5% to the NAV per share. The fair values of the private investments use
arm’s-length valuations from their respective managers and reflect an intent
for them to be long-term holdings held to maturity.
Investment Increase/ Contribution
(Decrease) % to NAV %
TCI REP Fund IV 5.5 1.3
John Laing 3.4 0.1
TCI REP Fund III 4.1 0.1
Avantus - (0.1)
Note: Percentage increase/(decrease) for individual holdings is calculated on
their local currency and based over the holding period if bought or sold
during the year. Contribution to NAV includes income received.”
The TCI Real Estate Partners Fund IV has continued to deploy capital and made
five further capital calls during the period, totalling US$5.9 million. This
was partly offset by equalisation payments we received on the Fund’s fourth
and fifth closes, totalling US$3.1 million. The Fund provides first mortgage
financing for residential and hotel real estate developments, which are best
in class in terms of energy efficiency and environmental standards. Buildings
contribute more than 30% of GHG emissions in the United States and raising
their efficiency levels is vital to reducing emissions. Each loan has several
elements of downside protection such as credit seniority, loan-to-value ratios
of up to 65% and completion and carry guarantees. The strategy has only ever
recorded one loss out of 37 loans. The manager expects the Fund to be fully
drawn by the end of the year and is currently forecasting net returns of
11-12% in US dollars. We believe this level of return represents an
exceptional balance between risk and reward. The position represented 6.6% of
NAV at the period end.
Following the successful repayment of one of its outstanding loans in the
first quarter, the TCI Real Estate Partners Fund III has only two remaining
loans to separate real estate developments in the United States. The fund
follows the same strategy, and offers similar environmental benefits, as the
TCI Real Estate Partners Fund IV. The Fund continues to draw down from its
remaining commitment (circa US$2.4 million) in line with the schedules of its
remaining loans. We expect one loan to be repaid early next year and the last
one to be repaid in late 2026. The Fund is on track to generate net returns of
9-10% in US dollars.
John Laing is an active manager of public-private partnerships and similar
concession-based assets. The company makes both green and brownfield
investments. The management team launched a new sustainability strategy in
2023 and is aiming to reach net zero by 2050, with an interim target for 70%
of assets to align with net zero by 2030. Controlling shareholder, KKR,
continues to execute on its plan to enhance and scale the business, with a new
management team now in place and assets under management having doubled,
whilst the asset base has expanded from 33 to 41 investments. The sale of the
Clarence Correctional Centre in Australia has also been completed. We have
agreed to participate in a follow-on equity investment round, equivalent to
0.5% of NAV, to provide the company with financing for several new deals
in September.
We were pleased to agree a new US$17.5 million co-investment with KKR in
Avantus, one of the leading solar and storage developers in the United States,
at the end of April. The company focuses on greenfield, utility-scale
projects and has a proven track record, having developed and sold projects
totalling 7.3 GW of solar and 17 GWh of storage. The development pipeline is
one of the largest and most advanced across California and the Southwest.
Following an ownership dispute, KKR was provided with the opportunity to make
a majority investment and take control of the business. The transaction
completed at the end of July and coincided with Avantus securing a new
development financing facility to accelerate project development. We believe
the deal is highly opportunistic and we expect to earn significantly higher
returns than in public equity markets.
Outlook
We believe our strategy of investing in businesses or opportunities delivering
or benefiting from the efficient use of energy and resources, and doing so
with a focus on the criteria of quality and value, results in a portfolio well
placed to generate superior returns for the risk taken We believe our quoted
equity portfolio will continue to demonstrate this performance. We aim to
complement the portfolio with private investments that offer a more attractive
balance between risk and reward and enhance the portfolio.
We ended the period with an elevated cash balance, representing 7.0% of NAV.
We plan to use this to fund expected capital calls from TCI Real Estate
Partners Fund IV over the remainder of the year. We also continue to look for
additional unlisted opportunities that will deliver the returns that this
component of our portfolio has done historically.
Following the positive year to date returns, the Company’s net asset value
per share has now compounded at 11%, after fees, for the five years ending 30
June 2024. The Company is the best performing investment trust in the
Association of Investment Companies’ Environmental and Flexible Investment
sectors over that time frame, on a net asset value basis. Share price
performance continues to trail net asset value returns, resulting in a wide
discount to net asset value. As significant owners of equity stakes, all the
members of the Investment Manager share the frustration this causes all
shareholders. We welcomed the Board’s decision to recommence buybacks, in
the hope that this will help to close the discount. In our opinion, at the
very least the buybacks are a highly efficient use of capital in terms of NAV
per share. We continue to work with the Board in addressing the discount,
while always remaining focused on our primary task – which is to deliver
strong performance in the portfolio.
Performance 1 year 3 year 5 year 7 year Inception
CAGR %
to 30 June 2024
NAV per share 13.5% 5.0% 11.1% 10.2% 7.1%
Share Price 7.1% (1.5)% 4.5% 6.9% 0.2%
RPI+3% 5.9% 10.9% 8.3% 7.2% 6.6%
Menhaden Capital Management LLP
Portfolio Manager
16 September 2024
.
Regulatory Disclosures
Principal Risks and Uncertainties
The principal risks and uncertainties faced by the Company are explained in
detail in the Company’s Annual Report for the year ended 31 December 2023
(the “Annual Report”). The Board believes that the Company’s principal
risks and uncertainties have not changed materially since the date of the
Annual Report and are not expected to change materially for the remaining six
months of the Company’s financial year.
Related Parties Transactions
During the first six months of the current financial year, no transactions
with related parties have taken place which have materially affected the
financial position or the performance of the Company.
Going Concern
The Directors believe, having considered the Company’s investment objective,
risk management policies, capital management policies and procedures, the
nature of the portfolio and the expenditure projections, that the Company has
adequate resources, an appropriate financial structure and suitable
management arrangements in place to continue in operational existence for the
foreseeable future. On the basis that shareholders pass the continuation vote
due to be put to them in 2025, there are no material uncertainties pertaining
to the Company that would prevent its ability to continue in such operational
existence for at least twelve months from the date of the approval of this
half year report. For these reasons, the Directors consider it is appropriate
to continue to adopt the going concern basis in preparing the financial
statements.
.
Directors’ Responsibilities Statement
The Board confirms that, to the best of the Directors’ knowledge:
(i) the condensed set of financial statements contained within the half year
report has been prepared in accordance with FRS 104 ‘Interim Financial
Reporting’ and gives a true and fair view of the assets, liabilities,
financial position and return of the Company; and
(ii) the interim management report includes a fair review of the information
required by sections 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure
Guidance and Transparency Rules.
In order to provide these confirmations, and in preparing these financial
statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and
prudent;
• state whether applicable UK Accounting Standards have been followed,
subject to any material departures disclosed and explained in the financial
statements; and
• prepare the financial statements on the going concern basis unless it
is inappropriate to presume that the Company will continue in business;
and the Directors confirm that they have done so.
This half year report contains certain forward-looking statements. These
statements are made by the Directors in good faith based on the information
available to them up to the date of this report and such statements should be
treated with caution due to the inherent uncertainties, including both
economic and business risk factors, underlying any such forward-looking
information.
Howard Pearce
Chairman
16 September 2024
.
Condensed Income Statement
Six months to 30 June 2024 Six months to 30 June 2023
(unaudited) (unaudited)
Note Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
Gains on investments at fair value through profit or loss - 9,684 9,684 - 17,492 17,492
Income from investments 5 1,684 – 1,684 1,129 – 1,129
Management and performance fees 6,9 (189) (1,589) (1,778) (161) (1,079) (1,240)
Other expenses (233) – (233) (193) – (193)
Net returns before taxation 1,262 8,095 9,357 775 16,413 17,188
Taxation (169) – (169) (99) – (99)
Net returns after taxation 1,093 8,095 9,188 676 16,413 17,089
Basic and diluted returns per share 7 1.4p 10.2p 11.6p 0.8p 20.7p 21.5p
The total column of this statement is the profit and loss account of the
Company. The supplementary revenue and capital columns are prepared under
guidance issued by the Association of Investment Companies’ Statement of
Recommended Practice.
All revenue and capital items in the above statement derive from continuing
operations.
There are no recognised gains or losses other than those shown above and
therefore no Statement of Total Comprehensive Income has been presented.
The notes on pages 18 and 20 form an integral part of these financial
statements.
.
Condensed Statement of Changes in Equity
Called up Special Capital Capital Revenue Total
share reserve redemption reserve reserve £’000
capital £’000 Reserve £’000 £’000
£’000 £’000
Six months to 30 June 2024 (unaudited)
Balance at 31 December 2023 790 76,442 10 48,169 1,268 126,679
Net returns after taxation – – – 8,095 1,093 9,188
Dividends paid – – – – (711) (711)
Balance at 30 June 2024 790 76,442 10 56,264 1,650 135,156
Six months to 30 June 2023 (unaudited)
Balance at 31 December 2022 800 77,371 – 24,970 690 103,831
Net returns after taxation – – – 16,413 676 17,089
Repurchase of ordinary shares for cancellation (10) (929) 10 – – (929)
Dividends paid – – – – (316) (316)
Balance at 30 June 2023 790 76,442 10 41,383 1,050 119,675
The notes on pages 18 and 20 form an integral part of these financial
statements.
.
Condensed Statement of Financial Position
Note As at As at
30 June 2024 31 December 2023
(unaudited) (audited)
£’000 £’000
Fixed assets
Investments at fair value through profit or loss 8 127,417 110,027
Current assets
Debtors 77 928
Derivative financial instruments 8 - 1,917
Cash and cash equivalents 9,442 14,898
9,519 17,743
Current liabilities
Creditors: amounts falling due within one year (950) (262)
Performance fee provisions 9 - (829)
Net current assets 8,569 16,652
Non-current liabilities
Performance fee provisions 9 (830) -
Net assets 135,156 126,679
Capital and reserves
Called up share capital 790 790
Special reserve 76,442 77,442
Capital redemption reserve 10 10
Capital reserve 56,264 48,169
Revenue reserve 1,650 1,268
Total shareholders’ funds 135,156 126,679
Net asset value per share 171.0p 160.3p
The notes on pages 18 and 20 form an integral part of these financial
statements.
.
Condensed Cash Flow Statement
Six months to Six months to
30 June 2024 30 June 2023
(unaudited) (unaudited)
£’000 £’000
Net cash (outflow)/inflow from operating activities (534) 6
Investing activities
Purchases of investments (25,879) (18,982)
Sales of investments 19,343 15,172
Settlement of derivatives 1,614 5,237
Net cash (outflow)/inflow from investing activities (4,922) 1,427
Financing activities
Dividends paid - (316)
Repurchase of ordinary shares for cancellation - (929)
Net cash outflow from financing activities - (1,245)
(Decrease)/increase in cash and cash equivalents (5,456) 188
Cash and cash equivalents at beginning of period 14,898 6,061
Cash and cash equivalents at end of period 9,442 6,249
The notes on pages 18 and 20 form an integral part of these financial
statements.
.
Notes to the Financial Statements
1 FINANCIAL STATEMENTS
The condensed financial statements contained in this interim financial
report do not constitute statutory accounts as defined in s434 of the
Companies Act 2006. The financial information for the six months to 30 June
2024 and 30 June 2023 has not been audited or reviewed by the Company’s
external auditor.
The information for the year ended 31 December 2023 has been extracted from
the latest published audited financial statements. Those statutory financial
statements have been filed with the Registrar of Companies and included the
report of the auditor, which was unqualified and did not contain a statement
under Sections 498(2) or (3) of the Companies Act 2006.
No statutory accounts in respect of any period after 31 December 2023 have
been reported on by the Company's auditor or delivered to the Registrar of
Companies.
Earnings for the first six months should not be taken as a guide to the
results for the full year.
2 ACCOUNTING POLICIES
These condensed financial statements have been prepared on a going concern
basis in accordance with the Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority, FRS 104 ‘Interim Financial Reporting’, the
Statement of Recommended Practice ‘Financial Statements of Investment Trust
Companies and Venture Capital Trusts’ and using the same accounting policies
as set out in the Company’s Annual Report for the year ended 31 December
2023.
3 GOING CONCERN
After making enquiries, and having reviewed the investments, Statement of
Financial Position and projected income and expenditure for the next 12
months, the Directors have a reasonable expectation that the Company has
adequate resources to continue in operation for the foreseeable future. The
Directors have therefore adopted the going concern basis in preparing these
financial statements.
4 PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks facing the Company together with an explanation of these
risks and how they are managed is contained in the Strategic Report and note
17 of the Company’s Annual Report for the year ended 31 December 2023.
5 INCOME
Six months to Six months to
30 June 2024 30 June 2023
(unaudited) (unaudited)
£’000 £’000
Income from investments
Overseas dividends 1,389 1,103
Total income from investments 1,389 1,103
Other income
Interest income* 295 26
Total income 1,684 1,129
*Includes £280,000 income from the Company's investment in money market fund
instruments, which are classified as cash equivalent in the Condensed
Statement of Financial Position.
6 AIFM AND PORTFOLIO MANAGEMENT FEES
Six months to 30 June 2024 (unaudited) Six months to 30 June 2023 (unaudited)
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
AIFM fee 29 119 148 25 99 124
Portfolio management fee 160 640 800 136 546 682
Provision for performance fee – 830 830 – 434 434
189 1,589 1,778 161 1,079 1,240
7 RETURNS PER SHARE
The revenue and capital returns/(losses) per share are based on the weighted
average number of Ordinary shares in issue during the six months to 30 June
2024, 79,025,001, and 30 June 2023, 79,375,968. The calculation of the total,
revenue and capital returns per share is carried out in accordance with IAS
33, “Earnings per Share”.
There are no dilutive instruments in the Company and so basic and diluted
returns are the same.
8 FAIR VALUE HIERARCHY
The methods of fair value measurement are classified into a hierarchy based
on reliability of the information used to determine the valuation.
Level 1 – Quoted prices in active markets.
Level 2 – Inputs other than quoted prices included within Level 1 that are
observable (i.e. developed using market data), either directly or indirectly.
Level 3 – Inputs are unobservable (i.e. for which market data is
unavailable).
The table below sets out the Company’s fair value hierarchy investments as
at 30 June 2024.
Level 1 Level 2 Level 3 Total
£’000 £’000 £’000 £’000
As at 30 June 2024 (unaudited)
Investments 98,637 – 28,780 127,417
As at 31 December 2023 (audited)
Investments 97,767 – 12,260 110,027
Derivatives – 1,917 – 1,917
9 PROVISIONS
Provisions are recognised when a present obligation arises from past events,
it is probable that the obligation will materialise and it is possible for a
reliable estimate to be made, but the timing of settlement or the exact amount
is uncertain.
The Company has provided for the performance fee obligation to its Portfolio
Manager that has arisen in the reporting period, being the first year of the
three-year performance period that commenced on 1 January 2024. This amounted
to £830,000 in performance fee provisions as at 30 June 2024 (2023:
£434,000). The amount provided is the Directors’ best estimate of the
obligation based on the NAV as at 30 June 2024 and has been charged to the
capital column of the Income Statement. If crystalised, settlement of
performance fee provisions will take place following approval of the annual
results for the year ended 31 December 2026, during financial year 2027.
Incremental changes to the provision will be recognised in each subsequent
period until crystallisation.
Full details of the performance fee arrangement can be found in the
Company’s Annual Report for the year ended 31 December 2023.
.
Glossary of Terms
Alternative Performance Measures (“APMs”)
Measures not specifically defined under the International Financial
Reporting Standards but which are viewed as particularly relevant for
investment trusts and which the Board of Directors uses to assess the
Company’s performance. Definitions of the terms used and the basis of
calculation are set out in this Glossary.
Discount/Premium (APM)
A description of the difference between the share price and the net asset
value per share. The size of the discount or premium is calculated by
subtracting the share price from the net asset value per share and is usually
expressed as a percentage (%) of the net asset value per share. If the share
price is higher than the net asset value per share the result is a premium. If
the share price is lower than the net asset value per share the shares are
trading at a discount.
Net Asset Value (“NAV”) Per Share (APM)
The value of the Company’s assets, principally investments made in other
companies and cash held, minus any liabilities. The NAV is also described as
“shareholders’ funds”. The NAV is often expressed in pence per share
after being divided by the number of shares that have been issued. The NAV per
share is unlikely to be the same as the share price, which is the price at
which the Company’s shares can be bought or sold by an investor. The share
price is determined by the relationship between the demand for and supply of
the shares.
NAV Total Return (APM)
The theoretical total return on shareholders’ funds per share, reflecting
the change in NAV assuming that dividends paid to shareholders were reinvested
at NAV at the time the shares were quoted ex-dividend. A way of measuring
investment management performance of investment trusts which is not affected
by movements in the share price.
To 30 June 2024 1 year 3 years 5 years 7 years Inception
Opening NAV per share (p) a 151.4 148.7 101.7 87.6 94.1
Closing NAV per share (p) b 171.0 171.0 171.0 171.0 171.0
Dividends per share paid (p) c 0.9 1.1 1.5 2.2 2.2
Dividend adjusted closing NAV per share (p) d=b+c 171.9 172.1 172.5 173.2 173.2
NAV per share Total Return (d-a)/a 13.5% 5.0% 11.1% 10.2% 7.1%
Share Price Total Return (APM)
Share price total return to a shareholder, on a last traded price to a last
traded price basis, assuming that all dividends received were reinvested,
without transaction costs, into the shares of the Company at the time the
shares were quoted ex-dividend.
To 30 June 2024 1 year 3 years 5 years 7 years Inception
Opening share price (p) a 96.5 108.0 83.0 65.5 102.5
Closing share price (p) b 102.5 102.5 102.5 102.5 102.5
Dividends per share paid (p) c 0.9 1.1 1.5 2.2 2.2
Dividend adjusted closing share price (p) d=b+c 103.4 103.6 104.0 104.7 104.7
S hare Price Total Return (d-a)/a 7.1% (1.5)% 4.5% 6.9% 0.2%
Ongoing Charges (APM)
The ongoing charges percentage reflects the costs incurred directly by the
Company which are associated with the management of a static investment
portfolio.
As recommended by the AIC, ongoing charges are defined as the Company’s
annualised revenue and capitalised expenses (excluding finance costs,
performance fees and certain non-recurring items) expressed as a percentage of
the average monthly net assets of the Company during the year.
30 June 31 December
2024 2023
(unaudited) (audited)
£’000 £’000
Total operating expenses 1,181 2,040
Total operating expenses (annualised) 2,362 2,040
Average NAV during the period/year 135,901 117,147
Ongoing Charges 1.7% 1.7%
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