Miton UK Microcap Trust Plc - Annual Financial Report
LEI: 21380048Q8UABVMAG916
(the "Company")
2024 Annual Results, Dividend announcement and Notice of Annual General Meeting
SUMMARY OF RESULTS
__________________________________________________________________________ | |Year to |Year to | | | | | | |30 April |30 April | | | | | | |2024 |2023 | |____________________________________________________|__________|__________| |Total net assets attributable to equity shareholders|43,297 |60,754 | |including fair value of warrants (£000) | | | |____________________________________________________|__________|__________| |Statutory NAV including fair value of warrants* |56.29p |64.20p | |____________________________________________________|__________|__________| |Adjusted NAV per Ordinary Share* |55.79p |64.20p | |____________________________________________________|__________|__________| |Share price (last close) |50.50p |59.50p | |____________________________________________________|__________|__________| |Discount to Adjusted NAV* |(9.48)% |(7.32)% | |____________________________________________________|__________|__________| |Investment income |£0.9m |£0.8m | |____________________________________________________|__________|__________| |Revenue return per Ordinary Share |0.09p |0.03p | |____________________________________________________|__________|__________| |Total return per Ordinary Share including value of |(9.17)р |(28.93)p | |warrants | | | |____________________________________________________|__________|__________| |Ongoing charges#* |1.99% |1.72% | |____________________________________________________|__________|__________| |Ordinary Shares in issue |76,923,603|94,638,561| |____________________________________________________|__________|__________|
*Alternative Performance Measure ("APM"). Details provided in the Glossary of the Annual Report. The Adjusted NAV is the Statutory NAV presented in the financial statements adjusted to exclude the fair value of the warrants held by the Trust
#The ongoing charges are calculated in accordance with AIC guidelines.
CHAIRMAN'S STATEMENT
The report covers the full year to
Earnings and Dividends
Earnings for the year, after costs, were 0.09p per share (2023: 0.03p) on the revenue account. Earnings on the capital account consisted of a loss of 9.26p per share (2023: loss of 28.96p). Earnings on the revenue account remain depressed as microcap companies seek to retain cash rather than paying it out in dividends to shareholders. As far as setting the dividend is concerned, the Directors have always given the Manager maximum flexibility to follow which ever course is believed to lead to the best results for our shareholders. As Directors, we regard the dividend as a useful by-product of the investment process but not a target in itself. This year, your Board is recommending a final dividend of 0.09p per ordinary share, reflecting the revenue for the year. Subject to approval by shareholders at the AGM, this will be paid on
Performance
With the dearth of buying interest in
Given the continuing mergers of wealth managers, the barriers to liquidity are now so high that in order to attract the selector's eye, investment trusts need to have market capitalisations of £1bn+. There are precious few of those around.
At the end of April, for example, it was reported that
Prospects
The last three years have been incredibly frustrating for the management teams of numerous
Whilst this is disappointing, the Trust was set up because quoted microcaps possess extraordinary upside potential. When microcaps succeed, sometimes their share prices can appreciate very dramatically. We liken this to an option-value upside, where the term of the option is open-ended, and its cost comes almost for free, embedded within the quoted microcap share price.
Currently the media is marvelling because Nvidia has delivered an annualised return of 86% in sterling terms over the last four years. And yet, the Trust's holding in Yü Group (a microcap exemplar), has appreciated at an annualised rate over the same period of 130%. In short, Yü Group's share price has risen some 27-fold, compared with Nvidia which has risen 11-fold.
Furthermore, after Nvidia's rise, it has moved up to a high-expectation valuation (Price to Book of 51.8x), whereas Yü Group is still on a modest valuation - even now its Price to Book is only 6.2x. Thus, Yü Group still retains bags more upside potential, even in the short-term.
Microcap share prices generally have been severely repressed over the last three years, so these abnormally large upsides have been more infrequent. To catch the discerning investor's eye, small stocks have to be exceptional. Yü Group is a good example and is currently one of the multi-baggers in the Company's portfolio.
Hopefully, by the time that you read this, the green shoots in
But the greatest upside potential has always lain within
In conclusion, it is hard to overstate the scale of the current upside potential for the
Share Issuance
As the shares did not trade at a premium to the prevailing Adjusted NAV during the year under report, there were no opportunities to issue shares. We will be seeking approval at the AGM in
Share Redemption
Each year your Directors offer the facility for shareholders to redeem their holdings in part or whole, at or close to the prevailing Adjusted Net Asset Value. The Directors are offering this facility again this year and the timetable is laid out in the annual report. Should the redemption be substantial, then the Directors may take the decision to form a separate redemption pool, as we did last year, and it may take a number of weeks, if not months, to liquidate the pool carefully without disadvantaging the remaining shareholders, or indeed the exiting ones. Thanks to microcaps having been out of favour for almost three years, the Trust has suffered heavy redemptions over each of the last two years, being 13.4% in 2022 and 18.7% in 2023. We have in place an agreement with the Trust's managers, Premier Miton, that they will rebate their ongoing management fee to the extent required for the Trust to maintain an ongoing charges ratio of no more than 2%. The Trust thus has the facility to remain viable at a lower level of market capitalisation than most investors would believe possible. It is also worth noting that Premier Miton's fee is based on the Trust's market capitalisation and not its Adjusted NAV, which, when it is trading at a significant discount, is of material benefit to shareholders.
Board Refreshment
Your Directors have a policy that a non-executive Director should serve for no more than nine years, from the date of first election. A well-structured waterfall of directors' retirements is always difficult when coming after a company has been launched, as directors should retire nine years after the first election by shareholders.
Environmental, Social and Governance (ESG) issues
Your Manager follows Premier Miton's responsible investing policy, which is to consider Environmental, Social and Governance issues and actively to engage in the investment process with investee companies, in order to deliver improved outcomes for all stakeholders and to take 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
Change of Service Providers
As reported in the interim report, following due process, evidenced by extensive due diligence and interviews, on
Annual General Meeting
The Annual General Meeting of the Trust will be held at
In conclusion, as I wrote in my last report, the Directors are grateful for your tolerance in holding the Trust's shares over what has been a fairly dismal period and we are hopeful that your patience will be amply rewarded in the not-too-distant future. Two of your Directors added materially to their holdings over the year, demonstrating their confidence in the long term prospects for the Company.
Chairman
INVESTMENT MANAGER'S REPORT
Which fund managers have day-to-day responsibility for the Trust's portfolio?
Since the launch of the Trust in
Gervais joined Miton in
Martin joined Miton in
What were the principal stock contributors and detractors in the portfolio over the year to
Over the last three years, including throughout the year to
However, occasionally, the prospects of a quoted microcap improve so significantly that even though its share price might appreciate by many multiples, its valuation still remains relatively modest. With the overhang of quoted microcaps sellers, this outcome has been somewhat more frequent than usual this year. The best example in this period was Yü Group, which appreciated three-fold over the year to
Given the generally unfavourable background, the share prices of portfolio holdings that chose to raise additional capital were often particularly weak. A good example is CyanConnode, a market leader in Indian smart meters. The Trust held this in its portfolio because the Indian government is tendering to install 250 million meters over the coming years. In
Alongside, there are always a number of portfolio holdings where prospects deteriorate, and which are therefore sold from the portfolio, typically crystalising losses. This year the most significant of these were Cap-XX, Ethernity Networks, FireAngel, Graft Polymer, MusicMagpie,
In a normal year, when buyers and sellers of microcap holdings are in balance, there will always be a number of microcap share prices that appreciate significantly. With microcap transactions being out of balance, however, these were comparatively scarce in the year under review. In addition, even microcaps that excelled did not necessarily appreciate in valuation as much as might be expected. Even so, where valuations of individual holdings moved well above others, these were sold, giving the potential to reinvest capital in other stocks standing on extremely overlooked valuations. For this reason, positions in
In summary, with the persistent sellers of microcap shares over the year to
What are the main factors that have driven the Trust's returns since it first listed in
As highlighted in previous annual reports, the best performing part of the
When the investment universe is narrowed further, solely to include microcaps standing on undemanding valuations (typically determined by low Price to Book ratios), the scale of their outperformance is even more marked. With this background in mind, the Trust's portfolio principally invests in
The globalisation trend was already declining when the Trust was set up in
Over recent years, the cost of raising additional microcap capital has typically become far more onerous, as investors have become increasingly cautious about committing additional capital to assets that continue to underperform. Thus, quoted microcaps seeking to raise additional capital have either contemplated issuing new shares at a discount to their subnormal valuations or chosen to live without additional capital. While issuing additional capital typically enhances prospects, many microcaps have preferred to grow at a slower pace over recent years rather than issue heavily dilutive new capital. Microcaps that have run out of cash meanwhile have often been obliged to raise new capital irrespective of its dilutive effect. In these cases, the prospective returns for existing shareholders will have been downgraded, other than for those that invested additional capital and therefore maintained their percentage ownership.
For these reasons, over the nine years since issue, the share prices of many
In spite of these severe microcap headwinds, the Adjusted NAV of the Trust has nevertheless modestly risen since inception in
Total returns of the Trust and various comparative indices since launch in
_____________________________________________ | |% | |________________________________________|____| |Deutsche Numis All Share Index |60.8| |________________________________________|____| |Deutsche Numis Smaller Companies Index |45.4| |________________________________________|____| |Deutsche Numis SC 1000 Index |55.3| |________________________________________|____| |Deutsche Numis Alternative Markets Index|12.0| |________________________________________|____| |MINI adjusted NAV |16.2| |________________________________________|____|
Source: Morningstar
In the light of the substantial decline in the Trust's Adjusted NAV over the last three years, have its longer-term prospects deteriorated?
The period of globalisation can be characterised as favouring `bigness', which may explain why the US stock market has greatly outpaced others over recent decades. During globalisation, the valuations of other exchanges such as the
Over the last decade or so however, the electorate has come to distrust the compromises that come with globalisation. This was evident as long ago as 2016 with the Brexit and Trump votes. Thereafter, the logistics nightmares of the pandemic have made the compromises that come with globalisation all the more prominent, and electoral pressure for change has become more persistent.
Beyond globalisation, policies such as reshoring manufacturing, which tend to boost inflation, are expected to lead to a much more challenging economic outlook. Interestingly, we believe changes like this favour companies funded with risk capital, such as those listed on stock markets, over those principally funded by debt, like private equities. Quoted companies generating cash surpluses (such as those that dominate the
Furthermore, we also anticipate that market trends will start to favour small cap stocks over large ones, in which the
Will institutional investors ever return to the
Inflationary pressures were benign during the period of globalisation, and asset valuations in general rose considerably. In addition, the opening up of international trade also enhanced world growth, so most businesses expanded. Overall, the returns of many assets have been unusually strong during globalisation.
As the favourable pattern persisted over decades, stock market returns were routinely well above inflation, and additional returns from smallcap portfolios became apparently optional for institutions. Indeed, institutions progressively favoured concentrating capital in large and megacap equities because they came with abundant market liquidity. Hence, although quoted smallcaps may have outperformed the majors during globalisation, the commercial returns from all sorts of mainstream assets were so copious that most institutional investors steadily reduced their smallcap participation. The adverse pattern has been most pronounced within the
Recent elections have led to a Balkanisation of international relationships, and globalisation is now in retreat. There are fewer opportunities to sell goods across all international geographies, which constrains opportunity for many global businesses. Furthermore, the reshoring of manufactured goods, and greater immigration controls add to inflationary pressures, and hence are also expected to reduce asset valuations. The return on mainstream stock markets by implication may be much poorer in the future. Given that many quoted megacaps are currently standing on incredibly high valuations, many stock markets around the world may fail to deliver a commercial return for many years.
Even if
Number of quoted companies in the
______________________________________________________________ | |No of Companies| | |______|_______________|_______________________________________| |<£150m|538 |Combined market capitalisation £14bn | |______|_______________|_______________________________________| |>£150m|468 |Combined market capitalisation £2,296bn| |______|_______________|_______________________________________|
Source: Premier Miton
The smallcap investment universe is typically defined as comprising the bottom ten percent of market capitalisations of the overall stock market, so an allocation from the large cap ninety percent, into the smallcap ten percent tends to amplify its performance. Furthermore, as microcaps are typically defined as being the bottom two percent, an allocation from the large and smallcap ninety-eight percent into the microcap two percent can be expected to have an even greater amplification impact on performance. Alongside, as
For all these reasons, we expect
What are the prospects for the Trust?
In the sections above, we outline why we believe the current political and geopolitical trends are now set to favour quoted equities and specifically
Even after setting out these arguments however, we believe that the full upside potential of the Trust's strategy is still not fully captured. The issue is that investors' expectations are currently framed in the context of a stock market that has become increasingly hostile towards
And yet, when
The bottom line is that when
Now that the mainstream
In summary, the Trust's strategy seeks to pick out stocks that have the potential to appreciate by many multiples of the original share price, and in our view the prospects for the Trust's
PORTFOLIO INFORMATION
As at
Valuation Rank Company Sector & main activity % of net assets £'000 1 Yü Group Utilities 3,967 9.2 2 MTI Wireless Edge Telecommunications 1,267 2.9 3 TruFin Financials 1,238 2.9 4 Serabi Gold Basic Materials 1,023 2.3 5 CyanConnode Holdings Telecommunications 889 2.0 (including warrants) 6 Zephyr Energy (including Energy 859 2.0 warrants) 7 Supreme Consumer Staples 834 1.9 8 Braemar Industrials 774 1.8 9 Concurrent Technologies Technology 743 1.7 10 UP Global Sourcing Consumer Discretionary 732 1.7 Holdings Top 10 investments 12,326 28.4 11 Frontier IP Group Industrials 705 1.6 12 Ingenta Technology 694 1.6 13 Zoo Digital Group Technology 691 1.6 14 STM Group Financials 659 1.5 15 Zinc Media Group Consumer Discretionary 645 1.5 16 Beeks Financial Cloud Technology 645 1.5 17 Amaroq Minerals Basic Materials 645 1.5 18 Andrada Mining Basic Materials 620 1.4 19 Marwyn Value Investors Financials 600 1.4 20 Capital Basic Materials 596 1.4 Top 20 investments 18,826 43.4 21 Savannah Resources Basic Materials 591 1.4 22 Record Financial Group Financials 570 1.3 23 Elemental Altus Royalties Basic Materials 508 1.2 24 Xeros Technology Industrials 507 1.2 25 CT Automotive Group Consumer Discretionary 506 1.2 26 Zotefoams Basic Materials 476 1.1 27 Van Elle Holdings Industrials 476 1.1 28 Mercia Asset Management Financials 467 1.1 29 Enteq Technologies Energy 465 1.1 30 Feedback Health Care 465 1.1 Top 30 investments 23,857 55.2 Balance held in equity 17,435 40.3 investments(including warrants) Total equity investments 41,292 95.5 Listed Put Option UKX - June 2024 5,900 Put 2 0.0 Other net current assets 2,003 4.5 Net assets 43,297 100.0
* Source: Refinitiv. Based on historical yields and therefore not representative of future yields. Includes special dividends where known.
Portfolio as at
_______________________________________________ |Portfolio exposure by sector (%)|£43.30 million| |________________________________|______________| |Basic Materials |17.4 | |________________________________|______________| |Technology |15.6 | |________________________________|______________| |Financial Services |12.5 | |________________________________|______________| |Industrials |10.2 | |________________________________|______________| |Utilities |10.0 | |________________________________|______________| |Energy |9.1 | |________________________________|______________| |Consumer Discretionary |6.1 | |________________________________|______________| |Telecommunications |5.9 | |________________________________|______________| |Cash and cash equivalents |4.5 | |________________________________|______________| |Health Care |4.0 | |________________________________|______________| |Consumer Staples |2.8 | |________________________________|______________| |Real Estate |1.9 | |________________________________|______________|
________________________________________________ |Actual annual income by sector (%)|£0.64 million| |__________________________________|_____________| |Financial Services |32.9 | |__________________________________|_____________| |Industrials |16.2 | |__________________________________|_____________| |Telecommunications |10.2 | |__________________________________|_____________| |Basic Materials |9.1 | |__________________________________|_____________| |Consumer Discretionary |7.2 | |__________________________________|_____________| |Technology |5.6 | |__________________________________|_____________| |Real Estate |4.8 | |__________________________________|_____________| |Energy |4.6 | |__________________________________|_____________| |Consumer Staples |4.3 | |__________________________________|_____________| |Utilities |3.8 | |__________________________________|_____________| |Health Care |1.3 | |__________________________________|_____________|
________________________________________________ |Net asset by asset allocation (%)|£43.30 million| |_________________________________|______________| |AIM/AQUIS Exchanges |78.7 | |_________________________________|______________| |Main Market |15.6 | |_________________________________|______________| |Cash and cash equivalents |4.5 | |_________________________________|______________| |International Equities |1.2 | |_________________________________|______________| |FTSE 100 Option |0.0 | |_________________________________|______________|
Source: Refinitiv.
DIVIDEND RECOMMENDATION
The Directors have recommended the payment of a final dividend in respect of the year of
NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS HEREBY GIVEN that the ninth annual general meeting of
FURTHER INFORMATION
It will also be submitted shortly in full unedited text to the
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