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Market Commentary - UK Small Cap Team, June 2021

16 July 2021

Posted by Anna Macdonald on 16th July 2021

Corporate activity has continued in the UK and overseas markets at a rapid pace, with an abundance of mergers and acquisitions and new flotations. The UK in particular remains below US and European valuations – and interestingly this is in all areas, even technology and consumer discretionary stocks, not just in energy and financials which make up such a large proportion of our indices. Consequently, M&A bids, mostly for overseas acquirers, have totalled £50bn to the end of June. IPOs have compensated in part, with a total value of £32bn.

Globally, we saw a rotation into value stocks once successful trial results were published from Pfizer, Moderna and AstraZeneca in late 2020. Vaccines allowed countries to start to ‘unlock’ and together with significant build up of household and corporate cash levels, this led to enthusiasm for stocks that would benefit from strong economic growth. Supply chain squeezes added to upward price pressure for everything from second-hand cars to housing to timber prices, and a low availability of workers, particularly in transport and hospitality, stoked fears of wage increases. This all led to concern that the Fed, Bank of England and other Central Banks would put the brakes on and taper quantitative easing programmes and maybe even raise interest rates sooner than expected. In recent weeks, some of those concerns have tempered slightly. Value stocks have also not sustained earnings upgrade momentum, as margins start to be squeezed. Bond yields have begun to fall again, and the rotation back into quality growth stocks has gained some traction, particularly as the services sector, having lagged, started to outperform.

The spread of the Delta variant, and third waves of Covid in countries throughout the world, has perhaps dampened initial thoughts that the crisis was nearly over. Pandemic ‘winners’ have started to rally once again - Facebook, Amazon, Alphabet, Apple and Microsoft included. These five companies now have a combined market capitalisaton of around seven trillion dollars, more than double that of the entire UK market.

TB Amati UK Smaller Companies Fund

The TB Amati Smaller Companies Fund fell 0.9% over the month, slightly less than the benchmark which fell 1.2%. Year to date the fund is up 14.5%, nearly 2% behind the Numis Smaller Companies Index plus AIM Benchmark which has risen 16.5%.

Muted performance masks a busy month of IPOs and placings, as corporate activity continued apace. 

We participated in the IPO of Victorian Plumbing. This was the largest flotation by market cap so far on the Alternative Investment Market. Started up by Mark Radcliffe in his parent’s back garden twenty years ago, this was an unusual offering, as the company had grown to 14% share of the UK bathroom market without ever taking outside equity or debt financing. Mark’s passion for his business was clear, and the company seems set fair to grow further, spurred by a well invested, proprietary tech platform, and more runway ahead in terms of share and adjacent product lines.

An IPO that failed to do well in its first weeks was Alphawave IP Group and after meeting with analysts, management, and a positive trading statement, we decided to build a position. This is a rare opportunity as a UK based investor to buy into the semiconductor IP (Intellectual Property) sector for 5G, AI and data centres applications.

We participated in placings by Gresham Technologies, Craneware and Rathbone Brothers to support acquisitions of complementary businesses. We have followed Gresham Tech, a provider of software to asset managers and banks, for a couple of years, and they have built their subscription revenue business impressively. The acquisition of Electra substantially grows their US client base with little overlap. Craneware first mooted an acquisition, of direct competitor VitalWare, last July. This fell through – perhaps fortuitously, given that now they have found a company with more service lines to cross-sell, rather than customer lists. Rathbone’s placing to fund the acquisition of Saunderson House gave us the opportunity to buy into a high quality, annuity revenue business, at a decent valuation.

Many of our successful holdings over the last years have not only improved the quality of their earnings, they have been rewarded with higher valuation multiples too. We would point here to Discoverie, which was our top contributor to performance in June, rising nearly 21%. Looking for the next companies to tread this path is our bread and butter. To this end, we bought Wickes Group and TT Electronics.

We funded these acquisitions by selling GB Group and RWS and some selective profit taking on several stocks. RWS’s acquisition of SDL is taking time to settle and we felt better opportunities could be found elsewhere.

Amati AIM VCT

The Amati AIM VCT fell by 1.7% in June, against a benchmark only slightly off, leading to a relative underperformance of -1.5%.  Year to date, the VCT is up by 5.8%, 3.5% behind.

Performance was led by Learning Technologies Group as growth companies returned to favour. Our biggest detractor was Frontier Developments as investors reacted to the launch of Elite Dangerous: Odyssey, which experienced significant teething troubles. These have been resolved and loyal players will stick with the game, however, incremental revenues from potential new players can no longer be expected. Whilst the shares reacted poorly, analysts have not changed numbers – testament to the broader portfolio of games, meaning individual games do not have too much impact. Additionally, the company announced a hotly anticipated sequel to Jurassic World Evolution. 

Saietta is a new holding for the VCT. We first invested in April, in the form of pre IPO equity and a convertible loan. We have added to our holding at IPO for both the VCT and IPO. Saietta is an engineering company founded by Lawrence Marazzi in 2014. The aim is to produce, efficiently, a motor to be used in passenger vehicles. What is different is that these motors have a large diameter and narrow width like disc, as opposed to traditional electric motors which have a small diameter and longer width, being like a cylinder. This disc can fit inside each wheel rim, rather than in the body of the automotive, which leads to a much more efficient transfer of power. Saietta’s aim is to transform the light motorbike (125cc) market in Asia. For example, 20m of these motorbikes are new to the road each year in India and are hugely polluting. The motivation to improve air quality and efficiency is huge and Saietta appears to us to be uniquely placed in terms of customer engagements already in place. The company is already in active discussions with motorbike manufacturers in India, Vietnam and Chinese partners. The Saietta team is led by CEO Vic Kist, who took the helm in 2018. His skill at building customer relationships in Asia and leading the company through a rapid development of R&D has impressed us hugely.