LMS Capital : Preliminary Results

Preliminary Results

Released : 22/03/2019

RNS Number : 6525T

LMS Capital PLC

22 March 2019

22 March 2019

LMS Capital plc

Preliminary Results for year ended 31 December 2018

The Board of LMS Capital plc, ("LMS Capital" or "the Company"), is pleased to announce the Company's annual results for the year ended 31 December 2018.

• · The net asset value at 31 December 2018 was £60.3 million, 74.7p per share (31 December 2017: £64.5 million, 79.9p per share);

• · The portfolio showed an overall net reduction in value on the year of £2.3 million (2017: net gain £10.5 million)

• · The loss for the year was £4.2 million (2017: profit £7.6 million)

• · Overhead costs, including those incurred by subsidiaries, showed a further reduction to £1.5 million (2017: £2.7 million) following the completion of the Company's transition to external management with Gresham House;

• · Continued successful realisations in the year totalled £17.6 million (2017: £21.7 million);

• · At the year end 29.3% (2017: 6.2%) of the NAV was in cash and a further 9.6% (2017: 13.4%) in quoted stocks; and

• · There are currently sale discussions underway on assets which could result in further significant realisation proceeds being received. The deployment of the cash in the group of some £17 million at the year end, plus any further realisation proceeds is under active consideration by the Board and Gresham House, the Manager.

The information contained within this announcement is deemed to constitute inside information as stipulated under the Market Abuse Regulation (EU) No. 596/2014. Upon the publication of this announcement, this inside information is now considered to be in the public domain.

For further information, please contact

LMS Capital plc	020 3837 6275
Martin Knight, Chairman
Gresham House Asset Management Limited	020 3837 6275
Graham Bird
J.P. Morgan Cazenove	020 7742 4000
Michael Wentworth‐Stanley
Chairman's statement

The results of the Company for the year ended 31 December 2018 show a reduction in net asset value, which is disappointing, but continued progress from the Manager in realising assets, has led to healthy cash balances.

The cash position of the Company and its subsidiaries has improved from £4.0 million at 31 December 2017 to £17.7 million at 31 December 2018, reflecting continued progress with realisations.

NET ASSET VALUE

Net asset value per share at 31 December 2018 was 74.7p. This was a reduction from 79.9p per share at 31 December 2017.

Overall portfolio net losses for the year, both realised and unrealised were £2.3 million (2017: Gains £10.5 million). This net result is stated after the impact of realised and unrealised exchange gains of £1.8 million (2017: exchange losses £3.2 million).

Despite the overall net reduction, a number of the portfolio assets, as noted below, have performed in line or ahead of our expectations.

The reductions in value, before the impact of exchange gains, arose principally on:

• • Assets managed by San Francisco Equity Partners ("SFEP") which reduced by net £2.8 million. This includes a write down of the estimated amount of consideration still to be received following the exit from Penguin Computing in June 2018. At the time of the sale, SFEP indicated that initial consideration plus payments from earn outs and escrow releases, should produce final proceeds close to pre‐sale carrying value. This now appears unlikely and estimates have been revised downwards;

• • IDE Group, a quoted investment, which reduced by £2.6 million;

• • Weatherford, a quoted investment, which reduced by £1.5 million; and

• • Other net portfolio reductions were £1.3 million.

Portfolio gains, before the impact of exchange gains, arose principally on:

• • Entuity, part of the directly held UK portfolio has repaid loans during the year, and together with a valuation uplift is showing an overall gain of £1.7 million;

• • The sale of NEP in December 2018, which realised a gain of £0.6 million;

• • The sale of Brockton Capital LLP in March 2018, which realised a gain of £0.6 million;

• • The funds portfolio (excluding SFEP) which produced gains of £0.7 million; and

• • Shares in Gresham House showed a gain over the year of £0.5 million.

Other movements in net asset value were a net reduction of £1.9 million and include overhead costs of £1.5 million (2017: £2.7 million) and other movements amounting to a net reduction of £0.4 million.

CASH BALANCES

Cash balances during the year, including cash in subsidiaries, have increased to £17.7 million following continued realisations. Total proceeds were £17.6 million including £9.0 million initial consideration from Penguin, £3.1 million from the sale of Brockton Capital and £3.6 million from NEP. The remaining unquoted and funds portfolio, excluding SFEP, generated £1.9 million of proceeds.

CONCLUSION AND OUTLOOK

GHAM continues to manage the existing portfolio to optimise value and, where appropriate to take advantage of opportunities to realise assets.

Since the year end sale discussions have commenced on some other assets that could result in realisation proceeds that would further increase cash balances.

The deployment of the Company's cash is under active consideration by the Board and Gresham House, as Manager. We will keep shareholders informed of its deployment as appropriate.

Martin Knight

Chairman

22 March 2019

Manager's Review

Introduction

Gresham House Asset Management ("GHAM") was appointed investment manager in August 2016. The objectives for the first 12 to 18 month period following appointment were to transition the Company to being externally managed and to fulfil the Company's commitment made in July 2016, to return a maximum of a further £11.0 million of capital to shareholders, alongside targeting annual cost savings.

These objectives were fully achieved, ahead of expectations. Clear shareholder benefits are evident, annual costs in 2018 were £1.5 million compared to £2.7 million in 2017, a year of transition, from internal to external management.

2018 has been a year of building cash resources available to re start the Company's active investment plans. Cash in the group has grown from £4.0 million at the start of the year to £17.7 million at 31 December 2018, following realisations.

The remaining assets continue to be managed to optimise value and support long term shareholder value creation. The Manager is actively engaged on a number of investment opportunities which fulfil its investment policy and are in line with the resources within Gresham House, now including Baronsmead VCT investment team.

Investment approach

The investment approach is now focused predominantly on private equity investment and alternative, specialist asset classes using the experience of the GHAM team in asset management, private equity and public markets:

• · The Manager will invest in profitable and cash generative businesses and investments to create value, targeting an annual return on equity of 12% ‐15% net of costs over the long term;

• · The focus will primarily be on smaller private investment opportunities below £50 million value where the Manager believes there to be significant market inefficiencies which create opportunities for superior long term returns and to leverage the experience of the investment team;

• · Investments may include alternative, specialist asset classes which target long term, illiquid strategies both through co‐investment and fund opportunities on preferred terms; and

• · The focus is also on optimising the value of existing holdings and, where growth prospects are clear, to preserve and support longer term value creation.

Market background 2018 saw a bullish start to the year, notably in US markets, followed by a correction and return of volatility in February as markets reacted to rising inflation, the prospect of rising interest rates and the threat of increased tariffs. The domestic environment has been dominated by Brexit throughout the year. It was an unnerving and at times volatile end to the year for global equity markets. An emerging global recessionary narrative coupled with Brexit negotiations in the UK, drove most equity indices into bear market territory ‐ the UK AIM and Small‐cap indices for example ended the year 22.5% and 14.4% respectively off their 52‐week highs. A number of economic indicators have turned sluggish. On quoted markets declines were initially led by the technology sector, however this has now passed on to consumer discretionary and ultimately across all sectors, highlighting growing investor concerns about the state of the UK economy in the run up to Brexit. This negative outlook may continue during 2019 and investors may face continued market volatility until there is greater clarity around the outcome of UK Brexit negotiations and whether the Federal Reserve's implied rate‐rise path shallows or even ends. This type of investment provides market dislocations and therefore attractive investment opportunities.

We continue to believe there are significant inefficiencies at the smaller end of the market, focusing on established smaller private companies below £50 million enterprise value where there can be less competition for deals and valuations are more attractive. This segment of the market tends to be off radar for venture and early stage funding providers and sub‐threshold for mid‐market private equity investors, creating an opportunity to generate superior long term returns.

Performance review

The movement in Net Asset Value during the year was as follows:

2018	2017
£'000	£'000
Opening Net Asset Value	64,488	68,116
(Loss)/return on investments	(2,482)	10,411
Overheads, and other net movements	(1,731)	(2,811)
60,275	75,716
Tender offer, including costs	‐	(11,228)
Closing Net Asset Value	60,275	64,488

Cash realisations from the portfolio in 2018 were as follows:

Year ended 31 December

2018	2017
£'000	£'000
Sales of investments	6,819	6,812
Distributions from funds and loan repayments	10,815	14,902
Total ‐ gross	17,634	21,714
New and follow‐on investments	(1,405)	(550)
Fund calls	(219)	(68)
Carried interest payments	‐	(417)
Total ‐ net	16,010	20,679
Realisations in 2018 include:

• · Proceeds of £9.0 million following the sale of Penguin of which £7.2 million was received as a distribution from SFEP and £1.8 million was received by the Company for its direct interest in Penguin;

• · £3.1 million of proceeds from the sale of the Company's interest in Brockton Capital LLP;

• · £3.6 million from the sale by the Company of its remaining debt interest in Nationwide Energy Partners;

• · Loan repayments totalling £0.4 million by Entuity;

• · Net cash of £0.1 million from the exercise by the Company of its Gresham House plc warrants; and

• · Other fund distributions of £1.4 million.

The follow‐on investments are in respect of working capital for Elateral, a UK direct investment, and participation in a short‐term loan note issued by Medhost, a US co‐investment, as part of an arrangement to facilitate the refinancing of that company's debt. Part of the Medhost loan note has been repaid, with interest in September 2018. In addition, the Company invested £0.3 million in the IDE Group refinancing in July 2018.

The new investment is a £600,000 investment in Northbridge Industrial Services PLC ("Northbridge") an AIM quoted Company that hires and sells specialist industrial equipment to utilities, public sector and oil and gas industries. The investment is via an unquoted 8% yielding convertible loan note and after the Gresham House plc investment, is the Company's first investment under the new investment committee, other than follow on investments, since the conclusion of its realisation strategy and adoption of its new investment policy in August 2016.

Below is a summary of the investment portfolio of the Company and its subsidiaries:

31 December

2018

2017

Asset type

UK £'000

US £'000

Total £'000

UK £'000

US £'000

Total £'000

Quoted Unquoted

Funds

4,814 7,223 7,375 19,412

947 11,101 13,423 25,471

5,761 18,324 20,798 44,883

6,874 8,400 7,806 23,080

• 1,770 8,644

• 14,504 22,904

• 24,464 32,270

40,738

63,818

The principal investments at 31 December 2018 comprising 60.7% of the net asset value shown below (81.5% of the remaining portfolio) are:

Name

GeographySectorBook value 31 December

% of Net asset value

2018 £'000

2017 £'000

31 December 2018

Quoted investments

Gresham House plc Unquoted investments

UK

Financial

4,469

4,123

7.4%

Medhost Inc

Entuity Elateral

US UK UKTechnology Technology Technology

8,276 4,925 1,610

8,183 3,600 2,300

13.7% 8.2% 2.6%

Fund investments

YesTo, Inc* Others Brockton Capital

US

Consumer

9,265

9,437

15.4%

Opus Capital Venture Partners

UK US

Property Technology

4,922 3,115

4,603 3,671

8.2% 5.2%

*includes holdings by SFEP and co‐investments held by the Company

Basis of valuation:

• · Quoted investments ‐ bid price of security quoted on relevant securities exchange;

• · Unquoted investments ‐ generally, unless an alternative method is more appropriate, multiple of revenues or earnings of comparable quoted companies with appropriate discounts for marketability; and

• · Fund interests ‐ based on amounts reported by the general partner unless the reported value is not in line with the Company's valuation policy.

Performance of the investment portfolio

The return on investments for the year ended 31 December 2018 was as follows:

Year ended 31 December 2018

2017

RealisedUnrealised

RealisedUnrealisedgains/(losses) gains/(losses)

Asset type

£'000

£'000

Total £'000

gains/(losses) gains/(losses)

Total

£'000

£'000 £'000

Quoted Unquoted Funds

43 1,930 242 2,215

(4,009)

(3,966)

1,912 (2,441) (4,538)

3,842 (2,199) (2,323)

190 2,488 3,595 6,273

787 977

(3,077) (589)

6,472 10,067

4,182 10,455

Charge for incentive plans

(159) (44)

(2,482) 10,411

Operating and similar expenses of subsidiaries

(862) (513)

(3,344) 9,898

The charge for incentive plans includes £159,000 (2017: charge of £44,000) for carried interest and other incentives relating to historic arrangements. GHAM was appointed manager in August 2016 and is not entitled to performance fees or incentives on any of the investments in the portfolio prior to that date.

Approximately 57% of the portfolio at 31 December 2018 is denominated in US dollars (31 December 2017: 64%) and the

above table includes the impact of currency movements. In the year ended 31 December 2018, the strengthening of the US dollar against sterling over the year as a whole resulted in an unrealised foreign currency gain of £1,792,000 (2017: unrealised loss £3,248,000) as is common practice in private equity investment, it is the Board's current policy not to hedge the Company's underlying non‐sterling investments.

Quoted investments

31 December

2018

Company

Sector

£'000

2017 £'000

Gresham House plc	UK financial	4,469	4,123
IDE Group Holdings (formerly	UK technology	345	2,751
Coretx Holdings)
Weatherford International	US energy	236	1,669
Others	‐	711	101
5,761	8,644

The net (losses)/gains on the quoted portfolio arose as follows:

Year ended 31 December

(Losses)/gains net	2018	2017
£'000	£'000
Realised
Solaredge	‐	155
Weatherford International	‐	35
Gresham House plc	43	‐
43	190
Unrealised
Gresham House plc	411	1,642
IDE Group Holdings	(2,615)	(344)
Weatherford International	(1,470)	(331)
Other quoted holdings	(421)	24
Unrealised foreign currency gains/(losses)	86	(204)
(4,009)	787
Total net (loss)/gain	(3,966)	977
Gresham House plc

The Gresham House share price rose from 412p at 31 December 2017 to 454p at 31 December 2018, following a year of substantial growth for the group in which assets under management grew to £2.3 billion and it became the largest UK forestry asset manager and took on the Baronsmead Private Equity Investment team and funds.

At 31 December 2018 the Company held 984,329 shares in Gresham House plc (31 December 2017: 801,985 shares and 909,908 warrants to acquire shares).

In May 2018 the Company exercised its 909,908 warrants to acquire shares in Gresham House plc at a price of 323.27p per share. At the time of exercise of the warrants, the Gresham House plc share price was 443p per share. The Company retained 182,344 of the shares acquired and sold 727,564 shares. The shares retained, in conjunction with shares it already owned, leave the Company with a holding of 984,329 shares, approximately 4% in Gresham House plc.

The 909,908 warrants had a carrying value of £0.8 million at 31 December 2017 and cost of exercise was £2.94 million. Proceeds from the sale of 727,564 shares were £3.05 million and the value of the 182,344 shares retained at 30 June was £0.8 million. The net gain to the Company from the exercise of the warrants, based on its carrying value at 31 December 2017 was £0.09 million.

The warrants had been acquired by the Company in October 2016, at a price of 28p per warrant, as part of the arrangements put in place to promote alignment between the Company and its new manager, when it appointed GHAM as manager of its portfolio in August 2016. Based on the acquisition cost of the warrants, the gain to the Company from the warrant exercise has been £0.65 million.