MHN Menhaden Resource Efficiency Plc

Menhaden Capital PLC
(the “Company”)

HALF YEAR REPORT
FOR THE SIX MONTHS ENDED 30 JUNE 2017

Source: Frostrow Capital LLP

* Ongoing charges are calculated as a percentage of shareholders’ funds using average net assets over the period and calculated in line with the AIC’s recommended methodology.

CHAIRMAN’S STATEMENT

This report covers your Company’s progress in the six months to 30 June 2017 and its financial position as at that date, almost two years since its launch.

Performance

During the first half of the year, the Company’s net asset value (“NAV”) per share grew by 2.6% (2016: -4.2%).  The increase in the NAV was primarily due to the good performance of the public equities component of the portfolio. The market value of the Company’s shares decreased by 1.4% over the period (2016: -19.5%) at the end of which the share price stood at a 25.2% discount to the NAV per share.

While the Company does not have a formal benchmark and our Portfolio Manager does not invest by reference to an index, over the same period the MSCI World Total Return Index (in sterling), rose by 5.3% (2016: +11.0%).  By way of additional comparison, the WilderHill New Energy Global Innovation Index (in sterling) rose by 8.3% and the AIC Environmental Sector rose by 5.4%. 

Our Portfolio Manager has provided a comprehensive analysis of all the factors contributing to the Company’s performance during the period later in this report.

Discount

The Board remains conscious of the level of the share price discount to NAV per share and reviews the situation at each Board meeting.  As I stated in the last Annual Report, the Board has considered the possibility of share buybacks but has decided that it would not be in the interests of shareholders to reduce the size of the Company at this stage of its development.  Instead, the Board will continue to focus on the Portfolio Manager’s performance and the effectiveness of marketing and distribution.

Dividend

The Board’s policy is to pay dividends as required to maintain UK investment trust status; thus no interim dividend will be declared for this period. 

The Company’s prospectus contains an undertaking to target an annual dividend yield of 2% of the average NAV by a target implementation date of 31 December 2017.  Having reviewed the Company’s income forecasts the Board believes that it will not achieve the target dividend without paying a significant portion out of capital.  The Board does not believe that this would be appropriate under current circumstances.  The Board will keep the dividend target under close review and continue to advise shareholders accordingly.

Management

Since the Company’s launch in 2015, the partners of Menhaden Capital Management LLP (“MCM”) have been seconded to the Company’s AIFM, Frostrow Capital LLP (“Frostrow”), in order to carry out the Company’s portfolio management responsibilities.  In the Company’s last Annual Report, it was stated that the Menhaden Team had applied to the Financial Conduct Authority for MCM to be authorised to perform portfolio management activities in its own right and the Board is pleased to report that such authorisation was granted by the FCA on 11 August.

As a result, the secondment of the Menhaden Team to Frostrow has now ended and Frostrow has, with the Board’s consent, delegated the Company’s day-to-day portfolio management activities to MCM by way of a portfolio management agreement.  The portfolio management and performance fees have not been affected.

Outlook

Our Portfolio Manager firmly believes that the long-term prospects for companies delivering or benefiting from the efficient use of energy and resources remain good.  The Board has been encouraged by steady improvements in the Company’s NAV per share over the past year and believes that the premise on which the Company was launched and its underlying investment strategy remain valid.

Sir Ian Cheshire
Chairman
20 September 2017

Investment Themes

¹ Investment made through Helios Co-Invest L.P.

² Investment made through KKR Evergreen Co-Invest L.P.

* Unquoted

PORTFOLIO MANAGER’S REVIEW

Performance

For the half year under review, the Company’s NAV per share increased by 2.6% to 87.6p. Total net assets increased by £1.8 million to £70.1 million during the period.

The contribution to the increase over the year is summarised below:

Public Equities

Most of the gain in NAV during the period came from the public equities component of our portfolio, of which the largest contributors to performance for the quarter were Airbus, contributing 1.4%, Safran, 0.9%, and Senvion, 0.6%. There were no detractors of note amongst our public equity positions.

Airbus shares rose 20% over the period. First quarter revenues at Airbus Commercial rose 13% year-over-year driven by a 9% increase in aircraft deliveries. Year-to-date, global airline passenger growth is running well above trend at 8% and load factors (capacity utilisation) are at a record high. Airlines require new aircraft to support this growth and both Airbus and Boeing are planning to increase production rates to fulfil the demand. Airbus now has an order book of over 6,700 aircraft which is 10 years of current production.

Airbus Commercial margins were weak due to fewer than expected deliveries of A320neos. Pratt & Whitney (“P&W”) are having to change the design of the GTF (one of the engines that powers the aircraft) due to problems discovered since the engine entered into service last year. Customers are unwilling to take the aircraft before P&W has introduced a permanent solution to the problems, which means that deliveries of A320neos will be heavily weighted to Q4. Airbus currently has about 30 A320neos in Toulouse without engines that cannot be delivered and this will negatively impact margins and cash flow in Q2 and Q3. Nevertheless, the A320neo delivers a 15% fuel burn saving compared to current single aisle aircraft operations, with targets to achieve a 20% reduction in fuel burn and CO² emissions by 2020. The A350 ramp-up is on track and Airbus is optimistic that 2017 will be a much better year for the programme. The A350 is still expected to break even in 2019, with price escalation being the main driver of this profit growth as launch pricing rolls off in 2018/2019.

Airbus’ key engines supplier, Safran reported very strong first quarter revenues with civil aftermarket sales up 18% year-over-year. Safran is focused on producing engines that are significantly more efficient and less polluting. The company delivered 81 LEAP engines in the quarter, up from 44 in Q4 2016, which indicates that the ramp-up is progressing well. LEAP production is on track to reach 500 engines in 2017. The LEAP-1A (which powers the Airbus A320neo) is now in operation with nine airlines, with 80,000 flight hours accumulated to date. It is meeting all performance specifications. The strong aftermarket growth and steady production ramp-up suggests profit growth should be very good this year.

The activist campaign by The Children’s Investment Fund against the proposed acquisition of Zodiac by Safran led to better proposed terms for the deal. Safran is financing the transaction mostly with low cost debt so the deal will be extremely accretive to earnings per share. Zodiac has two divisions: a) Aerosystems, which makes equipment such as power distribution and safety systems with substantial overlap with Safran’s Aircraft Equipment business. Most of the targeted synergies of €200 million will come from this division; and b) Aircraft Interiors, which makes cabin equipment (such as galleys and toilets) and seats. Revenues are over €3 billion but due to poorly priced, overly complex contracts and poor execution this division is currently making losses. If the deal with Zodiac closes, the combined company will be approximately 50% engines and 50% aircraft equipment and the business mix will remain extremely attractive.

Over the half year we initiated three new positions. We remain cautious over heady valuations in the public equity markets and when we initiate new positions it is where we believe they are positioned to benefit from changed circumstances.

Senvion, a German wind turbine manufacturer with a particularly strong position in turbines suited to high wind speed locations, is an example of this. Senvion is, we believe, well positioned for growth given the lifting of significant constraints placed on the business by the previous owners, and the recent appointment of a world-class management team from the German automotive sector. Senvion has significant cost cutting opportunities and is trading at a healthy discount to peers. Year-to-date, Senvion has shown significant progress. First quarter financials showed 8% growth year-over-year and disciplined working capital. Two orders from new markets (Ireland and the Czech Republic) came through and significant interest savings were achieved in a recently completed refinancing.

Adient, a position we initiated in Q2, is one of the world’s largest automotive seating suppliers, spun out of Johnson ControIs late last year. Adient’s innovative weight optimized components contribute to reduced fuel consumption and thus allow for lower greenhouse gas emissions. We like Adient in part because the business is part of a rational, oligopolistic market that possesses significant barriers to entry. Moreover, Adient has a clear path to improving operating performance (Adient’s expenses as a percentage of revenue are approximately 200bps higher than its nearest competitor).

In May we initiated a position in Terra Santa Agro, a Brazil-based company primarily involved in the agricultural sector. Terra Santa focuses on the cultivation of soybean, cotton and corn and owns approximately 89,000 hectares in the state of Mato Grosso. Brazil has one of the strictest environmental frameworks for land ownership, in the case of Terra Santa, 47,000 hectares are environmental reserves. 70% of the soy produced by Terra Santa Agro has the RTRS certification (Roundtable on Responsible Soy Association) with the intention to achieve 100% in the next 5-8 years. 100% of the cotton produced by Terra Santa has the Better Cotton Initiative certification. We believe the company is currently trading with a discount to NAV of approximately 70%.

During the period we divested a number of positions. In January we sold our position in Acuity Brands, a leading provider of LED lighting solutions. Acuity posted double digit volume growth for 14 consecutive quarters ending in November of last year. At 31 December, Acuity was trading at 16x forward EBITDA estimates and was starting to show signs of slowing growth. At this point we felt the risk of loss outweighed the expectation of gain and so we sold the entire position. Since that point the share price has fallen by 20% on the back of further disappointing operational news. In the same vein, we also divested positions in Shimano, Wabtec Corporation, Roper Technologies, BorgWarner and Johnson Matthey.

Private Investments

In January we completed our second direct private equity investment of £3.5 million in one of the largest independent smart electricity meter providers in the UK, Calvin Capital, alongside the infrastructure arm of global investment firm KKR. Calvin Capital’s business model is to purchase smart meters on behalf of energy suppliers, fund and pay for their installation and manage the billing process throughout their expected operating life of over 20 years. Given Calvin’s market leading position, we believe the business is well placed to capture the further rollout of smart meters in the UK over the next five years.

X-Elio, the solar developer and operator which represents our largest single position in the portfolio, is performing to expectations. Operating performance has been slightly above budget and we remain optimistic that X-Elio’s management team has the capability to take advantage of the burgeoning global solar opportunity. Our X-Elio position contributed 0.8% in the quarter, largely due to a revaluation of the portfolio.

As set out in the Company’s annual report for the year ended 31 December 2016 (the “Annual Report”), in March 2017 we divested half of our limited partner stake in Alpina Partners Fund LP* to limit the Company’s potential exposure to this fund, as once fully invested it would have represented nearly 15% of the Company’s NAV. The stake was sold at a discount to invested capital and was valued in the Annual Report using the sale price. The level of discount applied to the retained portion will be assessed on a quarterly basis, following review of the valuation report received from the fund’s general partner.

Meanwhile, our stake in the WCP Growth Fund LP* was the greatest detractor in the period, with a 2.4% negative impact on NAV; one portfolio company was written down to zero and another was sold at below holding value.

In Q2 we completed our third direct private equity investment in Perfin Apollo 12, with a total commitment of approximately £4.4 million. Perfin is an investment vehicle focused on the development of Brazilian electricity transmission assets, alongside one of the largest public transmission companies in Brazil, Alupar. Brazil is the second largest producer of hydroelectric power in the world, trailing only China, and the country depends on hydroelectricity for more than 75% of its electric power supply. Perfin Apollo 12 participated in the latest round of government auctions for transmission licences and will hold 49% of the equity of each individual transmission asset with Alupar holding the rest. The expected returns for the transmission assets in Brazilian Reals are inflation plus 10-12%. Perfin Apollo 12 also holds a put option that allows it to sell the assets back to Alupar, regardless of performance, at inflation plus 5% nine years after deployment.

Yield Investments

The main positive contributor for the period was Terraform Global after the announcement that its board had initiated an exploration of strategic alternatives and the subsequent acquisition of the company by Brookfield Asset Management at $5.10 per share, a 50% premium to the September 2016 price prior to the board announcement. This is expected to complete in the second half of 2017. Brookfield is also assuming the sponsor position from (now bankrupt) SunEdison for Terraform Power and will keep the company listed whilst providing the resources to expand the operating portfolio. We hold Brookfield in high esteem and believe their expertise in asset management will enable Terraform Power to grow in a sustainable, profitable manner.

We added two positions in the quarter. The first, Red Electrica, is sizeable at nearly 5% of NAV. Red Electrica is the monopoly owner of the Spanish transmission grid. The company develops the necessary infrastructure to facilitate the integration of renewable energy and implements demand-side management initiatives aimed at achieving greater electricity system efficiency. Red Electrica possesses an irreplaceable and essential asset base and a highly visible business model. We started building a position in the second, Grivalia, a Greek commercial real estate company, but stopped as political turmoil in Greece increased. Grivalia is the market leader in energy efficient buildings in Greece. So much so that the IFC, the financing arm of the World Bank, provided a loan to the company to help boost energy efficiency in the sector. This position represents less than 0.5% of NAV.

Lastly, Abengoa’s debt restructuring plan was approved and creditors injected over €1 billion into the company to enable it to continue operations and complete some late stage projects. We subscribed to the Company’s portion of this capital injection, which was well collateralised by a stake in Atlantica Yield, at just over €1 million. After the restructuring the bonds increased in value and, after the half-year end, we decided to exit the position as we felt the bonds no longer offered a material upside at their new level.

Personnel

In terms of our portfolio management team, as previously announced by the Company, Alexander Vavalidis resigned as a partner of Menhaden Capital Management LLP and consequently his membership of the Investment Committee ceased with effect from 15 September 2017.  Ben Goldsmith and Luciano Suana will continue to carry out the day to day portfolio management activities of the Company, identifying and presenting investment opportunities to the Investment Committee, which is chaired by Graham Thomas.  The Investment Committee makes all investment and divestment decisions in respect of the Company.  We are also actively recruiting to strengthen the team.

We would like to express our appreciation to Alexander for his contribution since the Company’s launch in July 2015.

Outlook

We remain cautious in respect of markets generally, given high levels of private and public debt globally, sluggish earnings growth across sectors and generally exuberant valuations. We are therefore very focused on looking for value, in the form of opportunities to acquire clearly identifiable assets and cash flows at attractive prices. The energy and resource efficiency theme, and particularly renewable energy, continues to mature and grow, and yet within it remain pockets of value. We benefit from an exceptional origination capability and as such we have a pipeline of potentially attractive ideas under review.

Menhaden Capital Management LLP
Portfolio Manager
20 September 2017

*The data regarding Alpina Partners Fund LP and WCP Growth Fund LP (together, the “Partnerships”) does not necessarily reflect the current or expected future performance of the Partnerships and should not be used to compare returns of the Partnerships against returns of other private equity funds.

REGULATORY DISCLOSURES

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company were explained in detail within the Company’s prospectus issued in July 2015 (the “Prospectus”) and the Annual Report for the year ended 31 December 2016 (the “Annual Report”). The Directors are not aware of any new risks or uncertainties for the Company and its investors for the period under review and moving forward, beyond those stated within the Prospectus and the Annual Report.

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 and, more specifically, that 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 there is reasonable evidence to continue to adopt the going concern basis in preparing the accounts.

Directors’ Responsibilities Statement

The Board of Directors confirms that, to the best of its knowledge:

1. 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
2. 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 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.

Sir Ian Cheshire
Chairman
20 September 2017

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.

CONDENSED STATEMENT OF CHANGES IN EQUITY

* The share premium account was cancelled in June 2016 and the 'Special Reserve' created.

CONDENSED STATEMENT OF FINANCIAL POSITION

CONDENSDED CASH FLOW STATEMENT

Notes to the Condensed Interim 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 2017 and 30 June 2016 has not been audited or reviewed by the Company’s external auditors.

The information for the year ended 31 December 2016 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 auditors, which was unqualified and did not contain a statement under Sections 498(2) or (3) of the Companies Act 2006.

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’ issued in November 2014 and updated in January 2017 and using the same accounting policies as set out in the Company’s Annual Report for the year ended 31 December 2016.

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 14 of the Company’s Annual Report for the year ended 31 December 2016.

5. Income

6. AIFM and portfolio management fees

7. Return per share

The revenue and capital returns per share are based on 80,000,001 shares, being the weighted average number of Ordinary shares in issue during the six months to 30 June 2017 and 30 June 2016.

The calculation of the total, revenue and capital losses per share is carried out in accordance with IAS 33, “Earnings per Share”.

8. Net asset value per share

The net asset value per share is based on the number of shares in issue at 30 June 2017 and 31 December 2016 of 80,000,001.

9. Transaction Costs

Purchase transaction costs for the six months ended 30 June 2017 were £9,000 (six months ended 30 June 2016: £4,000). These comprise mainly commission and stamp duty.  Sales transaction costs for the six months ended 30 June 2017 were £27,000 (six months ended 30 June 2016: £24,000). These comprise mainly commission.

10. 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.

The table below sets out the Company’s fair value hierarchy investments as at 30 June 2017.

For further information please contact:
Frostrow Capital LLP
Company Secretary
0203 709 8734
www.frostrow.com

A copy of the Half Year Report has been submitted to the National Storage Mechanism and will shortly be available for inspection at http://www.morningstar.co.uk/uk/NSM   

The Half Year Report will also shortly be available on the Company's website at www.menhaden.com  where up to date information on the Company, including NAV, share prices and fact sheets, can also be found.

Neither the contents of the Company's website nor the contents of any website accessible from hyperlinks on the Company's website (or any other website) is incorporated into or forms part of this announcement.

ENDS