1 August 2023

 

LMS CAPITAL PLC

Half year results for the six months ended 30 June 2023

 

Financial Update

 

·    Net Asset Value ("NAV") at 30 June 2023 of £44.6 million, 55.2p per share, compared to £46.5 million (57.7p per share) at 31 December 2022;

·    Realised and unrealised underlying portfolio gains of £0.6 million on the mature portfolio, offset by £1.1 million of unrealised foreign exchange losses;

·    Running costs were £0.9 million and investment related costs were £0.3 million;

·    Cash proceeds of £0.3 million from realisations during the half year;

·    Final dividend payment in June 2023 of 0.625 pence per share for the year ended 31 December 2022; and

·    Cash at 30 June 2023 was £16.5 million (31 December 2022: £17.9 million).

 

Interim Dividend

 

·    The Board has approved an interim dividend in respect of the Company's financial year to 31 December 2023 of 0.3 pence per share. The dividend will be paid on 12 September 2023 to shareholders on the share register at close of business on 11 August 2023 (with an ex-dividend date of 10 August 2023).

 

Robert Rayne, Chairman, commented:

"We remain focused on the prudent deployment of our capital and during the period, our team has been engaged in active negotiations in the retirement living space. On energy, the Dacian team continues work to bed down the assets acquired in late 2021. Good progress is being made streamlining the cost base, but equipment failures leading to interruptions in production are continuing to delay progress with the business plan, although these are being worked through. We hope to report progress on all fronts in the second half of the year"

 

1 August 2023

 

Enquiries: LMS Capital plc

0207 935 3555

Robert Rayne, Chairman

Nicholas Friedlos, Managing Director

 

 

 

LMS CAPITAL plc

Statement from the Chairman and the Managing Director

 

We are pleased to report the financial results of the Company for the first six months of the year and to provide an update on our portfolio and the direction of the business.

 

The NAV of the company at 30 June 2023 was £44.6 million, 55.2 pence per share (31 December 2022 £46.5 million, 57.7 pence per share) and is summarised below.

 

		30 June	31 December
		2023 (unaudited)	2022    (audited)
		£'000	£'000
Mature Investment Portfolio
Unquoted investments		6,669	6,626
Funds		13,662	14,033
Quoted investments		161	160
		20,492	20,819
New Investment Portfolio
Dacian		9,660	10,145
		9,660	10,145
Total Investments		30,152	30,964
Cash		16,500	17,906
Other net assets/liabilities		(2,070)	(2,329)
Net assets		44,582	46,541

 

 

After adjusting for the payment of the final dividend of 0.625 pence per share for the 2022 year, the overall NAV at 30 June 2023 is down 3.1% from the 31 December 2022 position and down 2.3% compared to 31 March 2023.

 

This overall decrease of £1.9 million comprises:

·    Dividend payments £0.5 million

·    Net income and fair value adjustments on the investment portfolio result in an overall valuation decrease of £0.5 million in the investment portfolio:

o  net increases in underlying investment values of £0.6 million on the mature asset portfolio;

o  offset by net decrease of £1.1 million from foreign exchange losses from the weakening of the US Dollar against sterling of which £0.6 million relates to the mature portfolio and £0.5 million to the investment in Dacian; and

o  no net underlying increase or decrease in the value of Dacian.

·    management fee income for LMS of £0.1 million from Dacian;

·    bank interest £0.3 million; and

·    running costs of £0.9 million, investment related costs of £0.3 million principally associated with developing real estate deal opportunities and other net outflows of £0.1 million.

 

 

The Company's NAV comprises three distinct groups of assets:

 

Mature Investments - 30 June 2023 NAV £20.5 million (25.4 pence per share)

The Mature Portfolio comprises investments which originate from the Company's strategy pre-2012 and are currently managed with a view to optimising the realisation values. As noted in our 2022 Annual Report, we continue to expect progress on realisation of these assets mainly in 2024 and 2025.

 

During the first half of 2023, this group of investments showed net realised and unrealised underlying gains of £0.6 million, offset by foreign exchanges losses of £0.6 million from the weakening of the US Dollar against sterling, and realisations of £0.3 million, resulting in an overall reduction of £0.3 million.

 

The underlying gains of £0.6 million, excluding foreign exchange losses, were as follows:

·    Unquoted investments

The unquoted portfolio recorded net unrealised gains of £0.6 million:

o  Medhost: £0.6 million increase. We continue to follow the valuation of Primus, the lead investment manager, which shows an unrealised gain of £0.6 million in the most recent valuation. Medhost operates in a mature market and it continues to be cash generative and perform in line with budget; and

o  Elateral: no change in valuation. The company's financial performance has improved since mid 2022. It has shown some success at winning new business and is currently EBITDA positive. We continue to support the management in their strategy to return to sustainable sales growth.

·    Fund investments

The fund investments showed neither a gain nor loss for the half year:

o  Opus: £0.8 million decrease. As reported in our Q1 2023 NAV update this was driven the fund manager's valuation primarily reflecting movements in public market comparables for the fund's two principal remaining assets;

o  Our investment in Brockton has increased by £0.4 million, reflecting the unwind of the discount in our discounted cash flow valuation; and

o  Our investment in Weber increased by £0.4 million reflecting the market price performance of the US listed microcap equities held in the fund.

·    Quoted shares

Overall, the quoted portfolio showed neither a gain nor loss during the first half of 2023.

 

Energy - Dacian - 30 JUNE 2023 NAV £9.7 million (12.0 pence per share)

In the first six months of the year, oil and gas revenues, net of applicable royalties and windfall taxes were $9.9 million. This was lower than budget due to a combination of lower pricing and, as explained below, lower production.

 

On the positive side, the team continue to take actions to reduce the cost base they inherited when they took over the business in late 2021. In the six months the cost reductions have more than offset lower revenues and the business is ahead of budget at the EBITDA level.

 

Management's aim has been to stabilise production at approximately 1,000 barrels of oil equivalent per day ("BOEPD") and from that base, build additional production through workover activity. It appeared in late 2022 and early 2023 that this stabilised level of production had been achieved. However, particularly in the second quarter the company has experienced further interruptions due to technical failures in equipment resulting in lost production and delayed progress on workovers. Production in the six months has averaged some 8% below the 1,000 BOEPD base level. The team's priority is to achieve consistent production at the stabilised base level and then to focus on the workover activity.

 

In recognition of the delays in the six months, whilst interest continues to be due and payable on the Company's loan notes, no net interest accrual has been recognised in the results for the half year. This will be reviewed at the year end in light of Dacian's progress during the second half of the year and prevailing market conditions.

 

The Dacian investment is denominated in US Dollars and is showing an unrealised foreign exchange loss of £0.5 million in the period.

 

The Company has benefitted from £0.1 million being six months' management fee income.

 

Liquidity - Cash less other net liabilities

Cash

Cash balances in the Company and its subsidiaries at 30 June 2023 were £16.5 million (31 December 2022: £17.9 million).

 

Significant outflows during the six months were running costs net of interest income and management fees received of £0.9 million, investment related costs of £0.3 million and dividend payments of £0.5 million.

 

Portfolio inflows were £0.3 million being proceeds from the sale by SFEP of ICU.

 

Net Liabilities

Net liabilities of £2.1 million consist primarily of accruals for income taxes, historic carried interest liabilities for one remaining asset and other sundry costs.

 

Dividend policy

A final dividend of 0.625 pence per share for the year ended 31 December 2022 was approved by shareholders at the AGM in May 2023 and paid in June 2023.

 

The Board has approved an interim dividend for the 2023 year of 0.3 pence per share to be paid on 12 September 2023 to shareholders on the share register at close of business on 11 August 2023 (with an ex-dividend date of 10 August 2023).

 

Looking forward

A priority for 2023 is to bring to fruition for investors the work that has been undertaken with our real estate teams, particularly on the development side where we have been actively seeking opportunities in the later living sector.  We see the potential for strong growth in sector generally and it offers the opportunity to combine our real estate skills with operating know how. From an investment perspective, the sector offers attractive returns in the medium to longer term for capital from LMS' balance sheet alongside its co-investors.

 

During the last six months we have been actively engaged in negotiations to acquire both operational retirement village assets as well as development sites. Whilst we are keen to deploy capital, we remain disciplined in our approach to the evaluation of all these opportunities.

 

 

In energy, we anticipate further opportunities to invest with the Dacian team in late life oil and gas production opportunities, although the priority for the team for the rest of this year remains to focus on the initial acquisition.

 

We would like to express our appreciation for the support from our team and from the network of people with whom we work on a regular basis. We would also like to express our appreciation for the continued support of our shareholders. We look forward to reporting to you further on our progress.

 

 

 

 

 

Robert Rayne

Chairman

 

 

 

 

 

Nicholas Friedlos

Managing Director

 

1 August 2023

LMS CAPITAL plc

PORTFOLIO MANAGEMENT REVIEW

 

Market background

Ongoing geopolitical tensions and domestic challenges in key markets are slowing any return to sustained growth.  Domestically both inflation and interest rates remains high.

 

Sterling strengthened against the US Dollar during the period and whilst global equity markets saw some recovery, with the US S&P 500 Index increasing by nearly 16%, the FTSE 100 remained flat.  The FTSE AIM 100 and SmallCap indices declined by 11% and 2%, respectively.

 

The Board and the Company continue to monitor closely the economic environment and capital markets, including the impact this has on the investment portfolio and its valuations. 

 

Performance review

The movement in NAV during the six months ended 30 June was as follows:

	Six months ended 30 June
	2023	2022
	£'000	£'000
Opening NAV	46,541	49,109
Income and fair value adjustments on investment portfolio	(495)	(658)
Dividends	(505)	(505)
Overheads and other net movements	(959)	(985)
Closing NAV	44,582	46,961

 

Cash realisations and new and follow-on investments from the portfolio were as follows:

	Six months ended 30 June
	2023	2022
	£'000	£'000
Proceeds from redemption of preference share	-	353
Distributions from funds and loan repayments	326	68
Total - gross cash realisations	326	421
New and follow-on investments	-	(263)
Fund calls	-	(105)
Total - net	326	53

Realisations relate to the sale of ICU Eyeware, the last investment held through San Francisco Equity Partners ("SFEP").

 

 

Below is a summary of the investment portfolio of the Company and its subsidiaries, which reflects all investments held by the Group:

 

	30 June				31 December
	2023					2022
Mature investment portfolio	UK £'000	US £'000	Total £'000			UK £'000	US £'000	Total £'000
Quoted	82	79	161			121	39	160
Unquoted	687	5,982	6,669			681	5,945	6,626
Funds	7,033	6,629	13,662			6,676	7,357	14,033
	7,802	12,690	20,492			7,478	13,341	20,819
New investment portfolio	UK £'000	US £'000	Total £'000			UK £'000	US £'000	Total £'000
Unquoted	-	9,660	9,660			-	10,145	10,145
	-	9,660	9,660			-	10,145	10,145
Total investments	7,802	22,350	30,152			7,478	23,486	30,964

 

Basis of valuation:

 

Quoted investments

Quoted investments for which an active market exists are valued at the closing bid price at the reporting date.

 

Unquoted direct investments

Unquoted direct investments for which there is no active market are valued using the most appropriate valuation technique with regard to the stage and nature of the investment.

 

Valuation methods that may be used include:

·    investments in an established business are valued using revenue or earnings multiples depending on the stage of development of the business and the extent to which it is generating sustainable revenue or earnings;

·    investments in an established business which is generating sustainable revenue or earnings but for which other valuation methods are not appropriate are valued by calculating the discounted value of future cash flows;

·    investments in debt instruments or loan notes are determined on a standalone basis, with the initial investment recorded at the price of the transaction and subsequent adjustments to the valuation are considered for changes in credit risk or market rates; and

·    convertible instruments are valued by disaggregating the convertible feature from the debt instrument and valuing it using a Black-Scholes model.

 

Funds

Investments in managed funds are valued at fair value. The general partners of the funds will provide periodic valuations on a fair value basis, the latest available of which the Company will adopt provided it is satisfied that the valuation methods used by the funds are not materially different from the Company's valuation methods. Adjustments will be made to the fund valuation where the Company believes the evidence available supports an alternative valuation.

 

 

Performance of the investment portfolio

The return on investments for the six months ended 30 June 2023 was as follows:

 

	Six months ended 30 June 2023			Six months ended 30 June 2022
	Realised	Unrealised		Realised	Unrealised
	gains/(losses)	gains/(losses)	Total	gains/(losses)	gains/(losses)	Total
Asset type	£'000	£'000	£'000	£'000	£'000	£'000
Quoted	-	1	1	-	(201)	(201)
Unquoted	62	(864)	(802)	24	(1,123)	(1,099)
Funds	(9)	(339)	(348)	-	44	44
	53	(1,202)	(1,149)	24	(1,280)	(1,256)
Accrued interest income			654			598
Income and fair value adjustments on investment portfolio			(495)			(658)

 

As noted in the commentary on page 5, no net benefit has been recognised in these interim financial statements from the interest accruing on the Dacian loan notes for the period January to June 2023. In order to comply with GAAP the £0.654 million entitlement to interest must be recognised as income and this is then adjusted down by an equal amount as part of the fair value adjustments and is included in the £0.864 million unrealised loss adjustment on unquoted investments in the table above.

 

Approximately 74% of the portfolio at 30 June 2023 is denominated in US Dollars (31 December 2022: 76%) and the above table includes the impact of currency movements. In the first six months of 2023, the strengthening of sterling against the US Dollar resulted in a significant unrealised foreign currency loss of £1.1 million of which £0.6 million relates to the mature portfolio and £0.5 million to the investment in Dacian (2022: unrealised gain of £2.6 million). 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

			30 June	31 December
			2023	2022
Company	Sector		£'000	£'000
Tialis Essential IT plc	UK technology		82	121
Arsenal Digital Holdings Inc	US energy		56	13
Others	-		23	26
			161	160

The changes in valuation on the quoted portfolio arose as follows:

	Six months ended 30 June
Fair value increases/(decreases)	2023 £'000	2022 £'000
Unrealised
Tialis Essential IT plc	(39)	(73)
Arsenal Digital Holdings Inc	44	(130)
Other quoted holdings	(2)	(9)
Unrealised foreign currency (losses)/gains	(2)	11
Total fair value increases/(decreases)	1	(201)

Unquoted investments

			30 June	31 December
			2023	2022
Company	Sector		£'000	£'000
Dacian	Romanian energy		9,660	10,145
Medhost Inc	US technology		5,944	5,673
Elateral	UK technology		599	599
ICU Eyewear*	US consumer		-	232
Tialis loan notes	UK technology		87	82
Cresco	US consumer		39	40
			16,329	16,771
*Co-investment with SFEP

 

The changes in valuation on the unquoted portfolio arose as follows:

	Six months ended 30 June
	2023	2022
Fair value increases/(decreases)	£'000	£'000
Realised
Medhost	-	24
ICU Eyeware	62	-
	62	24
Unrealised
Dacian (see note on page 9)	(644)	-
Medhost	554	(1,032)
Elateral	-	(443)
ICU Eyewear	-	(1,376)
Tialis loan notes	5	(27)
Unrealised foreign currency (losses)/gains	(779)	1,755
	(864)	(1,123)
Total fair value decreases	(802)	(1,099)
Income movements
Interest on Dacian Investment	654	598

Valuations are sensitive to changes in the following two inputs:

·    the operating performance of the individual businesses within the portfolio; and

·    changes in the revenue and profitability multiples and transaction prices of comparable businesses, which are used in the underlying calculations.

 

Comments on individual companies are set out below.

 

Medhost

Medhost is a co-investment with funds of Primus Capital. Medhost's financial performance in 2023 is expected to be profitable and cash generative and slightly up on EBITDA compared to budgets. This resulted in an increase to the valuation by the fund manager for the period.

 

ICU Eyewear

This was the only remaining asset in the SFEP III fund and was sold during the period realising a gain of £62,000.

 

 

Fund interests

		30 June	31 December
		2023	2022
General partner	Sector	£'000	£'000
Brockton Capital Fund 1	UK real estate	6,406	6,036
Opus Capital Venture Partners	US venture capital	4,263	5,275
GW 2001 Fund	US micro-cap quoted stocks	2,329	2,046
EMAC ILF	Europe real estate	332	341
Simmons Parallel Energy	UK energy	296	262
Eden Ventures	UK venture capital	-	37
Other interests	-	36	36
		13,662	14,033

The changes in valuation on the Company's fund portfolio for the six months ended 30 June 2023 were as follows: 

	Six months ended 30 June
Fair value increases/(decreases)	2023 £'000	2022 £'000
Unrealised
Brockton Capital Fund 1	369	401
Opus Capital Venture Partners	(783)	931
GW 2001 Fund	383	(1,063)
Simmons Parallel Energy	42	(154)
Eden Ventures	(5)	(418)
San Francisco Equity Partners	-	(89)
Others (net)	2	(392)
Unrealised foreign currency (losses)/gains	(347)	828
Realised
San Francisco Equity Partners	(9)	-
Total fair value (decreases)/increases	(348)	44

Fund interests

·    Brockton Capital Fund 1 - The Company's investment represents its share (via the Brockton Fund) of preferred debt investments in a "Super Prime" central London residential development. The investment showed an increase in the valuation of £0.4 million for the first half of 2023 due to unrealised gains from the unwinding of the discount rate as the investment is valued on a discounted cash flow basis;

·    GW 2001 Fund - holds US publicly traded micro-cap securities and showed an unrealised gain of £0.4 million reflecting an increase in the underlying equity prices; and

·    Opus Capital - a US venture fund, showed an unrealised loss of £0.8 million from valuation losses on its two main assets, primarily due to movements in quoted market comparables for its two main remaining assets.

 

 

Costs

Group costs for the period (including £1.1 million incurred by the Company and £ 0.1 million by subsidiaries) were £1.2 million (2022: £1.1 million) which include running costs of £0.9 million and investment related costs of £0.3 million for support costs for real estate and co-investment activities.

 

Taxation

The Group tax provision for the period, all of which arose in the subsidiaries, is £0.1 million (2022: £0.6 million).

 

Financial Resources and Commitments

At 30 June 2023 cash holdings, including cash in subsidiaries, were £16.5 million (31 December 2022: £17.9 million) and neither the Company nor any of its subsidiaries had any external debt.

 

At 30 June 2023, subsidiary companies had commitments of £2.7 million (31 December 2022: £2.7 million) to meet outstanding capital calls from fund interests.

 

 

 

 

 

 

LMS CAPITAL PLC

1 August 2023

 

LMS Capital plc

Unaudited Condensed Company Income Statement

 

		Six months ended 30 June
		2023	2022
	Notes	£'000	£'000
Net losses on investments	5	(716)	(484)
Interest income		275	37
Other income		64	49
Total losses on investments		(377)	(398)
Operating expenses		(1,089)	(940)
Net losses on foreign currency		(14)	(331)
Losses before tax		(1,480)	(1,669)
Taxation		-	-
Losses for the period		(1,480)	(1,669)
Attributable to:
Equity shareholders		(1,480)	(1,669)
Loss per ordinary share - basic	6	(1.8p)	(2.1p)
Loss per ordinary share - diluted	6	(1.8p)	(2.1p)