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North Atlantic offers cash for firms bowled over by Covid

21 May 2020

Having helped refinance bowling operator Ten Entertainment, fund manager Chris Mills says North Atlantic Smaller Companies trust is ready to support more companies struggling during the coronavirus crisis.

The coronavirus pandemic has caused ‘serious issues’ for a number of the companies in the North Atlantic Smaller Companies (NAS ) investment trust, which is ready to jump in with £5m of funding to keep them afloat. 

Fund manager Chris Mills said many of the businesses in the portfolio have ‘had to shut down or have had operations substantially curtailed’ with the trust helping to refinance some companies and expecting to dip into its cash to help more

‘To date we have helped refinance Ten Entertainment (TEG) (the UK’s second largest bowling operator) so that it can now withstand a shutdown of 15 months at a cost of less than £1m,’ said Mills, whose Harwood Capital holds over a third of the trust’s shares. 

‘We would expect that no more than two or three other investments will require funding with an estimated cost to the company of no more than £5m,’ said Mills (pictured below). 

The trust’s chair, Peregrine Moncrieffe, said ‘many of our businesses face serious issues as a consequence of the coronavirus outbreak’ and the worst-case scenario of ‘more frequent global pandemics goes some way to explain the all-time low bond yields’.

‘These rates will probably rise when the global moves towards massive fiscal stimulus ceases to be primarily financed by central banks,’ he said. 

However, Moncreiffe said the biggest pain for companies will be felt in the ‘containment and delay stages’ of the strategy to combat the pandemic.

‘Once we move into the mitigate phase, there should be some return to some normalcy and economic growth with the restoration of supply chains and consumer demand,’ he said. 

‘Even if effective vaccines take time to develop, the clarification that there are a number of potential treatments will help to alleviate public alarm during the mitigation phase.’ 

He added that the valuations of the pharmaceutical and medical testing companies in the portfolio are being supported and ‘our tendency to avoid debt-laden companies should protect extreme downside outcomes in our investments which are exposed to the ongoing decline in discretionary consumer spending’. 

The company still has ‘substantial’ cash reserve that will enable the fund to take advantage of ‘attractive opportunities, both listed and unlisted, which are now appearing with the volatility and sporadic weakness in the equity markets’.

The trust’s latest annual report shows cash reduced from £122m to £82m over the year to end of January due to the repurchase of over 165,000 shares for redemption at a discount to NAV.

Mills said the ‘standout success stories’ of the year were hazard waste management specialists Augean (AUG) and Renalytix (RENX), which develops artificial intelligence used in the diagnosis of kidney disease. 

‘[The companies] collectively created nearly £35m of value for our shareholders during the 12-month period,’ he said.

The biggest detractor was a holding in five-a-side football company Goals Soccer Centre, which had to be written off at a cost of £4m after it was sold due to fraud investigations surrounding its former executives. 

The £389m small-cap trust has struggled to keep up with its S&P Composite benchmark in the 12 months to 31 January, despite net asset value (NAV) returns of 18.2%, as the index rose 18.4%.

However, chairman Peregrine Moncreiffe, said the fund - which is majority invested in the UK - ‘materially outperformed’ when pegged against relevant indices in the UK, which only shook off Brexit uncertainty at the beginning of the year. 

Year-to-date the trust’s NAV has plunged over 19% and its shares 22%, leaving the shares on a 28% discount. This leaves shareholder returns flat over three years, although over five years they have seen gains of 44.2%, just behind the 45.9% of the MSCI Global Smaller World index.




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