Liontrust UK Micro Cap Fund

The Liontrust UK Micro Cap Fund returned 3.4%* in July. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmarks returned 5.6% and 3.1% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 4.3%.

An eventful month of political developments failed to hold back the UK market, with investors focused on an equally busy period for company reporting and looking forward with increased confidence to upcoming interest rate cuts in the UK and US (the former being delivered in early August).

Enthusiasm around artificial intelligence suffered a moderate setback as earnings updates from some Magnificent Seven constituents underwhelmed, a trend which presented a big headwind to US markets and global indices. The UK, in contrast, was among the world’s best performing major markets in June.

Starting with the Fund’s largest risers, two of these staged strong relief rallies on the receipt of much-anticipated contracts.

Inspiration Healthcare Group (+54%) shares have had a tough 2024 due to a delay in receiving a large export order. In May, the company stated that while it still expects to receive the order this financial year, it had to seek waivers from end-April covenant tests on its debt, adjust covenants due next year and raise funds of £3 million. Investors were therefore relieved to see July’s announcement that the contract has now been signed. Inspiration will delivery SLE6000 neonatal ventilators, First Breath Humidification and other accessories in a deal worth $4.3 million – the largest single order for the SLE6000 ventilators.

While it released in-line full-year results during the month, it was contract news which also drove Totally (+52%) higher. The frontline healthcare services provider has been through an exceptionally tough period, suffering delays in the re-tender process for some expiring contracts and high costs due to clinical workforce shortages leading to a greater reliance on agency staff.

Some of the recent hesitancy from clients resulted from election uncertainty, so it was pleasing to see the announcement of multiple contracts being extended in July. In a 11^th July release, Totally announced it will take on three contracts worth around £8 million to help reduce elective care waiting lists across three NHS integrated care boards. The same announcement included details of three contracts worth £3.5 million to support urgent care services and GP Out of Hours services in the North East and Clinical Assessment services in Yorkshire.

Later in the month it announced two further urgent care contract extensions worth over £1 million, as well as a new corporate wellbeing agreement worth £0.5 million over three years.

Interim results from Quartix Technologies (+28%) prompted shares in the company to reclaim a modest amount of the ground lost over the last couple of years – a tough period during which slowing fleet growth in the UK and US prompted a strategic review led by Andy Walters, Quartix’s founder and former CEO who returned to the company as Chairman.

The provider of vehicle tracking systems and associated analytics and services released six-month numbers which were marginally ahead of guidance given earlier in the month, and which also commented that full-year revenue and profit will “moderately exceed” market consensus forecasts. Quartix recorded 1% revenue growth to £16.1 million in the first half of 2024, following a 13% increase in the rate of new units being added to fleet subscriptions (to 37,863). The fleet subscription base now stands at 282,922, with annualised recurring revenues rising 11% to nearly £31 million.

The most disappointing portfolio news in June came from Nexteq (-31%). It updated investors that trading was below market expectations, and separately the Chair, CEO and CFO will step down from the Board in the coming year. Nexteq’s Quixant division supplies computer platforms for the casino gaming and slot machine market, while its Denistron business provides display components into a diverse range of industrial sectors. Both units have seen soft demand in the first half of 2024, and Nexteq has cut full-year financial guidance as a result.

With regard to the management changes, Nexteq states that all three departures are amicable, but it would be reasonable to assume that there has been some level of disagreement at Board level. We have engaged with Deputy Chair, to seek reassurance that the strength in the operational management team below Board level mitigates the potential disruption to the day-to-day running of the business, but clearly it is important that the positions are filled in a timely manner and by the right candidates.

Shares in Crimson Tide (-43%) also suffered a large fall in July, although this was simply June’s bid excitement reversing. Last month, the provider of cloud-based mobile workflow solutions received takeover interest. This initially came from Checkit, an augmented workflow and smart sensor automation company proposing an all-share deal, but more significant interest emerged in the form of a potential 312p a share cash bid from Ideagen. While Crimson Tide’s board rejected Checkit’s approach, it indicated it was considering Ideagen’s offer – leading its shares to jump to around 270p. However, July’s announcement that Ideagen had withdrawn its bid interest led these gains to be reversed.

Returning to positive news, financial markets cloud computing and connectivity provider Beeks Financial Cloud Group (+43%) announced that results for the year to 30 June 2024 are expected to be in line with analyst expectations, with 27% growth in revenues to £28 million and a 67% increase in underlying profit before tax. In March, Beeks announced a cloud contract extension and proximity cloud win with the Johannesburg Stock Exchange, providing a strong basis for further growth next year. Beeks is also confident of securing a further cloud contract with one of the largest global exchanges. The contract was provisionally announced in February but remains conditional on regulatory approval; Beeks states it expects to update on the outcome shortly.

ActiveOps (+29%) is a high-recurring Software as a Service (SaaS) business that automates backoffice operations for large, complex organisations – mostly in financial services. The fund managers had been following ActiveOps since its 2022 IPO and it achieving profitability allowed an entry point towards the end of 2023. Results for the year to 31 March showed a 5% increase in revenues to £26.8 million, with recurring revenues rising 11% to £25.1 million. The company posted profit before tax of £1 million for the year, compared with a £0.2 million loss last year. The company commented that trading in the first few months of the new financial year have been in line with expectations, helped by customer expansions and the addition of a new customer with significant expansion potential.

Elsewhere in the portfolio, James Cropper (-18%) and CML Microsystems (-11%) slid after giving underwhelming assessments of current trading conditions.

James Cropper dropped at the start of the year after downgrading sales and profit guidance due to negative trends at both its legacy Paper Products unit and its faster growing Advanced Materials business. The former has seen supply chain destocking and high inflation hit customer demand, while Advanced Materials has suffered from delays to hydrogen energy projects – a sector it has targeted with specific technical fibres. Full-year results released in July confirmed a 21% revenue drop in the year to 31 March 2024 and, although profit before tax was marginally ahead of the reduced guidance issued in January, there was no indication that the immediate headwinds are set to abate.

CML Microsystems is a developer of mixed-signal, RF and microwave semiconductors for global communications markets. While revenue grew in the year to 31 March, profits fell due to inventory over-stocking among its customers. In its outlook comments, the company is keen to emphasise that while its medium-term prospects remain strong, it expects tough market conditions to persist in the near term.

The positions in Cohort, Avingtrans, and Surgical Innovations were exited during the month. Cohort’s recent share price performance, supported by a significant increase in defence sector activity in the wake of conflict in Ukraine and the Middle East, has resulted in the company exceeding the market capitalisation upper threshold of the process. The stock has been a successful long-term holding with the position initiated in July 2016 at a share price of 310p, which compares to the price of the final exiting share sale of 845p.  The fund managers took the decision to exit the position in Avingtrans due to a shift in the perceived risk/reward dynamics. The company has made the decision to invest heavily in its Medical and Industrial Imaging division, and while Avingtrans is excited by the growth potential of this market, the level of the forecast increased divisional losses and impact on the free cash generation of the business, which informed the decision to exit the position. Surgical Innovations has been a disappointing performer over a number of years, struggling to generate consistent profits and cash and demonstrate an ability to deliver compounding returns.

On the first day of August, the Bank of England cut interest rates by 25 basis points to 5.0%. Although increasingly priced into markets in the days and weeks prior to the decision, the cut is in our view another incremental positive in an improving outlook for UK equity markets.

The last few months have delivered stabilising inflation, a return to economic growth, a stable government, and now an interest rate reduction.

We feel that there is currently a compelling opportunity for investors in UK shares. The UK is at a clear valuation discount to historic averages and measures of intrinsic value but there is the potential for government policy intervention (focused on pension fund domestic equity allocations in particular) to help turn the tide of investor sentiment and capital flows, which would be of particular benefit to smaller company valuations.

Positive contributors included:

Inspiration Healthcare Group (+54%), Totally (+52%), Beeks Financial Cloud Group (+43%), Activeops (+29%) and Quartix Technologies (+28%).

Negative contributors included:

Crimson Tide (-43%), Nexteq (-31%), Cropper (-18%), Mind Gym (-16%) and CML Microsystems (-11%).