Menhaden Resource Efficiency Plc - Half-year Report

Menhaden Resource Efficiency PLC

Half Year Report

for the six months ended 30 June 2023

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Financial Highlights

 

MenhadenResourceEfficiencyPLC(the“Company”)isaninvestmenttrust.Itssharesarelistedonthepremium segmentoftheOfficialListandtradedonthemainmarketoftheLondonStockExchange.

 

TheCompany’sinvestmentobjectiveistogeneratelong-termshareholderreturns,predominantlyintheformofcapital growth,byinvestinginbusinessesandopportunitiesthataredemonstrablydeliveringorbenefitingsignificantlyfrom theefficientuseofenergyandresourcesirrespectiveoftheirsize,locationorstageofdevelopment.

 

Performance	Asat 30June2023	Asat 31December2022
Totalnetassets	£119,675,000	£103,831,000
Netassetvalue(“NAV”)pershare	151.4p	129.8p
Shareprice	96.5p	89.0p
SharepricediscounttotheNAVpershare^	36.3%	31.4%

 

Total returns	Sixmonthsto 30June2023	Yearto 31December2022
NAVpershare^	16.9%	(16.5%)
Shareprice^	8.8%	(20.3%)
RPI+3%	5.9%	13.7%

 

	Sixmonthsto 30June2023	Yearto 31December2022
Annualisedongoingchargesratio^	1.8%	1.8%

 

^AlternativePerformanceMeasure.PleaserefertotheGlossaryonpage21fordefinitionsofthesetermsandthebasisoftheircalculation.

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StrategicContext

Overthefirstsixmonthsof2023thelevelofinvestment inboththeglobalquotedandprivatecapitalmarketswas subdued. The main reasons include post pandemic concerns, the dislocating impact of the Ukraine war on global energy and other resource supply chains, inflationary pressures and rising central bank interest rates,andincidenceofextremeweathereventsinNorth America, Europe, and Asia.

At the same time the global demand for energy and resources continues to rise. The World Meteorological Associationhasstatedthat2023issettobethehottest yeareverrecordedandtheInternationalMonetaryFund reportedthatfinancialmarketsareunder-pricingclimate relatedrisks.Theneedforbusinessestoprogressively reduce their use of fossil fuels and greenhouse gas emissions has never been so critical.

Consequently, our investment thesis to invest in high quality businesses that both enjoy strong market positions and are demonstrably delivering or significantly benefitting from the efficient use of energy and resources is now evenmorerelevantandsoshouldbebeneficialforlong-term shareholders.

 

FinancialPerformance

The performance of our investment portfolio has been encouraging.Between31December2022and30June2023theCompany’stotalnetassetsincreased from£103.8millionto£119.7million.TheNAVpershare increasedfrom129.8pat31December2022to151.4p at 30 June 2023, giving an NAV per share total return of 16.9%. The Company’s share price over the same periodrosefrom89.0ppershareto96.5p,givingashare price total return of 8.8%.

Thesemetricscomparewithareturnoverthesixmonths of our primary performance comparator, RPI+3% per annum,of5.9%.AttheendofJunethesharepricestood at a 36.3% discount to the NAV per share. Such share pricediscountsarecurrentlyreflectedacrossmuchofthe investmenttrustsectoranddoesnotreflectourNAVper shareCAGRperformanceof12.5%,10.5%and10.3 % over1,3and5years.

Notablecontributorstoourperformanceincludedprivate equitycleanenergydeveloperX-ELIO,whichisexpected torealise2.2timesinvestedcapitalfollowingits proposed acquisitionbyBrookfieldRenewable, expected to conclude by the end of 2023.Takentogether,our three largest digitalisation (decarbonisation) themed public equities (Microsoft, Alphabet and Amazon) contributed 9.2% to NAV. The two largest detractors were two sustainable infrastructure and transport companies, Union PacificandCanadianNationalRailway,whichreducedour NAV by 0.3%.

Themostsignificantchangestotheportfoliointheperiod includedinvestmentprofitsbeingtakenfromreducing,by aroundhalf,theholdinginAlphabetandre-investmentin Airbus (because of its focus on manufacturing more efficientenginespoweredbysustainableaviationfuel).We also made a new large US$25 million private equity commitment into TCI Real Estate Partners Fund IV (becauseofitsfocusondevelopingbestinclassenergy efficient buildings).

 

EnvironmentalPerformance

OurPortfolioManageractivelymonitorstheenergyand resource efficiency of our investments in line with the carbondisclosureprojectandtheScienceBasedTargets initiative.

The focus of engagement with all quoted investee companies has been on their alignment with the Paris Agreementtoreduceglobalwarming,deforestationand biodiversity loss. The aim of this engagement is to encourage them to adopt and use best practice environmentalsolutionsanddefinepathwaystoreduce theirGHGemissionsandpreservetropicalrainforests, together with associated biodiversity. Some positive responseswerereceived,whichwerewelcomed.Where a weak or no response was received further follow-up engagement is planned.

Our Portfolio Manager supported AGM resolutionsseekinggreaterdisclosuresbyKLAoftheirNet ZerotargetsandtheCanadianNationalRailwayclimate action plan.

 

SharePriceDiscount

We had not previously favoured share buy backs for mitigationofthesharepricediscountandremainofthe view that share buybacks are not usually in the best interest of shareholders as they reduce the size of the Company and increase the ongoing charges ratio. However, after a step-down in the share price in January2023theBoarddecideditwouldtrialavery modestprogrammeofsharebuybacks.Weconsidered thatthismightreducethevolatilityoftheshareprice,take advantage of the accretion to NAV that buying back sharesatadiscountachievesandprovideasignaltothe marketofourconfidenceinthevalueoftheCompany’s portfolio. Some 975,000 shares were bought back betweenFebruaryandApril2023atanaveragepriceof 94.35pencepershare.Theexercisedidprovidesome additionalliquidityinthevolatilemarketconditions, was accretive to our shareholders and the cost of execution was modest.

WewillcontinuetomonitorcloselythediscounttoNAV atwhichtheCompany’ssharestrade.Anyfutureaction willbedependentonmarketconditions,theCompany’s available liquid resources and the potential conflict betweenaccretivesharebuybacksandtheavailabilityof attractive portfolio investment opportunities. Buybacks will remain at the discretion of the Board.

As the Company can only issue new shares when the sharepriceisatapremiumtoNAVitremainstheBoard’s goal to improve the share price through enhanced investment performance and by having effective marketingstrategiesandinformativecommunicationsto potential new investors.

 

Dividend

InlinewithpreviouspracticetheBoardhasnotdeclared an interim dividend in respect of this half year. As shareholders will be aware a dividend of 0.4p per sharewasrecommendedinrespectoftheyearto 31December2022and,followingshareholderapproval in June 2023, was paid in July 2023.

Income generation is not part of the Company’s investmentobjectiveandshareholdersareremindedthat theCompany’sdividendpolicyisthattheCompanywill onlypaydividendssufficienttomaintaininvestmenttrust status. If that threshold is crossed once again for the current financial year, to 31 December 2023, the Directors willrecommendtoshareholders,forapprovalatthenext AGM,adividendsufficienttoachievecompliancewiththe investment trust status requirements.

 

Outlook

Whilst financial markets have generally been resilient overallsofarin2023,andtheBoardhopesforanupturn for both quoted equities and private investment opportunities, we cannot ignore background macro factors,including:thecontinuingwarinUkraine;tension between the USA and China over trade; inflationary pressuresandhighinterestrates,whichmaypersistfor some time; nor the potential for further energy and resource price volatility; and climate change impacts.

However,theBoardconsiderstheCompany’sportfolioto be well placed for further capital growth because of its qualityandthedefensiveandinflationresistantproperties ofmanyoftheholdings.Moreover,theBoardcontinues toremainconvincedofthevalidityofthepremisethatthe world and all businesses need to be more energy and resourceefficientandtheCompany’sinvestmentthesis should accordingly provide long-term benefits for our investors.

 

FurtherInformation

Our Portfolio Manager’s report, starting on page 8 providesfurtherdetailsaboutourinvestmentsandtheir contribution to the Company’s performance during the period. The Company’s most recent 2022 annual environmentalimpactreportandmonthlyfactsheetscan befoundonourwebsitewww.menhaden.com.Our2023 annual report and environmental impact report will be published in mid 2024.

 

HowardPearce
Chairman
14 September2023

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Investment Themes

Theme	Description
Clean energy	Companies involved in the production and transmission of power from clean sources such as solar or wind.
Industrial emissions reduction	Companies focused on improving energy efficiency (e.g. in buildings or manufacturing processes) or creating emissions reduction products or services.
Sustainable infrastructure and transportation	Companies in the infrastructure and transport sectors helping to reduce harmful emissions.
Water and waste management	Companies with products or services that enable reductions in usage/volumes and/or smarter ways to manage water and waste.
Digitalisation	Companies that facilitate reduced resource consumption through digital technology.
Reporting	Companies providing the means for environmental reporting and evaluation.

 

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Portfolioasat30June2023

 

Investment	Country	FairValue £’000	%of netassets
Airbus	France	14,875	12.4
X-ELIO*1	Spain	13,588	11.4
Alphabet	UnitedStates	13,181	11.0
Microsoft	UnitedStates	13,115	11.0
Safran	France	10,587	8.8
CanadianPacificKanasCity	Canada	10,291	8.6
VINCI	France	9,595	8.0
CanadianNationalRailway	Canada	8,953	7.5
Amazon.com	UnitedStates	5,841	4.9
JohnLaing Group*2	UK	4,396	3.7
Tenlargestinvestments		104,422	87.3
OceanWilsons	Bermuda	3,456	2.9
TCIRealEstatePartnersFundIII*	UnitedStates	1,676	1.4
Union Pacific	UnitedStates	869	0.7
WasteManagement	UnitedStates	859	0.7
ASML	Netherlands	683	0.6
KLA	UnitedStates	496	0.4
LAM Research	UnitedStates	354	0.3
Totalinvestments		112,815	94.3
Net currentassets(includingcash)		6,860	5.7
Totalnetassets		119,675	100.0

 

1 InvestmentmadethroughHeliosCo-Invest LP

2 Investmentmade throughKKR AqueductCo-Invest LP

*Unquoted

 

 

Investment	BusinessDescription	Theme
Airbus	Designs and manufactures aircraft with the most fuel-efficient engines in the industry	Sustainableinfrastructureand transportation
X-ELIO	Develops and operates solar energy assets	Cleanenergy
Alphabet	Delivers a range of internet-based products and services for users andadvertisers, which are powered by renewable energy with the group being the largestcorporatebuyerofrenewablepower worldwide	Digitalisation
Microsoft	Provides cloud infrastructure and software services which deliver energy efficiency savings for customers versus legacy solutions	Digitalisation
Safran	Designs, manufactures and services next generation aircraft engines which offer significant fuel efficiency savings	Industrial emissions reduction
CanadianPacificKanasCity	Owns andoperatesfuel-efficientfreightrailwaysin CanadaandtheUSA	Sustainableinfrastructure and transportation
VINCI	Buildsandoperatesenergyefficientcriticalinfrastructureassets	Sustainableinfrastructure and transportation
CanadianNationalRailway	Operates rail freight services across North America, which represent the most environmentally friendly way to transport freight over land	Sustainableinfrastructure and transportation
Amazon.com	An energy efficient ecommerce and cloud computing business aiming to use only renewable energy by 2030	Digitalisation
JohnLaing Group	Portfolioofmostlyrenewablerailandsocialinfrastructureassets	Sustainableinfrastructure and transportation
OceanWilsons	OperatesportsandprovideslowerclimateimpactmaritimeservicesinBrazil	Sustainableinfrastructure and transportation
TCIRealEstatePartnersFundIII	Invests in energy-efficient real estate projects	Sustainableinfrastructure and transportation
Union Pacific	Provides fuel-efficient rail freight services across the USA	Sustainableinfrastructure and transportation
WasteManagement	Provides waste management and environmental services in North America	Water and wastemanagement
ASML	Develops, manufactures and services advanced lithography systems used to producemoreenergyefficientsemiconductorchips	Digitalisation
KLA	Develops, manufactures and services inspection and metrology equipment used to increase the efficiency of semiconductor manufacturing	Digitalisation
LAM Research	Develops, manufactures and services etching and deposition equipment used toproduce more energy efficient semiconductor chips	Digitalisation

 

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PortfolioManager’sReview

 

Performance

During the first half of 2023, the Company’s NAV per shareincreasedfrom129.8pto151.4p.Thisrepresents atotalreturnof16.9%andcomparestothebenchmark returnof5.9%.TheCompany’ssharepricetradedata 36.3% discount to NAV as at 30 June 2023. The contributionstotheNAVpersharetotalreturnoverthe period are summarised below:

 

AssetCategory	30 June 2023 NAV%	Return Contribution %
PublicEquities	77.8	13.1
PrivateInvestments	16.4	2.7
Cash	5.3	-
Foreignexchangeforwards	1.1	2.1
Dividend Paid		(0.3)
Expenses(includingaccruals)	(0.6)	(1.8)
NetAssets	100.0
NetReturn		15.8
Reinvesteddividend		0.3
Impactofsharerepurchases		0.8
Total Return		16.9
NetAssets	100.0

 

Theeasingofinflationandhopeforasoftlandinginthe higher interest rate environment have buoyed equity marketsthisyear.Theconsumerremainsresilientsofar and dislocations in the United States regional banking sector seem to have been successfully contained. We continue to actively look for attractive private opportunities withbetterrisk-rewardprofilesthanthoseinourquoted portfolio.Thereissomeevidenceofincreasingdealflow andamoresensibleapproachtopricingwhichwillsatisfy ourrequirements.TheglobalmovetowardsNetZeroby 2050 continues to gain momentum. More and more companies from all sectors of the economy are establishingframeworkstoreducetheirgreenhousegas (GHG)emissions.Webelieveourthesisofinvestingin businessesbenefittingfromtheefficientuseofenergyand resourcesremainsmorerelevantthanever.

In the current environment, the portfolio continues to prioritisequotedequities,whichrepresented77.8%ofthe NAVattheperiodend.Ourquotedequitiesspana number of energy and resource efficiency themes, namely:cleanenergy;digitalisation;industrialemissions reduction;sustainableinfrastructureandtransport;water andwastemanagement.Theseallofferseculargrowth andtheirindustrystructuresprovidetheincumbentswith formidablecompetitivepositions.Commitmentstodeliver themoreefficientuseofenergyandresourcesarenow widelyrecognisedasaddingtotheshareholdervalueof those companies.

Investment performance was led by our biggest digitalisation holdings (Microsoft, Alphabet and Amazon),inareversaloftheirpoorperformancein2022. Withintheprivateportfolio,KKRagreedadealtosellits 50%stakeinSpanishsolardeveloper,X-ELIO,tojoint venture partner, Brookfield Renewable. We expect the transactiontocompleteinthesecondhalfofthisyearand delivera compounded rate of returnof13%over8yearsinUSdollars.Thiswill beourfourthsuccessfulexitfromaprivateinvestment, which, in aggregate, will have realised gains of approximately £21 million.

Investmentperformancewasnegativelyaffectedbythe appreciationofsterling,althoughthiswaspartlyoffsetby our forward currency contract hedges. We realised net cashproceedsof£5.2millionfromourcurrencyhedging over the period.

Keyinvestmentdecisionsduringtheperiodincludedthe reduction of our Alphabet position by one half and the partialredeploymentoftheproceedsintoanewposition inAirbusinFebruary.Wecontinuedtoincreasethesize ofthepositionoverthesubsequentmonths.Weregularly monitorvaluationandadjustpositionsaccordinglywhere appropriate. We opted to take some profits on our Microsoft holding in June, following very strong performance. We then added the proceeds, and some excess cash, to our Airbus, Canadian National Railway and VINCI holdings.

Ourprivateinvestmentactivitywaslimited,withnonew transactionsintheperiod.However,wewerepleasedto makeanewcommitmenttothefourthvintageoftheTCI RealEstatePartnersstrategyinMarch.Thisfundwillfollow thesamestrategy,andoffersimilarenvironmentalbenefits, astheTCIRealEstatePartnersFundIIIintowhichwe made a US$15 million commitment in 2018. The fund helpstofinancedevelopmentswhicharebestinclassin termsofenergyefficiencyandenvironmentalstandards.

TheCompany’ssharepricehascontinuedtotradeata significant discount to its net asset value. Following a widening of the discount in January, the Board of Directorsauthorisedthedeploymentofupto£1million forasharebuybackprogram.975,000shares(1.2%of the total issued) costing a total of £929,000 were purchased between mid-February to early April.

We maintain a proactive stance on stewardship. We carefullyassessshareholderresolutionsandengagewith portfolio companies on environmental issues, while remaining mindful of our size. We seek to promote energy transitionplanstoprogresstowardsnetzerotargetsand greater disclosure of greenhouse gas emission reduction and mitigation strategies. During the period we voted againsttherecommendationofAmazon’smanagement to support a resolution requesting disclosure on how the companyisprotectingtheretirementplan’sbeneficiaries from climate risk.

 

PublicEquities

Quotedpublicequitiesrepresented77.8%oftotalNAVat 30June2023,anddeliveredatotalreturnof16.9%over the period, adding 13.0% to the NAV per share.

 

Investment	Increase/ (Decrease)%	Contribution toNAV %
Microsoft	42.0	3.9
Alphabet	35.7	3.5
Amazon	55.2	1.8
Safran	22.7	1.7
VINCI	14.0	0.8
Airbus	5.3	0.5
Ocean Wilsons	3.2	0.4
ASML	31.6	0.1
CanadianPacificKansasCity	8.3	0.1
LAMResearch	53.0	0.1
KLA	28.6	0.1
WasteManagement	10.5	-
Union Pacific	(1.2)	(0.1)
Canadian National Railway	1.8	(0.2)

Note: Percentage increase/(decrease) for individual holdings is calculated ontheirlocalcurrencyandbasedovertheholdingperiodifboughtorsoldduring the year.

 

Microsoft remains the key technology partner for all enterprises and its software products are ubiquitous. Customers can depend on Microsoft to ensure their technology infrastructure is fully sustainable, with the company aiming to operate on carbon-free energy everywhere,atalltimes,by2030.Microsoftisalsoset tobeoneoftheprimebeneficiariesofArtificialIntelligence. The new Copilot products will enable customers to harnessthepowerofGenerativeAI.Therateofadoption maybegradual,butwebelievethattheproductivity gains from it willsupportsignificantfuturerevenuegrowth.The coreprofitdrivers,Office365CommercialandtheAzure Cloudbusinessareperformingwell.Office365nowhas morethan380millionusersandcontinuestogrow.Azure isstillgainingmarketshare.Percentagerevenuegrowth hasremainedinthehigh20sonayear-over-yearbasis, even as customers have focused on optimising workloads toreducecosts.Positively,theweakerPCmarketshould ceasetobeaheadwindgoingforwards.Withtheshares upmorethan40%year-to-dateinUSdollars,weopted totakesomeprofitsinJuneandreducedourpositionby 2.0% of NAV.

Alphabet continues to step up its response to the competitive threat posed by Open AI/Microsoft and ChatGPT.ManagementisfocusedonusingGenerativeAI toenhanceGoogle’sproductsandservicesforbothusers and advertisers. The launch of a new beta search experienceintheUS(aspartof“SearchLabs”)provides anAIpoweredsnapshotofkeyinformationtoconsider, thensuggestednextstepsandhaschatcapabilities.The tempo of iterative product development appears to be increasing.Wewelcomethenewsenseofurgency.The companycontinuestopushforwardonitssustainability agendawithaimstoachievenet-zeroemissions,runon 24/7carbon-freeenergyandtoreplenishmorewaterthan itconsumes.Progressisalsobeingmadeoncosts,with headcountnowfallingandoperatingmarginsimproving. The company should be able to accelerate revenue growth once the economy improves.

We opted to reduce our position materially in February duetoconcernsstemmingfromheightenedcompetition inSearch,followingMicrosoft’slaunchofitsnewBing searchengine.WhilstwethoughtthatAlphabetwaswell positionedtofendoffthisnewchallenge,werealisedthat thelevelofriskandrangeofoutcomeshadwidened.We soldapproximatelyonehalfofourposition,leavingitequal to the profit we made on our original holding. We have been happy to maintain the position since then but do continuetomonitorthevariousanti-trustactionsagainst the company.

The turnaround at Amazon is gaining momentum. Profitabilityandfreecashflowgenerationhaveinflected. TheRetailbusiness’operatingmarginshavebenefited fromlowerfuelprices,fallingfreightratesandtheswitch to a regional fulfilment model in the US. The latter translatesintoshorterdeliverydistancesandfasterdelivery speeds.AmazonWebServices’growthrateisalsopicking up following a softer Cloud environment focused on workload optimisations. CEO Jassy has always been adamantonthefutureforAWS,outlininghow90%ofIT spendisstillon-premises.Weweredisappointedtosee thatAmazonrecentlyfailedtomeettheScienceBased Targetsinitiative’s(SBTi)deadlinetosubmittheiremissions reduction targets for validation. We intend to raise this matter during our engagement with the company.

French aircraft engine manufacturer, Safran, has continuedtoprofitfromthecommercialaviationindustry’s resurgence.ThereopeningofChinainJanuaryremoved thelastmajorobstacletoafullrecovery.Webelieveair travelremainsaseculargrowthstory,withmostpeople still never having travelled on a plane.

Flightcyclesarethekeydriverofthecompany’sfinancial performance, with most of its profits coming from aftermarketsalesofspareparts.Safrancontinuestolead the way towards the decarbonisation of the aviation sector.Wewerepleasedtoseethatitsemissionreduction targetswereindependentlyapprovedbytheSBTi.These include targets to reduce Scope 1 and 2 emissions by 50%by2030andreduceScope3emissionsby42.5% by2035(versus2018).

Holding company, Ocean Wilsons, owns a controlling interest in publicly listed Brazilian port operator,WilsonSons,alongsideadiversifiedinvestmentportfolio. WilsonSons’assetbaseenjoyshighbarrierstoentryand substantial operating leverage for growth in Brazil’s international trade shipping sector. Shipping has the lowestclimateimpactofanyfreightmethod,onaperunit basis,producingbetween10-40gramsofCO2permetric ton of freight per kilometre of transportation, which is around half that even of rail freight. Ocean Wilsons recentlyconfirmedthatitisundertakingastrategicreview of its investment in Wilson Sons. We believe that the companycouldunlocksignificantvalue,withtheshares trading at more than a 50% discount to NAV at the period end.

French infrastructure group, VINCI, benefited from the recovery of its Airports business and the good performance of its Energies and Cobra contracting businesses. Traffic at the former is now above 90% of 2019levels.Themanagementteamcontinuestomake progress on its targets to reduce Scope 1 and 2 emissions by 40% and Scope 3 emissions by 20% by 2030.Thisincludesthecompany’sconstructionbusiness increasingtheuseoflowcarbonconcretefor90%ofits needs.TherecentcompletionoftheBelmontesolarfarm inBrazilmarksVINCI’sfirstforayintorenewablepower generation. The company is currently waiting for the publication of the French government’s opinion on the possibility of changing taxes levied on motorway concessions in the country.

Our North American railroad holdings, Canadian NationalRailway,CanadianPacificKansasCityand UnionPacific,arecurrentlyfacingaslowingeconomy. We view the headwinds as only cyclical in nature. Rail retainsasignificantcostadvantageovertrucksonlonger haul routes and no one is building railroads today. Rail remains the most environmentally friendly way of transportingfreightoverland,withcurrentlocomotivesfour timesmore fuel efficientthan trucking on aper unit basis.

We opted to add incrementally to our position in Canadian National Railway in June. We believed the sharesofferedgoodvaluecomparedtothecompany’s midtermorganicgrowthprofile.CanadianPacificfinally completeditsmergerwithKansasCitySoutherninApril. Canadian Pacific Kansas Cityhas multiple opportunities to grow volumes, including by converting truck traffic to rail. We consider the published earnings pershareguidancetobeoverlyconservative.Webelieve new Union Pacific CEO, Jim Vena, should be able to helpthecompanyfulfilitspotentialanddelivermeaningful improvements in operations and profits.

Signs are emerging that the semiconductor industry is finding a bottom to its current cycle. A return to growth should translate into higher capital spending. This should benefit our semiconductor capital equipment companies, ASML,LamResearchandKLA.Eachcompany dominatesitsrespectivenicheinthevaluechainandplays acriticalroleinhelpingthewiderindustrybothmaximise semiconductor production from finite resources and develop and produce more advanced and energy efficient chips. We believe the fundamental drivers of semiconductor demand remain as clear as ever: cloud computing, artificial intelligence, 5G, the Internet of Things (IoT) and the digitalisation of the automotive industry.Semiconductormanufacturers’capitalintensity also continues to increase. We expect all these companies to have very bright futures.

Solidwastepricingismoderatingasinflationeases,but WasteManagementcontinuestodriveforwardsonits sustainability agenda. Growth investments in new automatedrecyclingfacilitiesandrenewablenaturalgas plants at landfill sites should help to drive double digit earningsgrowthgoingforward.Thecompanyprovides essentialservicesandbenefitsfromahighproportionof annuity-like revenue streams, with the cost of its services representing a very small portion (circa 0.5%) of customers’ total expenses.

We opened a new position in aircraft manufacturer, Airbus, in February and increased its size over the subsequentmonthsto12.4%ofNAVattheperiodend. Wepreviouslyheldthecompany’ssharesbutexitedin April2021,believingthatthepostCovidrecoverywould takesignificantlylongerthanimpliedbytheprice.Now commercialaviation’srecoveryfromtheglobalreactionto theCovidpandemicisnearlycompleteandthesecular growthofairtravelappearssettoresume.Fleetrenewal requirementsandtheneedfortheglobalaviationsector to accelerate their decarbonisation are key drivers. By upgradingtoAirbus’latestgenerationaircraft,customers canreducecarbonemissionsby20-30%.Airbus’aircraft arealsocertifiedtooperateon50%sustainableaviation fuel(SAF),withatargettoreach100%bytheendofthe decade.

Airbus’ A320 program is the most successful aircraft familyever.Productionissoldoutuntil2029.Deliveries should increase from a target of 720 this year to more than1,000inthecomingyearsandunderpinsignificant earnings growth. We were also pleased to see the company receive approval from the SBTi for its greenhousegasemissionsnear-termreductiontargets. Theseincludeplanstoreducescope1and2emissions by63%by2030andreducescope3emissionsby46% by2035.

 

PrivateInvestments

Ourportfolioofprivateinvestmentsrepresented16.4%of thetotalNAVasat30June2023,anddeliveredatotal return of 16.6% during the period, adding 2.7% to the NAV per share.

 

Investment	Increase/ (Decrease)%	Contribution toNAV%
X-ELIO	52.0	2.8
JohnLaing	(2.5)	(0.1)
TCIRealEstatePartnersFundIII	4.5	-

 

Note: Percentage increase/(decrease) for individual holdings is calculated ontheirlocalcurrencyandbasedovertheholdingperiodifboughtorsoldduring the year.

KKRagreedadealtosellits50%stakeinSpanishsolar energy developer, X-ELIO, to joint venture partner, Brookfield Renewable in March. We marked up our valuation to align with the sale price. We expect the transactiontocompleteinthesecondhalfofthisyearand deliver a return of ~2.2 times invested capital in US dollars,equivalenttoanIRRof~13%over8years.

TCIRealEstatePartnersFundIIIcurrentlycomprises threeloanstoseparaterealestatedevelopmentsinthe United States. They are first mortgages and have low loan-to-value ratios (less than 60%). These developments are best in class in terms of energy efficiency and environmentalstandards.Buildingscontributemorethan 30%ofGHGemissionsintheUnitedStatesandraising theirefficiencylevelsisvitaltoreducingemissions.Whilst the Fund did not manage to commit the level of capital weoriginallyhoped,investmentreturnshaveremainedin linewithexpectations.TheFundhascontinuedtodraw down from its remaining commitment (circa US$3.2 million)inlinewiththeschedulesofitsexistingloans.We expect the last loan to be repaid in 2026.

John Laingis an active manager of public-private partnershipsandsimilarconcession-basedassets.The companymakesbothgreenandbrownfieldinvestments. Environmentalimpactsaremanagedonanassetbyasset basis and the firm is seeking to achieve a net zero transitionforitsdirectoperationsby2050orbefore.We markeddownourvaluationtoalignwiththemanager’s latestvaluation,withthedowngradebeingprimarilydriven bylossesoncurrencytranslation.KKR’soverhaulofthe company’s operations continues, with the appointment of AndrewTruscottasCEOinMarch.Recentinvestments include the acquisition of a majority stake in National Road RV555,Norway’slargestPPP,andthepurchaseofthree Irish infrastructure assets from AMP Capital. The latter consistingofValleyHealthcare,aportfolioofprimarycare centres,theConventionCentreDublinandTowercom,a mobile tower operator.

We were pleased to finalise a new US$25 million commitmenttotheTCIRealEstatePartnersFundIV. Thisfundwillfollowthesamestrategy,andoffersimilar environmental benefits, as the TCI Real Estate Partners FundIII.Thecoronavirusepidemicprovidedastresstest for Fund III. We were very pleased that while certain developments were affected by construction delays, returnexpectationsontheloansremainedunchanged. Eachloanhasseveralelementsofdownsideprotection suchascreditseniority,loan-to-valueratiosofupto65% andcompletionandcarryguarantees.Thestrategyhas onlyeverrecordedonelossoutof37loans.Themanager believes that stress is starting to permeate real estate creditmarketsandthattheemergingconditionsshould underpinstrongdemandforitsdifferentiatedfinancing. Furthermore,theriseininterestrateshasincreasedthe relative attractiveness of their traditionally premium rates. The manager is targeting gross returns of 11-14%. We believe this level of return represents an exceptional balancebetweenriskandreward.Weexpectthefundto startdrawingdownthisyear.Weexpectournetinvested amount,onacostbasis,topeakatapproximately70% of the total commitment in mid-2026.

 

FXHedges

The aim of our currency hedging policy, to date, has been to address volatility inherent in the portfolio's exposure to both the US dollar and the euro. While in this period we realised proceeds of £5.2 million, we continue to keep the policy under review.

 

Outlook

We continue to focus on what we can control. Our preferenceremainsforinvestmentswhichrequireusto make as few predictions as possible. We believe our criteria of investing in energy and resource efficiency businesses offering quality and value should leave the portfolio well placed to generate superior risk adjusted returns over time in most market conditions.

Private investment opportunities are becoming more interesting,withhigherexpectedreturns.Webelievethat the balance between risk and reward on proposed transactions is improving but we will take a considered approachtocommittingcapital.Wecontinuetoevaluate new transactions with a critical lens. We will only make private investments when they offer a more attractive balance between risk and reward compared to public markets.WebelievethenextvintageofTCIRealEstate Partners’strategymetthiscriteriaandwereveryhappy to make a substantial commitment (US$25 million) in March.Weexpecttoearncomparablereturnstoequity markets,whilstincurringsubstantiallylessriskduetoour more senior position in the capital structure.

Followingthestrongyeartodatereturns,theCompany’s netassetvaluepersharehasnowcompoundedatover 10%,afterfees,forthefiveyearsended30June2023. Sharepriceperformancecontinuestotrailnetassetvalue returns.Webelievethetwoshouldconvergeintime.We remain optimistic on both our energy and resource efficiency investment thesis and our current portfolio’s prospects.

 

Performance CAGR%	30/06/22- 30/06/23 1Yr	30/06/20 - 30/06/23 3Yr	30/06/18- 30/06/23 5Yr	30/06/16- 30/06/23 7Yr	31/07/15- 30/06/23 Inception
NAVper share	12.5%	10.5%	10.3%	9.6%	5.8%
Share Price	(2.4%)	4.9%	6.6%	6.8%	(0.2%)
RPI+3%	11.2%	9.8%	7.6%	7.1%	6.9%

 

Note:Figuresareadjustedforcumulativedividendreinvestments

 

MenhadenCapitalManagementLLP
PortfolioManager
14 September2023

.

 

RegulatoryDisclosures

 

PrincipalRisksandUncertainties

The principal risks and uncertainties faced by the Company are explained in detail in the Company’s Annual Report for the year ended 31 December 2022 (the “AnnualReport”).TheBoardbelievesthattheCompany’s principal risks and uncertainties have not changed materiallysincethedateoftheAnnualReportandarenot expected to change materially for the remaining six months of the Company’s financial year.

 

RelatedPartiesTransactions

Duringthefirstsixmonthsofthecurrentfinancialyear,no transactionswithrelatedpartieshavetakenplacewhich have materially affected the financial position or the performance of the Company.

 

GoingConcern

The Directors believe, having considered the Company’s investmentobjective,riskmanagementpolicies,capital managementpoliciesandprocedures,thenatureofthe portfolio and the expenditure projections, that the Company has adequate resources, an appropriate financial structure and suitable management arrangementsinplacetocontinueinoperationalexistence for the foreseeable future and, more specifically, that there arenomaterialuncertaintiespertainingtotheCompany that would prevent its ability to continue in such operationalexistenceforatleasttwelvemonthsfromthe date of the approval of this half year report. For these reasons, the Directors consider it is appropriate to continuetoadoptthegoingconcernbasisinpreparing the financial statements.

.

 

Directors’ResponsibilitiesStatement

 

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

(i) thecondensedsetoffinancialstatementscontained 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,financialpositionandreturnofthe Company; and

(ii)  the interim management report includes a fair review oftheinformationrequiredbysections4.2.7Rand 4.2.8R of the UK Listing Authority Disclosure Guidance and Transparency Rules.

Inordertoprovidetheseconfirmations,andinpreparing thesefinancialstatements,theDirectorsarerequiredto:

•  selectsuitableaccountingpoliciesandthenapply them consistently;

•  make judgements and accounting estimates that are reasonable and prudent;

•  statewhetherapplicableUKAccountingStandards have been followed, subject to any material departuresdisclosedandexplainedinthefinancial statements; and

•  prepare the financial statements on the going concernbasisunlessitisinappropriatetopresume that the Company will continue in business;

andtheDirectorsconfirmthattheyhavedoneso.

This half year report contains certain forward-looking statements.ThesestatementsaremadebytheDirectors ingoodfaithbasedontheinformationavailabletothem uptothedateofthisreportandsuchstatementsshould betreatedwithcautionduetotheinherentuncertainties, including both economic and business risk factors, underlying any such forward-looking information.

 

HowardPearce
Chairman
14 September2023

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CondensedIncomeStatement

 

		Six months to 30 June 2023 (unaudited)			Six months to 30 June 2022 (unaudited)
	Note	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000
Gains/(losses)on investments at fair value through profit or loss		-	17,492	17,492	-	(17,838)	(17,838)
Income from investments	5	1,129	–	1,129	761	–	761
Management and performance fees	6,9	(161)	(1,079)	(1,240)	(164)	1,021	857
Other expenses		(193)	–	(193)	(221)	–	(221)
Net returns/(losses) before taxation		775	16,413	17,188	376	(16,817)	(16,441)
Taxation		(99)	–	(99)	(57)	–	(57)
Net returns/(losses) after taxation		676	16,413	17,089	319	(16,817)	(16,498)
Basic and diluted returns/(losses) per share	7	0.8p	20.7p	21.5p	0.4p	(21.0)p	(20.6)p

 

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

 

	Calledup share capital £’000	Special reserve £’000	Capital redemption Reserve £’000	Capital reserve £’000	Revenue reserve £’000	Total £’000
Sixmonthsto30June2023(unaudited)
Balanceat31December2022	800	77,371	–	24,970	690	103,831
Netreturnsaftertaxation	–	–	–	16,413	676	17,089
Repurchaseofordinarysharesforcancellation	(10)	(929)	10	–	–	(929)
Dividendspaid	–	–	–	–	(316)	(316)
Balanceat30June2023	790	76,442	10	41,383	1,050	119,675
Sixmonthsto30June2022(unaudited)
Balanceat31December2021	800	77,371	–	45,996	364	124,531
Net(losses)/returnsaftertaxation	–	–	–	(16,817)	319	(16,498)
Dividendspaid	–	–	–	–	(160)	(160)
Balanceat30June2022	800	77,371	–	29,179	523	107,873

.

 

Condensed Statement of Financial Position

 

	Note	As at 30 June 2023 (unaudited) £’000	Asat 31December2022 (audited) £’000
Fixedassets
Investmentsatfairvaluethroughprofitorloss	8	112,815	93,809
Currentassets
Debtors		76	104
Derivativefinancialinstruments	8	1,259	4,200
Cash		6,249	6,061
		7,584	10,365
Currentliabilities
Creditors:amountsfallingduewithinoneyear		(291)	(343)
Performancefeeprovisions	9	(433)	–
Netcurrentassets		6,860	10,022
Netassets		119,675	103,831
Capitalandreserves
Called upsharecapital		790	800
Special reserve		76,442	77,371
Capitalredemptionreserve		10	–
Capitalreserve		41,383	24,970
Revenuereserve		1,050	690
Totalshareholders’funds		119,675	103,831
Netassetvaluepershare		151.4p	129.8p

 

.

 

Condensed Cash Flow Statement

 

		Six months to 30 June 2023 (unaudited) £’000	Six months to 30 June 2022 (unaudited) £’000
Netcashinflow/(outflow)fromoperatingactivities		6	(299)
Investing activities
Purchasesofinvestments		(18,982)	(10,049)
Salesof investments		15,172	20,017
Settlementofderivatives		5,237	(3,618)
Netcashinflowfrominvestingactivities		1,427	6,350
Financingactivities
Dividendspaid		(316)	(160)
Repurchaseofordinarysharesforcancellation		(929)	–
Netcashoutflowfromfinancingactivities		(1,245)	(160)
Increaseincashandcashequivalents		188	5,891
Cashandcashequivalentsatbeginningofperiod		6,061	878
Cashandcashequivalentsatendofperiod		6,249	6,769

 

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Notes to the Financial Statements

 

1 FINANCIALSTATEMENTS

Thecondensedfinancialstatementscontainedinthisinterimfinancialreportdonotconstitutestatutoryaccounts asdefinedins434oftheCompaniesAct2006.Thefinancialinformationforthesixmonthsto30June2023 and30June2022hasnotbeenauditedorreviewedbytheCompany’sexternalauditor.

Theinformationfortheyearended31December2022hasbeenextractedfromthelatestpublishedaudited financial statements. Those statutory financial statements have been filed with the Registrar of Companies and included the report of the auditor, which was unqualified and did not contain a statement under Sections 498(2) or (3) of the Companies Act 2006.

No statutory accounts in respect of any period after 31 December 2022 have been reported on by the Company's auditor or delivered to the Registrar of Companies.

Earningsforthefirstsixmonthsshouldnotbetakenasaguidetotheresultsforthefullyear.

 

2 ACCOUNTINGPOLICIES

Thesecondensedfinancialstatementshavebeenpreparedonagoingconcernbasisinaccordancewiththe DisclosureGuidanceandTransparencyRulesoftheFinancialConductAuthority,FRS104‘InterimFinancial Reporting’, the April 2021 Statement of Recommended Practice ‘Financial Statements of Investment Trust CompaniesandVentureCapitalTrusts’andusingthesameaccountingpoliciesassetoutintheCompany’s Annual Report for the year ended 31 December 2022.

3 GOINGCONCERN

Aftermakingenquiries,andhavingreviewedtheinvestments,StatementofFinancialPositionandprojected incomeandexpenditureforthenext12months,theDirectorshaveareasonableexpectationthattheCompany has adequate resources to continue in operation for the foreseeable future. The Directors have therefore adopted thegoingconcernbasisinpreparingthesefinancialstatements.

4 PRINCIPALRISKSANDUNCERTAINTIES

TheprincipalrisksfacingtheCompanytogetherwithanexplanationoftheserisksandhowtheyaremanaged iscontainedintheStrategicReportandnote17oftheCompany’sAnnualReportfortheyearended 31 December 2022.

5 INCOME

	Six months to 30 June 2023 (unaudited) £’000	Six months to 30 June 2022 (unaudited) £’000
Incomefrominvestments
Overseasdividends	1,103	761
Totalincomefrominvestments	1,103	761
Other income
Interestincome	26	–
Total income	1,129	761

 

6 AIFM AND PORTFOLIO MANAGEMENT FEES

	Sixmonthsto30June2023 (unaudited)			Sixmonthsto30June2022 (unaudited)
	Revenue £’000	Capital £’000	Total £’000	Revenue £’000	Capital £’000	Total £’000
AIFMfee	25	99	124	25	101	126
Portfoliomanagementfee	136	546	682	139	555	694
Provisionforperformancefee	–	434	434	–	(1,677)	(1,677)
	161	1,079	1,240	164	(1,021)	(857)

 

7 RETURNS/(LOSSES)PERSHARE

Therevenueandcapitalreturns/(losses)persharearebasedontheweightedaveragenumberofOrdinary shares in issue during the six months to 30 June 2023, 79,375,968, and 30 June 2022, 80,000,001. The calculationofthetotal,revenueandcapitalreturns/(losses)pershareiscarriedoutinaccordancewithIAS33, “Earnings per Share”.

TherearenodilutiveinstrumentsintheCompanyandsobasicanddilutedreturns/(losses)arethesame.

 

8 FAIRVALUEHIERARCHY

The methods of fair value measurement are classified into a hierarchy based on reliability of the information used to determine the valuation.

Level1 – Quotedpricesinactivemarkets.

Level 2 – InputsotherthanquotedpricesincludedwithinLevel1thatareobservable(i.e.developedusing market data), either directly or indirectly.

Level3 – Inputsareunobservable(i.e.forwhichmarketdataisunavailable).

ThetablebelowsetsouttheCompany’sfairvaluehierarchyinvestmentsasat30June2023.

	Level1 £’000	Level2 £’000	Level3 £’000	Total £’000
Asat30June2023(unaudited)
Investments	93,155	–	19,660	112,815
Derivatives	–	1,259	–	1,259
Asat31December2022 (audited)
Investments	76,945	–	16,864	93,809
Derivatives	–	4,200	–	4,200

 

9 PROVISIONS

Provisionsarerecognisedwhenapresentobligationarisesfrompastevents,itisprobablethattheobligation willmaterialiseanditispossibleforareliableestimatetobemade,butthetimingofsettlementortheexact amount is uncertain.

FulldetailsoftheperformancefeearrangementcanbefoundintheCompany’sAnnualReportfortheyear ended 31 December 2022.

.

 

Glossary of Terms

 

AlternativePerformanceMeasures(“APMs”) MeasuresnotspecificallydefinedundertheInternational FinancialReportingStandardsbutwhichareviewedas

particularlyrelevantforinvestmenttrustsandwhichthe

Board of Directors uses to assess the Company’s performance.Definitionsofthetermsusedandthebasis of calculation are set out in this Glossary.

 

Discount/Premium(APM)

Adescriptionofthedifferencebetweenthesharepriceand thenetassetvaluepershare.Thesizeofthediscountor premiumiscalculatedbysubtractingthesharepricefrom thenetassetvaluepershareandisusuallyexpressedas apercentage(%)ofthenetassetvaluepershare.Ifthe sharepriceishigherthanthenetassetvaluepersharethe resultisapremium.Ifthesharepriceislowerthanthenet asset value per sharethe shares aretrading at a discount.

 

NetAssetValue(“NAV”)PerShare

The value of the Company’s assets, principally investments made in other companies and cash held, minus any liabilities. The NAV is also described as “shareholders’ funds”. The NAV is often expressed in pence per share after being divided by the number of shares that have been issued. The NAV per share is unlikelytobethesameastheshareprice,whichisthe price at which the Company’s shares can be bought or soldbyaninvestor.Thesharepriceisdeterminedbythe relationship between the demand for and supply of the shares.

 

NAVTotalReturn(APM)

The theoretical total return on shareholders’ funds per share, reflecting the change in NAV assuming that dividendspaidtoshareholderswerereinvestedatNAVat the time the shares were quoted ex-dividend. A way of measuring investment management performance of investmenttrustswhichisnotaffectedbymovementsin the share price.

 

	30 June 2023 (unaudited)	31December 2022 (audited)
OpeningNAV	129.8p	155.7p
Increase/(decrease)inNAV	21.7p	(25.9)p
ClosingNAV	151.4p	129.8p
%Increase/(decrease)inNAV	16.6%	(16.6)%
Impactofdividendreinvested	0.3%	0.1%
NAVTotalReturn	16.9%	(16.5)%

 

SharePriceTotalReturn(APM)

Sharepricetotalreturntoashareholder,onalasttraded price to a last traded price basis, assuming that all dividendsreceivedwerereinvested,withouttransaction costs, into the shares of the Company at the time the shares were quoted ex-dividend.

 

	30 June 2023 (unaudited)	31December 2022 (audited)
Opening share price	89.0p	112.0p
Increase/(decrease) in share price	7.5p	(23.0)p
Closingshareprice	96.5p	89.0p
%Increase/(decrease) in share price	8.4%	(20.5)%
Impactofreinvested dividends	0.4%	0.2%
SharePriceTotalReturn	8.8%	(20.3)%

 

OngoingCharges(APM)

OngoingchargesarecalculatedbytakingtheCompany’s annualisedoperatingexpensesexcludingfinancecosts, taxationandexceptionalitems,andexpressingthemas apercentageoftheaveragedailynetassetvalueofthe Companyovertheperiod.Thecostsofbuyingandselling investmentsandperformancefeesareexcluded,asare interest costs, taxation, costs of buying back or issuing shares and other non-recurring costs. These items are excluded because if included, they could distort the understanding of the Company’s performance for the period and the comparability between periods.

 

	30 June 2023 (unaudited) £’000	31December 2022 (audited) £’000
Totaloperating expenses	1,000	2,018
Totaloperatingexpenses (annualised)	2,000	2,018
AverageNAVduringthe period/year	112,658	111,560
OngoingCharges	1.8%	1.8%

 

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