Factsheet Commentary : June 2021

During the month, HeiQ announced the acquisition of Life Material Technologies, a business specialising in bio-based antimicrobials and surface hygiene, for an initial cash consideration of $6.45m. This acquisition builds on HeiQ’s acquisitions of Chrisal and RAS Materials earlier in the year, allowing the company to further broaden its range of antimicrobial solutions in applications outside of textiles. This company has a long runway ahead of it. 

We also heard from Liontrust, who reported their full-year results for the period ending 31 March 2021, which showed a continuation of the very positive trend of recent years. Revenue has increased at a compound annual growth rate of 28% over the last 5 years and now stands at £175m. In FY21, adjusted profit before tax increased to £64m, up 69% on the prior year and assets under management stood at £31bn, up 92%. We run an asset management business ourselves, so we readily appreciate such excellent performance. CEO John Ions and CFO Vinay Abrol are a first-rate duo, who are executing superbly on their buy and build strategy. Through our shareholding, we continue to benefit from their thoughtfulness. It would be silly to book gains now; we continue to run our profits. 

Russian Doll Investing: Given the experience of the team, we have the skills in-house to value a wide range of businesses. One area we like to invest in is sum-of-parts opportunities – especially if we can invest at a discount before the market wakes up to the embedded value that we have identified. 

Such situations can provide a good margin of safety if our assessment of hidden value is accurate. Our holding in Open Orphan provides a good example. Having followed one of its acquisitions, Venn Life Sciences, for a number of years, we took the decision to invest in Open Orphan in May 2020, at a price of 11p. In the past, founder Cathal Friel had shared his plans on extracting value from noncore assets via spin-offs and it is a delight when managements actually deliver on their promises. The proposed spin out of Poolbeg Pharma announced in midJune represents a first step along this journey; in the coming years we expect more Russian dolls to emerge. The current price hovers around 30p but again, there is nothing more to do except exercise some patience. 

Many investors, after having done the hard work of identifying a great company, often cash out too soon because, psychologically, it feels good to book profits. Conversely, when they make a mistake, they continue to hold on, hoping to eventually be able to get out at breakeven. Our view is different: we like to run our winners, while trying to cut our losers. Very much like a watchful gardener, we water our flowers and pull up the weeds.

Sterling Investments Management Ltd
Lynwood House 2-4 Crofton Road,
Orpington, England, BR6 8QE

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