Kings Arms Yard AGM 2019

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Kings Arms Yard (KAY) AGM

This year’s Kings Arms Yard VCT AGM was held on Monday (May 21st 2019) starting at 11.00. The venue was the same as the previous eight AGMs since Albion took over as manager in 2011: The City of London Club, 19 Broad Street, London, EC2N 1DS. Sadly this is the last year they will hold it at this excellent venue due to a building refit, so next year it will be held at Albion’s new offices in Farringdon.

The Chairman Robin Field (RF) began by welcoming shareholders to the meeting and outlining the running order which started with a portfolio review by the Manager (including Q&A), we then had the formal AGM which was followed by a presentation by Steve Turley, the CEO at Perpetuum (one of the Spark/Quester legacy investee companies) and then finally lunch.

The Annual Report for year ending December 31st 2018 can be found here:
https://www.albion.capital/sites/defaul ... %20web.pdf

The IMS (Jan 1st to March 31st 2019) was also released on Tuesday, this reported NAV at 23.38p/share (on March 31st), which was an increase of 0.71p/share (3%) from March the previous year.
https://www.investegate.co.uk/kings-arm ... 4228H3820/


Managers Presentation

Robert Whitby-Smith (RWS) and Will Fraser-Allen (WFA) gave the managers presentation, most of the information presented can be found in the annual report.
Since taking over the management of the VCT eight years ago, the IRR has been 9% per annum, this performance is within the first quartile for all VCTs over the same period. For the year ending Dec 2018, the total returns (2.38/share) exceeded the dividend payment (1.2p/share) by1.18p/share. A significant part of the increase was due to uplifts in two of the Care homes (Active lives) Egress and Quantex.
There were 7 new investments and 5 follow on investments. Notable exits were the sale of Grapeshot to Oracle (10X multiple) and Oxford Immunotech (through share sales on Nasdaq). There was a fundraising for £8m which launched in January and closed fully subscribed in April.

Q&A:

(Note: All Q&As are paraphrased, they are not a verbatim account)

Q: You seem to have a lot of legacy investments from the days when Spark managed the VCT, many of them seem to have very little value, when are you going to get rid of them?
A: Legacy investments constitute around 15% of the portfolio, but most of the value is concentrated in just three legacy companies which are in the top ten (Antenova, Perpetuum and Anthropics). We have written a number of these down to a fairly negligible value (these are useful to retain for VCT qualification purposes).

Q: You mentioned all the companies that have done well, but haven’t mentioned the two which have done quite badly: Edo and in particular Elateral which has £10m in liabilities and you are charging them 22% interest on a loan.
A: Edo was a legacy investment which is now in administration. In the case of Elateral, they lost one big customer during the year and they gained two smaller ones, although these two new customers did not fully compensate for losing the big one. The company has no bank debt. £6M of the liabilities are in shareholder loans, the interest is not paid in cash, it is just rolled up and will be settled on exit.

Q: Could you tell us a bit more about one of your new investments, Arecor, how long do you intend to hold and what sort of exit do you envisage?
A: It is a new investment, so it is difficult to say how long we will hold, but it could be sold in a trade sale to a Pharma company which specialise in endocrinology.

Q: How long do you intend to continue to hold the asset backed investments, in particular the RE assets and the care homes? Are you under any time pressure from HMRC to sell out and reinvest in riskier assets?
A: We are not under any pressure to sell from HMRC, we typically hold investments for 7 – 10 years, the Renewable Energy assets seem like the sort of investments we might hold for longer.

Q: The regular annual management fee seems to be quite fair (circa 2%), but the performance fee seems rather high and adds significantly to the overall fees. Are you planning to look at the performance fee again now the portfolio has largely transitioned to Albion’s own investments?
A: When the directors were seeking a new manager to replace Spark back in 2011, all of the candidates were asking for a performance fee. We recognised that they would be taking on a basket case and there would be write downs, so we did not want to set the criteria until there was some stability in the portfolio. When we did agree the performance fee (in 2013) it was set in the middle of the market in terms of hurdles and quantum. All of the directors are shareholders in the VCT, so our interests are aligned with your interests.

Q: Much of the uplift leading to triggering the performance fee is due to unrealised gains. Surely the performance fee should only be on realised gains?
A: We understand that concern, but this is standard practice and it seems to work.

Q: Could you put a chart in the accounts showing realised and unrealised gains since Albion assumed management in 2011?
A: We hear what you are saying, but the AR probably already has enough charts already.

Q: Are you sure the dividend target of 5 – 6% of net assets is sustainable given you are switching the portfolio to more risk, longer term investments?
A: We intend to build a more diversified portfolio in respect to sectors and stages of development; hopefully we will find a few more investments to match the performance of Grapeshot.

Formal AGM

For this year’s AGM there was a fairly standard list of resolutions and there were no questions asked on any of the specific resolutions. Most were passed with a majority of 95%, the only resolutions attracting less support were Resolution 9: disapplication of pre-emption rights (93.92%) and Resolution 10: share buybacks 90.85)%.


Perpetuum

https://perpetuum.com/

Kings Arms Yard currently own 11.8% of the equity in Perpetuum (valued at £2.268m) having first invested under the previous manager Spark (over eight years ago). The company was founded in 2004 and they currently employ 70 staff. Their focus is on selling sensors to the rail industry for detecting vibration patterns in wheels axles, gearboxes etc. which are then fed into alogrithms designed to predict likely component failure. The sensors generate their own power through harvesting vibrations, so there is no need for an external power source, or battery. There are currently 15K sensors deployed with another 10K ordered by customers. To date, there have been no breakdowns for any faults monitored by Perpetuum sensors and they are able to predict component failure five months in advance. Competitive systems use audio and/or heat sensors to predict wear (and failure) and use either on board battery powered systems or trackside systems powered by mains electricity.

Approximately 30% of the problems are with the bogie (rather than the carriage or the track), the sensors can also be employed to get a measure of ride quality (Virgin Trains have used this application).

Historically the business has been UK centric and focused on passenger services, but going forward the plan is to expand further geographically and also expand into the freight business which is big in N America.

Perpetuum currently have alliances with a number of big industry suppliers, for example Knorr-Bremse, Schaeffler and Siemens. They derive revenue from capital sales of the sensors and through an ongoing servicing / monitoring fee (SaaS)

Q&As:

Q: What is the IP situation for your technology?
A: There are patents on the hardware and “know how/trade secrets on the software

Q: Will you look at other industries, such as automotive and shipping?
A: Yes, but that is longer term, for now we will focus on rail.

Q: Why were revenues dropping in the UK last year?
A: This was mainly due to the franchise cycle, operator spend tends to be at the beginning of the franchise not the end.

Q: How would you describe your relationship with Albion?
A: Very supportive.

Q: Are all the data analytics conducted in the UK?
A: Yes, and we charge customers via a SaaS model

Q: You mentioned competitive systems, but you didn’t tell us who they were, or what they would say about the virtues or their systems vs Perpetuum?
A: There are two main competitors worthy of mention:
SKF (their main business is bearing manufacture)
https://www.skf.com/uk/products/index.html
They have battery powered on board sensors. They have only sold a few hundred sensors and the battery only lasts for around 3 years. Their main sales pitch is likely to be that the initial cost would be cheaper than Perpetuum.
Wabtech
https://www.wabtec.com/business-units/wabtec-rail
This is a trackside system, but it is not terrible reliable and will not predict all the failures. They will probably pitch it on price (it is relatively cheap) and that the reliability is improving and will be better in the future.

Q: Are you profitable?
A: Historically No, but we forecast we will reach profitability in Q4 2019

Q: Are their big regulatory hurdles to overcome with these systems?
A: No it is remarkably easy, our system monitors every three minutes, it has built in failure notification if the sensor fails to work and it improves safety and reliability for the operators.

Q: This has been a very slow burn investment. Why has it taken so long?
A: We originally focused on energy harvesting from vibration, but we didn’t want to be at the bottom of the supplier chain, we wanted to move up the value chain into application and a SaaS revenue model, hence the current strategy.

Q: How does the vibration info get back to the data analytics centre?
A: It is all totally wireless. Data is sent from sensors to a data concentrator on board the train and then via the mobile network to the data analytics centre.

Q: What happens if a sensor fails?
A: It is self diagnostic, so the software will tell you if a sensor fails. Even if a sensor was down for two weeks, it would probably have no practical consequences as the system gives (on average) 5 months’ notice of an impending component failure.

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Timbo
I was unable to attend this AGM which I had been planning to and am delighted to have read this very informative post.
Many thanks