Horizon Discovery AGM and Chrysalis VCT

Yesterday I attended the Annual General Meeting of Horizon Discovery Group (HZD) in Cambridge. This is a new holding for me, and I don’t often buy shares in companies that are not reporting profits, but I thought it was worth going along to learn some more about the business. The company’s primary focus is on cell manipulation tools (gene editing, gene modulation) which they sell to drug development companies et al. I am not sure I have great understanding of the science but they recently had an offer for the business from Abcam who should understand it, particularly as they shared a non-exec director, Jonathan Milner, until recently. The offer from Abcam was rejected on the basis it was not good enough. The board of Horizon thought it was worth twice as much on a revenue multiple basis looking at comparable companies so the offer was withdrawn. Analysts forecasts are for near breakeven on an adjusted basis this year so it is making progress, but it’s still valued at more than seven times revenue.

However, I shouldn’t need to tell you that this area of medical science is a rapidly developing one with great prospects for innovatory cures of genetic defects and more focused drugs to match a person’s DNA profile.

With minimal shareholders present, it was a short meeting and only I asked any questions, so it will be a short report. One question I asked is why the company loses money on services but makes a profit on product sales. See segmental breakdown on page 66 of the Annual Report. As I said at the time, normally it’s easier to lose money on product sales because with services if they are not profitable you can simply stop providing them. In other words, this was an unusual profile. The Chairman, Ian Gilham, initially denied they lost money on services (it’s over £10 million excluding even “leveraged R&D”), but the CFO then explained that the services are often development projects for customers where they retain the IP, i.e. the customers are paying to some extent to develop the products. That is always a good business model.

I asked why the former CEO had recently left and the only answer I got was that he probably wanted to work for a smaller company while Horizon is now quite large after the recent acquisition of Dharmacon. That will transform the financial numbers. The new CEO is Terry Pizzie who has worked for the company since February 2017.

I was favorably impressed on the whole but I did comment that even if it is an AIM company they could do with having a Remuneration resolution on the agenda. Their pay scheme is actually quite a simple one, and bonuses last year were quite limited, so I would have voted in favour of it anyway.

A long-awaited announcement yesterday on what they plan to do to tackle some strategic issues was from Chrysalis VCT (CYS). This venture capital trust has been somewhat unusual in being self-managed and having no discount control mechanism, i.e. no active buy-back policy. As a result of the latter combined with decent fund performance the trust was offering a very high dividend yield to those investors brave enough to buy shares in the market (like me). Some of the directors took advantage of that situation in the past, although not recently. However the company is facing some possible problems in that the size of the trust is tending to run down due to the high dividends paid out, and the changes to the VCT rules might make it difficult to follow their past investment strategy.

So yesterday they announced that they were implementing an “active buy-back” policy with a target discount to NAV of 15%. The share price rose on the day as a result. Even after that the yield is 7.6% (tax free) according to the AIC. The buy-back policy might help if they wished to raise more investment funds, but they also say they are likely to make “further distributions of capital” so it looks like the fund will run down further in size instead.

The half year results given in the same announcement were somewhat pedestrian (NAV up 1.6%) like many VCTs I hold of late. But anyone considering the shares needs to look at the large holding of Coolabi in the portfolio.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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Chrysalis VCT AGM Report

Last week (27/2/2018) I attended the Annual General Meeting of Chrysalis VCT Plc (CYS) in the City of London. Here’s a brief report on the event. There were about half a dozen ordinary shareholders present, the three directors and fund management representatives despite the difficult travel conditions.

Chrysalis is of course a venture capital trust but somewhat different to many VCTs. It has a good performance record in recent years but does not undertake share buy-backs. As a result the shares trade at a high discount to NAV (about 20% at the time of writing). With a dividend yield of about 8% (and no tax on VCT dividends), many of the current shareholders may have purchased their shares in the market although some of my holdings date back to the year 2000 when I claimed capital gains roll-over relief.

The company is relatively small in size for a VCT, and the new VCT rules which require such companies to focus on early stage investments are causing the board some concerns apparently. There is reference in the Annual Report to “a review of the options available to the Company” and there was considerable discussion on that topic at the AGM.

Should the company wind-up? Or simply become an ordinary investment company rather than a VCT? Or perhaps look for a merger with another VCT? As regards the latter possibility, this company seems to be getting into the same situation as Rensburg AIM VCT which eventually merged with Unicorn but rather late in the day and after a lot of encouragement from me to take action. I likewise encouraged the directors of this company to make decisions fairly soon on the future of the company.

One matter discussed at the AGM was the company’s large investment in Coolabi where they hold debt repayable in 2020. Having looked at the Annual Report of that company available from Companies House before the meeting, I have a pretty jaundiced view of the value of that business. Although Chrysalis increased the valuation of their loan in the accounts, they actually wrote down their equity stake to zero it transpired (holders of Edge VCT who have a big equity stake in Coolabi should note). However, fund manager Chris Kay did make some very positive comments about the value of the intellectual property in Coolabi.

Chris also commented on the difficulty of making new investments at present with small companies now valued very highly and lots of competition for the good ones. The new VCT rules are making it more difficult and it seems that there are still long delays on getting pre-approval (advance clearance) from HMRC (now 3 to 6 months).

Obviously what the company decides to do affects different shareholders in different ways, depending on their tax status, whether they claimed roll-over relief on investment, and their desire to convert their holdings into cash. The company may do a survey of shareholders but they are not sure they will get a good response.

Those present gave their views on the situation and there were some differences. I plan to write to the Chairman giving my views in more detail. For example, I will probably suggest a “shareholder committee” that might act as a consultative group.

If you are holding shares in Chrysalis, are interested in discussing the future of this company, or would like a copy of my letter to the Chairman, you can contact me via this web page (my company’s web site): http://www.roliscon.com/contact.html

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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