Monthly Growth Fund Newsletter
Issue 25 - September 2010

Downs and Ups? 

So far this year your fund has not performed that well. As a unit holder myself I share your frustration. Over almost 3 years our record is excellent but 2010 has not (yet) been an annus mirabilis. Now we are not giving up. As it happens we are optimistic about the prospects for the fund. But Rome was not built in a day we need to show some patience. So why has the fund not flown as it did last year?

1. We have not really changed our style or approach to investing. We are still long termists. We still seek long term value plays. So nothing has changed much there.
   
   
2. However we are overweight in gold stocks and gold stocks have not had a great year. This has held us back. Do we think gold and gold stocks are a bad bet? No. The argument that inflation will take a grip grows stronger by the day and we see gold heading sharply higher over the next few months. When it does your fund will prosper.
   
   
3. We defensively positioned the fund with a good pile of convertible loan notes earlier this year. These offer us a good income but even when the underlying equities head higher they are still marked at par and so until we convert (and we are in no rush as we are cautious souls) then the headline performance is held back. That is something we were aware off when making the call and we remain aware of. But in the long run the underlying value we are building up will show through.
   
   
4. No dodging the bullet - some of our investments have not performed as we might have hoped. In a small fund which is tightly held this has a clear impact. Where we recognise that value will not be delivered we fess up and sell. But where there is clear value we do not. So with bidders circling why should we sell First Artist, for instance? At 9.5p there is huge short term upside (if a bid emerges) and we would argue more if a bid does not emerge. So we do not sell but First Artist on its own has knocked 2p off the NAV in recent weeks. We expect to get all or most of that back in the very short term.
   
   
5. Most small cap funds invest mostly in FTSE 350 stocks or larger small companies.  We invest in Microcaps. To date during 2010 microcaps have underperformed the larger small caps. Since when was a FTSE 350 stock  a small cap anyway? The valuation gap is now getting to the level where microcaps  must start to be re-rated or they will simply be  hovered up in all paper offers anyway. That process will on its own start the re-rating.

So what now? Frankly it does not take much movement from a number of key holdings to shift the NAV either way. We continue to buy shares in companies that are fundamentally cheap. That is not in new companies but simply adding to our holdings in existing companies. As such during the past month we have increased our holdings in ILX and Intandem when lines have become available and also in First Quad Capital where we await a fairly imminent trading statement with interest.

September will be a hectic month on that front. We are also expecting news from, among others, ILX, Northern Bear, Nexus, Avisen, IQ, Empresaria, K3 Business Technology, RSH, RAM and Symphony. Within 4 weeks it should be very clear to one and all whether our assessment that single digit PEs are overly harsh proves valid. Our routine and very regular company contact leaves us confident that our judgement will be vindicated and that this will be reflected in the NAV leaving those of us who have used NAV weakness as an opportunity to add to our holdings feeling more smug than usual.

Tom Winnifrith
Senior Fund Manager

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email growthfund@t1psim.com

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email growthfund@t1psim.com

Now is the Time to Buy Growth Fund Units - How to Do it!

1. Contact your broker. Most brokers offer the chance to buy units although few can match our initial rate of 2.5%. But call your broker. If your broker will not deal please call Spiros Kurtidis on 0207 562 3386 and he will try to rectify the situation.

2. Deal through t1ps and The Share Centre at the initial fee rate of 2.5%. If you want an application form email growthfund@t1psim.com go to www.t1psim.com.

3.Once you have made an initial investment (of as little as £1000) you can set up a monthly standing order with The Share Centre to drip feed further cash (as little as £25 a month) into the fund. All existing fund holders can set up such an order.

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email growthfund@t1psim.com


Benchmarking

Total return, bid to bid line chart from 22/11/2007 to 03/09/2010 from UKUT and OEICs Universe

Source: Financial Express
Past performance is not a reliable indication of future results

Total return, bid to bid line chart from 03/09/2009 to 03/09/2010 from UKUT and OEICs Universe

Source: Financial Express
Past performance is not a reliable indication of future results

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email growthfund@t1psim.com

Three yet to deliver!

It is easy to always talk about your winners. But below we look at 3 investments that are yet to deliver buy which we expect will deliver so we hang on and in the case of 2 of the three we have bought more.

On 24th August 2010, First Artist delivered a disappointing Interim Report for the six months ended 31st May 2010, with a headline first half loss of £5.1 million but that was mainly non operating and non cash numbers. The statement detailed how the business continued to be impacted by the global recession, and had struggled through a very challenging period. Joint revenue across both divisions, Media and Events, totalled £36.5 million, with the Media division generating 96.5% of total revenue. Total adjusted EBITDA was at £0.284 million. But added to that was a foreign exchange loss of £1.182 million and a series of non cash write-down’s which First Artist was forced to make under AIM rules because - as we learned on the 10th August 2010 - the Group is involved in talks which may or may not lead to an offer being made for the Company.

 Due to a minor breach of banking covenants the entire Group debt is now classified as a current liability in that in theory the bank could pull the plug. But why would it on a technical breach. First has that situation under control. The shares now trade at 9.125p a Market Cap of £2.7m and an Enterprise Value of c£20 million.

Although, the high level of debt undoubtedly has the market extremely concerned, the Mezzanine Loan of £3.7m, plus rolled up interest costs of £347,000, due 31st August 2010, has been extended to 28th October 2010. First has explained how a recalibration of existing banking covenants is required, plus a restructuring of Group debt. The bottom line is that First is in play. We reckon that any bidder is really only after SpotCo and Dewynters and will have to pay a price of at least 15p per share but plausibly a lot more for the equity as well as taking on the debt. If no bidder emerges, with an underlying EBITDA of £5-6 million likely to be generated during the next year by First, it can simply clear its debt over time (4years). We are happy to stay invested for either outcome.

AIM listed Avisen, the business and technology consultancy Group, has been in the headlines of late with a board room bust up allowing us to buy vast numbers of shares on the cheap.

Avisen agreed on 11th March 2010 to acquire Xpolite through an all share consideration of £11.4 million. Xploite’s main operational arm is Storage Fusion, a SRA software business focusing on storage analytics solutions. A subsequent consolidation of the two respective boards entailed with Ian Smith, Anthony Weaver, and Michael Frank, the Xpolite management, joining the Avisen board. What followed was a complete shake down of the amalgamated board, seeing the Xploite management subsequently leave to pursue alternative business. This rocked investor sentiment which was compounded by the maladroitly worded results for the year ended 31st January 2010, released on 30th July 2010. The results detailed and contained all the costs associated with the acquisitions throughout the year, plus the loss on the disposal of the South African non core business, announced on 14th July 2010.

The results showed a notable increase in revenue to £7.2 million, but were undeniably hurt by the carelessly worded statement that the Group was trading in line with management expectations on a monthly basis. Following an increased pre tax loss of £3.1 million the wording of this statement was clearly unnerving, and made no attempt to satisfy shareholders that the Company was creating healthy revenue. Revenue will be further boosted once either Storage Fusion is fully consolidated into the business, or sold. The aligned Board’s primary focus is now scalable organic growth, taking advantage of value adding acquisitions if the opportunity presents itself.

The directorate changes sparked a topple in the Company’s share price from 8.525p, with the Final Results compounding the misery, leaving the share price currently resting at 4.25p, equating to a market cap of £9.57 million. We are confident that the recent shake up and results do not convey the real picture and prospects of the increasingly consolidated business and technology service provider. The results contained £730,000 non cash charges for share based payments, as a number of options have been granted and vested, which hurt the bottom line even more.

What has been missed by the majority of investors is that the company has added to it’s Blue Chip clients, for example Tesco, and is expected to receive £2.15m as a deferred consideration associated with the earlier Anix disposal. We believe that the most recent results do not demonstrate the fact that all acquisitions have been integrated into the core business and in our opinion the Company, in it’s current position is very capable of delivering £2 million+ of pre tax profits this year. We believe Avisen to have effective net cash of c£4 million, taking into account the Anix deferred consideration. We also believe that Storage Fusion will be sold, and we see a price of £5-7 million as realistic, but there is no rush to sell this asset. So at today’s price the ex-cash PE is effectively zero. That is too low a multiple - we continue to feast.

Your Fund has recently taken advantage of the massively discounted £3.6m fundraising announced by Southern Bear on the 17th August 2010, as a result of a need to restructure the Group's balance sheet. The fundraising followed disappointing year ended 31st March 2010 numbers announced on the same day, which detailed the extent of the Company’s balance sheet issues. The headline loss of £17.16 million was largely a non cash affair and that coupled with the majorly discounted fundraising saw the share price fall sharply.

Last year's loss reflects the sheer uselessness of the former management team. Nigel Wray has since moved in, axed non core activities, slashed costs and trading seem pretty strong. Wray explains how the main focus of the newly restructured Group will be upon the robust, legislation led support service and fire prevention markets. This focus will be driven through the now core businesses of BGC Ltd, Fenhams Ltd, and Intumescent Protective Coatings Ltd. The Board has established a direct interest scheme with the main management figures of the three core businesses being integrated as significant shareholders, creating a vested interest for all involved, with opportunities to increase holdings when respective targets are met. This continues on from Wray’s own loan of £2.2m to the Group as announced on the 14th June 2010. The group is now changing its name to Environ and undertaking a  40-1 consolidation so the current open offer (where we took up rights) is effectively at 4p. With all debt now cleared  at 0.35p (call that 14p) the market capitalisation is £19.25 million: for a business that should be capable of doing £3 million plus in net income per annum that is far from demanding. So we have taken up our rights in full.

Ross Jones and Tom Winnifrith

If you have any questions about investing in the SF t1ps Smaller Companies Growth Fund or if you want a simplified prospectus and an application form please visit our website at www.t1psim.com or email growthfund@t1psim.com

Risk warning: