UIL — Confident in portfolio companies’ strong prospects

UIL (LSE: UTL)

Last close As at 29/02/2024

GBP1.16

3.50 (3.13%)

Market capitalisation

GBP94m

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Research: Investment Companies

UIL — Confident in portfolio companies’ strong prospects

UIL Limited (UIL) is managed by Charles Jillings at deep-value investor ICM. The portfolio reflects his three medium-term views: the world’s financial markets are over indebted; technological change offers strong investment upside; and emerging markets offer better GDP growth opportunities than developed markets. Despite a difficult macroeconomic backdrop, characterised by the war in Ukraine and central banks raising interest rates to combat higher inflation, the manager has a high degree of confidence in the prospects for UIL’s investee companies. He believes that they are well placed to trade through the current uncertain period and emerge the other side as even stronger businesses.

Melanie Jenner

Written by

Mel Jenner

Director, Investment Trusts

Investment Companies

UIL

Confident in portfolio companies’ strong prospects

Investment companies
Global value

9 March 2023

Price

142.0p

Market cap

£119m

Total assets

£336m

NAV*

226.3p

Discount to NAV

37.3%

*Including income. At 6 March 2023.

Yield

5.6%

Ordinary shares in issue

83.8m

Code/ISIN

UTL/BMG917071026

Primary exchange

LSE

AIC sector

Flexible Investment

Financial year end

30 June

52-week high/low

246.0p

142.0p

NAV* high/low

386.4p

224.8p

*Including income

Net gearing*

77.2%

*Including zero discount preference (ZDP) shares.
At 28 February 2023.

Fund objective

UIL’s objective is to maximise shareholder returns by identifying and investing in investments worldwide where the estimated underlying value is not fully recognised. The company’s investment performance is benchmarked against the broad UK equity market. UIL is a member of the AIC flexible investment sector.

Bull points

High-conviction portfolio of undervalued assets.

Regular quarterly dividend payments and an attractive yield.

Scope for a higher valuation given large discount to NAV.

Bear points

Levered strategy means losses are amplified in a falling market.

Modest 20% free float – the majority of UIL’s shares are closely held.

Relatively high concentration risk as the largest holding is c 19% of the fund on a look-through basis.

Analyst

Mel Jenner

+44 (0)20 3077 5700

UIL is a research client of Edison Investment Research Limited

UIL Limited (UIL) is managed by Charles Jillings at deep-value investor ICM. The portfolio reflects his three medium-term views: the world’s financial markets are over indebted; technological change offers strong investment upside; and emerging markets offer better GDP growth opportunities than developed markets. Despite a difficult macroeconomic backdrop, characterised by the war in Ukraine and central banks raising interest rates to combat higher inflation, the manager has a high degree of confidence in the prospects for UIL’s investee companies. He believes that they are well placed to trade through the current uncertain period and emerge the other side as even stronger businesses.

Higher growth potential in emerging and developing economies

Source: International Monetary Fund World Economic Outlook January 2023, Edison Investment Research. Note: e is estimated, p is projected.

The analyst’s view

UIL is unique in that it offers investors a differentiated portfolio structure compared with other global funds; it has c 45% weighting in financial services businesses and a c 40% allocation to Australian companies. Holdings are a mix of platform companies (collective investment vehicles, c 70% of the fund) and direct investments (c 30%). UIL suffered a period of weak relative performance in 2022, as investor preference shifted away from growth stocks in a rising interest rate environment; unfortunately, this has negatively affected the company’s longer-term record. However, patience should be rewarded as the manager’s approach of buying undervalued niche assets has proved to be a successful strategy. Data from UIL show that since the fund’s inception in 2003 until the end of H123, the company’s NAV total return has compounded at an annual rate of 8.9%, which compares with an annual 7.3% total return for the broad UK stock market.

Valuation: More than meets the eye

UIL’s headline share price discount to cum-income net asset value (NAV) of 37.3% does not tell the whole story, as some of its platform companies are also trading at a discount, thereby affording UIL’s shareholders a ‘double discount’. For example, at end-February 2023, Zeta Resources (15.1% of the fund) was trading at a 24.6% discount to net tangible assets and Utilico Emerging Markets Trust (12.2% of the fund) was trading at a 13.7% discount to NAV.

Market outlook: A longer-term perspective is warranted

Many investors will be pleased to draw a line under a difficult 2022, where in the United States (the largest global stock market), the bellwether S&P 500 Index declined by c 20% and the technology heavy Nasdaq fared even worse, falling by around a third. However, in 2023, the macroeconomic backdrop remains very uncertain. Corporate earnings are being negatively affected by higher interest rates and rising input costs, while consumers are struggling with an increased cost of living. The war in Ukraine continues to place upward pressure on energy and food prices and is dampening investor sentiment. China’s U-turn on its zero-COVID policy is a positive development for global growth, but multinational manufacturers have been reducing their reliance on China, by bringing their operations closer to home, which can increase costs, thereby adding to inflation pressures. Central banks in the developed world are actively raising interest rates to combat higher prices, which increases the risk of recessions. In an uncertain world, investors are likely to be better served by adopting a longer-term perspective. Focusing on high-quality companies that are trading on reasonable valuations should prove beneficial for when the macroeconomic clouds clear, given that over the long term, share prices are driven by company fundamentals rather than stock market ‘noise’.

Exhibit 1: Market performance and valuation

Performance of indices (last 10 years, £)

Datastream indices forward P/E multiples (at 7 March 2023)

(x)

Last

High

Low

10-year
average

Last as % of
average

UK

11.1

15.7

9.4

13.5

82

Developed markets

15.8

20.7

12.7

15.9

99

Emerging markets

10.5

16.6

10.5

13.1

80

World

14.9

19.9

12.5

15.4

96

Source: Refinitiv, Edison Investment Research

The fund manager: Charles Jillings

The manager’s view: Central banks will tame higher inflation

Jillings says that inflation has been exacerbated by the war in Ukraine, especially for energy and food prices, while a tight labour market is also adding to cost pressures. He comments that central banks face the challenge of bringing down inflation when there is full employment. The manager suggests that if employment data remain firm, inflation will remain elevated and central banks will have to keep interest rates higher for longer. Going into 2023 Jillings thought that inflation would moderate by the middle of the year and then roll over in the third or fourth quarter; this view has now been pushed out by a quarter. He believes that central banks will prevail, inflation will come down and within two to three years, will be behind us.

The manager explains that China’s zero-COVID approach could not square up with the country’s economic growth aspirations, and there were protests from all quarters of the country against the strict policy. He says that the speed of the policy pivot was surprising, as was the move to complete tolerance of COVID. Although individual fatalities are tragic, herd immunity developed in a month once the Chinese economy had reopened, and activity is now back to more normal levels. Jillings reports that Chinese metro usage is now above pre-pandemic levels; people have returned to work and the government is focused on wealth creation. While there is also a focus on wealth redistribution, the manager suggests that the Chinese authorities have the levers required to get the domestic economy growing again, including interest rate and housing market policies. Chinese GDP growth is targeted at 5% for 2023, so with weakness in Q123 due to lockdowns, activity should accelerate through the balance of this year.

Jillings says that as China’s economy reopens, there should be a step-up in demand for commodities such as copper and iron ore, and copper production is currently being affected by disruptions in Peru. In the medium term, he believes that there should also be support for commodity prices and producers due to a multi-year period of underinvestment.

The manager comments that, in general, investee companies are experiencing strong top-line growth. During the global pandemic company margins expanded but are now being squeezed by higher input prices. Jillings says that the corporate response will be to tackle costs and with labour being a large part of these, he expects unemployment to rise. The manager opines that as and when there is no longer full employment, inflation should moderate, and central banks will have achieved their desired outcome.

Jillings highlights the devastating war in Ukraine. He believes that at some point both parties will find that support for, and the ability to continue, the war will weaken, so peace negotiations will happen. The manager suggests that there could be a series of false starts, but there has been too much invested in the war by both sides to not find a resolution. He believes that the conflict could last a few more months, but neither Russia nor Ukraine will likely want to be at war throughout another winter. Jillings says that there are neutral countries that could broker negotiations, but while the conflict continues it is very disruptive to asset markets.

Current portfolio positioning

At end-February 2023, UIL’s top 10 holdings made up 91.4% of the fund, which was a lower concentration compared with 96.1% a year earlier; five positions were common to both periods. However, the four top holdings (Somers, Zeta Resources, Utilico Emerging Markets Trust and Allectus Capital) are platforms with a portfolio of underlying investments, so UIL’s fund is more diversified than these numbers suggest.

Exhibit 2: Top 10 holdings (at 28 February 2023)

Company

Country*

Sector

Portfolio weight %

28 Feb 2023

28 Feb 2022**

Somers

Bermuda

Financial services investment holding co

37.5

39.0

Zeta Resources

Australia

Resources investment company

15.1

20.0

Utilico Emerging Markets Trust

UK

Emerging markets investment trust

12.2

15.2

Allectus Capital

Bermuda

Fintech investment company

7.1

5.1

Resimac Group

Australia

Financial services

6.3

N/A

West Hamilton Holdings

Bermuda

Property

4.5

N/A

The Market Herald

Australia

Financial services

4.0

N/A

Allectus Quantum Holdings

UK

Investment holding company

1.7

N/A

Littlepay

UK

Payments technology

1.6

N/A

AssetCo

UK

Asset and wealth management services

1.4

1.1

Top 10 (% of portfolio)

91.4

96.1

Source: UIL, Edison Investment Research. Note *Country of listing or domicile. **N/A where not in end-February 2022 top 10.

On a look-through basis, at end-February 2023, UIL’s top 10 positions made up 61.7% of the fund, with the top 20 at 75.3% and the top 50 at 88.2%. The three largest holdings were: Resimac (18.8%, held by UIL and Somers); Waverton Investment Management (12.7%, Somers); and Alliance Mining Commodities (4.8%, Zeta Resources).

The total number of positions including the platforms is c 35 and c 11% of the fund is held in unlisted investments (excluding loans to listed companies and listed companies classed as level 3 investments, which are valued using inputs that are not based on observable market data).

Following board approval, on 11 October 2022, UIL sold its holdings in unlisted ICM Mobility Group and Snapper Services (UK) for £45.6m to Somers. The consideration for the sale was satisfied through the transfer to UIL of Somers' holdings in West Hamilton Holdings (a Bermuda property holding company, listed on the Bermuda Stock Exchange), BNK Banking Corporation (an Australian banking group, listed on the Australian Stock Exchange) and WT Financial Group (an Australian financial advisory group, listed on the Australian Stock Exchange), which had an aggregate fair value of £23.3m; a cash payment of £13.6m; and a loan of £8.7m to UIL repayable by Somers. The cash payment contributed to UIL's repayment of the 2022 ZDPs on 31 October 2022.

Exhibit 3: Portfolio geographic exposure on a look-through basis (% unless stated)

Portfolio end-February 2023

Portfolio end-February 2022*

Change (pp)

Australia

39.4

33.5

5.9

UK

16.0

14.0

2.0

Bermuda

9.0

4.3

4.7

Asia

7.5

11.4

(3.9)

Europe (ex-UK)

6.5

6.7

(0.2)

Middle East/Africa

6.4

1.2

5.2

US

5.9

N/S

N/A

Canada

4.7

N/S

N/A

Latin America

3.8

4.2

(0.4)

New Zealand

0.8

1.4

(0.6)

Total adjusted for cash

100.0

100.0

 

Source: UIL, Edison Investment Research. Note: N/S is not stated separately. *At end-February 2022, North America made up 18.8% of the fund, with 4.5% classified as other – gold mining.

Exhibit 3 shows UIL’s geographic breakdown. It has a differentiated geographic exposure compared with other global funds, with Australia making up c 40% of the portfolio followed by c 15% in the UK. Year-on-year comparisons are not straightforward as classifications have changed during the 12 months ending 28 February 2023. The United States and Canada are now disclosed separately, whereas at 28 February 2022, North America made up 18.8% of the fund, with 4.5% classified as other – gold mining. Some of the other – gold mining assets were sold with the balance now classified within Middle East/Africa.

Exhibit 4: Portfolio sector exposure on a look-through basis (% unless stated)

Portfolio end-February 2023

Portfolio end-February 2022

Change (pp)

Financial services

45.3

39.0

6.3

Technology

20.8

18.5

2.3

Resources

14.1

18.0

(3.9)

Gold mining

2.7

4.5

(1.8)

Ports

2.5

3.4

(0.9)

Electricity

2.2

2.1

0.1

Renewables

1.6

1.2

0.4

Telecoms

1.1

1.9

(0.8)

Oil & gas

1.0

1.7

(0.7)

Water

0.9

0.7

0.2

Airports

0.9

0.8

0.1

Infrastructure investments

0.5

1.0

(0.5)

Other

6.4

7.2

(0.8)

100.0

100.0

Source: UIL, Edison Investment Research

Over the 12 months to end-February 2023, there is a notable increase in UIL’s financial services exposure (+6.3pp). The largest decrease is a 3.9pp decline in the fund’s allocation to resources.

Some of UIL’s top 10 holdings are recent additions to the list:

West Hamilton Holdings is a Bermuda-listed property investment and management company with commercial and residential property assets in Hamilton, Bermuda.

The Market Herald is an Australia-listed, multi-platform publisher and media company. It operates one of the largest digital business communities in Australia and Canada and, in September 2022, it acquired the online classifieds business, GCA Group, which has a portfolio of complementary brands: Gumtree, Carsguide and Autotrader. These three businesses reach approximately one in three Australians per month and have significant further potential for monetisation. Jillings believes that there should be considerable upside from cross-selling opportunities between the company’s business segments and that the firm is undervalued.

Allectus Quantum Holdings is an investment holding company set up to invest in Diraq, a quantum computing company seeking to develop a full-stack quantum computer based on electron spins in silicon. Diraq is building a value chain to open the transformational applications of quantum computing that require many millions to billions of qubits.

Littlepay provides fare pay systems to transport operators. Its technology enables travellers to tap to pay using credit cards such as Mastercard and Visa. The availability of a simple contactless payment method is linked to increased ridership and more frequent travel using public transit. Littlepay was founded in 2017, but already has over 250 customers globally and over 20,000 installed payment readers.

Performance: Tough period over the last 12 months

Exhibit 5: Five-year discrete performance data

12 months ending

Share price
(%)

NAV
(%)

CBOE UK All Companies (%)

MSCI AC
World (%)

MSCI Emerging Markets (%)

28/02/19

10.2

15.9

1.6

3.3

(6.3)

29/02/20

22.9

2.4

(2.1)

8.8

2.6

28/02/21

33.3

20.8

2.8

19.6

24.7

28/02/22

(9.2)

(3.3)

16.7

12.8

(6.6)

28/02/23

(35.0)

(31.6)

8.2

2.2

(5.7)

Source: Refinitiv. Note: All % on a total return basis in pounds sterling.

Exhibit 6: Investment company performance to 28 February 2023

Price, NAV* and index total return performance, one-year rebased

Price, NAV and index total return performance (%)

Source: Refinitiv, Edison Investment Research. Note: Three-, five- and 10-year performance figures annualised. *Monthly NAVs.

In H123 (ending 31 December 2022), UIL’s NAV and share price total returns of -6.5% and -12.6% respectively trailed the broad UK market index’s +5.1% total return. Part of the underperformance is due to the market index having a double-digit weighting in the energy sector, which performed very well in 2022, whereas UIL has no energy exposure.

Somers’ valuation declined by 14.8% in H123, (+10.8% including the August 2022 $4.55p per share dividend payment). Resimac’s share price declined by 10.9% due to net interest margin compression caused by its securitising funding model and higher interest rates. Net interest margins should rise when interest rates decline. Despite the current headwind, Resimac is generating strong cash flow and profits and the stock is trading on a mid-single digit P/E multiple. Waverton Asset Management is performing well, ahead of budget, in a challenging operating environment and its assets under management are growing despite volatile markets.

Zeta Resources’ share price declined by 15.2%. China’s zero-COVID policy contributed to lower global growth while higher costs squeezed company margins. Also, Zeta’s discount to NAV widened from 15.3% to 22.8% over the course of H123. Its best performing investment was Horizon Gold (+19.2%), but this was more than offset by declines in GME Resources (-14.0%) and Panoramic Resources (-10.3%).

Exhibit 7: Share price and NAV total return performance, relative to indices (%)

 

One month

Three months

Six months

One year

Three years

Five years

10 years

Price relative to CBOE UK All Companies

(13.2)

(17.7)

(31.6)

(39.9)

(39.3)

(17.4)

(22.3)

NAV relative to CBOE UK All Companies

(14.4)

(5.6)

(24.7)

(36.8)

(38.4)

(26.5)

(28.1)

Price relative to MSCI AC World

(10.7)

(12.5)

(24.8)

(36.4)

(42.9)

(31.1)

(49.4)

NAV relative to MSCI AC World

(11.8)

0.4

(17.2)

(33.0)

(42.0)

(38.7)

(53.2)

Price relative to MSCI Emerging Markets

(7.2)

(12.0)

(20.5)

(31.1)

(28.3)

1.1

(5.2)

NAV relative to MSCI Emerging Markets

(8.4)

1.0

(12.4)

(27.4)

(27.2)

(10.1)

(12.3)

Source: Refinitiv, Edison Investment Research. Note: Data to end-February 2023. Geometric calculation.

Jillings comments that UIL’s performance has been disappointing as despite many of its investee businesses making real progress, company valuations have declined. UIL has a meaningful exposure to financial services and the manager says that the shares of non-bank financial services companies have been particularly weak. UIL also holds a considerable number of growth companies, which have been out of favour with investors in a rising interest rate environment. Jillings highlights the high levels of market volatility, saying that individual stocks can rise or fall by 10%, commodities by 5%, and currencies by 1–2%, in a single day.

Exhibit 8: NAV total return performance relative to CBOE UK All Cos Index over three years

Source: Refinitiv, Edison Investment Research

Peer group comparison

The AIC Flexible Investment sector is an eclectic mix of 25 different sized funds with a wide variety of investment mandates. In Exhibit 9, we show the largest 16 companies with market caps greater than £50m that have been trading for more than 10 years.

UIL’s NAV total returns are below average over the periods shown. The company has one of the widest discounts in the selected peer group, the third highest ongoing charge and by far the highest level of gearing (most of the funds are ungeared). UIL offers an attractive dividend yield, which is currently 3.2pp above the average of the selected peer group.

Exhibit 9: Selected peer group at 7 March 2023*

% unless stated

Market
cap £m

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

NAV TR
10 year

Discount
(cum-fair)

Ongoing charge

Perf.
fee

Net
gearing

Dividend
yield

UIL

119.1

(34.5)

(23.4)

(8.7)

26.3

(37.3)

2.9

Yes

182

5.6

Aberdeen Diversified Inc & Growth

270.4

0.2

6.4

12.3

24.9

(24.0)

0.6

No

100

6.4

Caledonia Investments

1,967.9

12.1

48.0

68.0

184.9

(27.9)

0.9

No

100

1.8

Capital Gearing

1,277.7

(0.4)

17.2

33.3

60.0

(1.2)

0.5

No

100

1.0

CT Global Managed Portfolio Growth

90.6

(1.5)

18.4

21.4

99.3

(2.0)

1.0

No

100

0.0

CT Global Managed Portfolio Inc

62.1

4.0

15.8

19.9

72.0

(0.7)

1.0

Yes

106

5.4

Global Opportunities Trust

95.1

15.5

33.3

24.1

109.1

(11.2)

1.0

No

100

1.5

Hansa Investment Company class A

141.2

4.9

21.9

23.0

71.0

(44.2)

1.1

No

100

1.8

JZ Capital Partners

129.8

10.1

(26.6)

(51.4)

(37.6)

(52.4)

3.5

Yes

100

0.0

Livermore Investments

78.5

(17.2)

1.0

2.0

71.1

(35.0)

5.0

No

100

7.0

MIGO Opportunities Trust

83.4

(1.3)

32.9

22.0

114.7

(0.8)

1.3

No

100

0.1

New Star Investment Trust

87.4

(1.8)

18.0

22.0

74.0

(31.5)

0.9

No

100

1.1

Personal Assets

1,858.0

(1.6)

16.9

28.9

53.1

(0.0)

0.7

No

100

1.2

RIT Capital Partners

3,108.4

(8.4)

32.4

43.1

121.4

(18.2)

0.9

Yes

109

0.0

Ruffer Investment Company

1,147.0

3.8

39.5

39.4

60.9

1.0

1.1

No

100

0.9

Tetragon Financial

764.8

16.2

43.0

85.2

244.5

(65.3)

2.3

Yes

100

4.2

Simple average

705.1

0.0

18.4

24.0

84.4

(21.9)

1.5

106

2.4

Fund rank in sector (16 funds)

10

16

15

15

14

13

3

1

3

Source: Morningstar, Edison Investment Research. Note: *Performance to 6 March 2023 based on ex-par NAV. TR = total return. Net gearing is total assets less cash and equivalents as a percentage of net assets.

Dividends: Fully covered by income since FY19

UIL pays regular quarterly dividends in December, March, June and September. The board aims to at least maintain the total annual distribution, using revenue reserves as required (it also has the flexibility to pay dividends out of capital). At the end of H123, UIL had revenue reserves of 19.0p per share, which is equivalent to c 2.4x the current annual dividend.

In H123, UIL’s revenue income was £8.5m, which was a 97.7% increase compared with £4.3m in H122. However, this includes a single rather than a semi-annual dividend payment from Somers. UIL’s H122 semi-annual dividend was 1.9x covered and maintained at 4.0p per share.

Exhibit 10: Dividend history since FY17

Source: Bloomberg, Edison Investment Research

Jillings highlights that as Zeta Resources and Somers repaid loan notes to UIL as partial funding for the redemption of the 2022 ZDPs (see Gearing section below), UIL’s interest income will decline. However, its dividend income is rising; for example, Resimac has just declared a final dividend of A$0.04 per share and Utilico Emerging Markets Trust has increased its dividend; its second and third interim payments for FY23 are 7.5% higher year-on-year. The manager comments that UIL is close to having a covered dividend in FY23.

Valuation: Board seeks lower discount

UIL’s shares are trading at a 37.3% discount to cum-income NAV, which not dissimilar to the average discounts of 33.2%, 35.8%, 37.0% and 34.5% over the last one, three, five and 10 years respectively (based on monthly NAVs).

Jillings is hopeful that, over time, UIL’s discount can narrow to the 20% target set by the board, helped by share buybacks and continued marketing to existing and potential investors. In FY22, c 0.5m shares (c 0 5% of the share base) were repurchased. Since then, there have been no further buybacks as in 2022, any available liquidity was put towards redeeming the 2022 ZDPs. Once liquidity becomes available, share repurchases may resume.

Exhibit 11: Discount over three years

Exhibit 12: Buybacks and issuance

Source: Refinitiv, Edison Investment Research. Note: Based on monthly NAVs.

Source: Morningstar, Edison Investment Research

Exhibit 11: Discount over three years

Source: Refinitiv, Edison Investment Research. Note: Based on monthly NAVs.

Exhibit 12: Buybacks and issuance

Source: Morningstar, Edison Investment Research

Fund profile: Seeking undervalued assets

UIL began trading on 20 June 2007 as the successor vehicle to Utilico Investment Trust, which was launched in August 2003 (for more information about the company’s history, please see our December 2019 initiation report). It is a Bermuda-registered company listed on both the Specialist Fund Segment of the London Stock Exchange (which does not have any free float requirements) and the Bermuda Stock Exchange. UIL is managed by ICM Investment Management and ICM (collectively referred to as ICM), which has c £1.8bn of assets directly under management and is responsible for a further c £22.2bn of assets in subsidiary investments. ICM has more than 80 staff based in more than 10 offices around the world.

Manager Charles Jillings and the other members of the ICM investment team aim to identify and invest in compelling long-term investments across the globe, where their forecast underlying values are not fully recognised. UIL may invest in shares, bonds, convertibles and other types of securities, including non-investment-grade bonds. Unlisted securities of up to 25% of gross assets at the time of investment are also permitted. Derivative instruments have been used for investment purposes and efficient portfolio management and at times currency exposure may be hedged. UIL’s sector and geographic exposure is unrestricted, but at the time of investment, a single investment may not exceed 30% of gross assets (except for platforms, which may not exceed 50%).

The company’s performance is benchmarked against a broad UK equity market index. UIL employs a levered strategy through ZDP shares and a limited amount of bank debt. Its ZDP shares are listed on the Standard Segment of the Main Market of the London Stock Exchange.

Investment process: Long-term perspective

ICM’s investment teams are led by Duncan Saville and Charles Jillings. The other senior members of the team are: Jacqueline Broers, Jonathan Groocock and Mark Lebbell, focused respectively on the telecommunications, utilities and infrastructure sectors; fixed income specialist Gavin Blessing; Dugald Morrison, who covers resources; Jason Cheong and Matt Gould, who focus on technology and emerging technologies; and Alasdair Younie, who covers financial services. UIL seeks to generate long-term capital growth by investing in undervalued assets across the globe. Businesses may be under-priced for a variety of reasons including technological change, competition, an inefficient balance sheet, an underperforming management team or a lack of investor interest. Around 70% of UIL’s portfolio is invested in four ICM-managed funds, referred to as ‘platforms’: Somers (financial services), Zeta Resources (natural resources), Utilico Emerging Markets Trust (emerging markets utilities and infrastructure) and Allectus Capital (technology, with a particular focus on fintech). Jillings suggests this approach offers the following benefits:

Focused strategy – each platform has a dedicated mandate and the strategy has an objective of finding and implementing attractive investments within these.

Dedicated research analysts – for each platform the analysts are focused on understanding existing portfolio businesses and identifying compelling investments.

Financial support – ability to draw on UIL’s support and financial backing.

Deep knowledge – utilising ICM’s knowledge across many jurisdictions to optimise investment opportunities and undertake corporate finance-led transactions.

The remaining c 30% of the fund is in direct holdings. The manager stresses the importance of supporting investee companies with their capital requirements and says UIL may often be among their largest shareholders, maintaining regular contact with them. There is no limit as to how much of a company UIL can own, and it may sometimes take legal or management control of a firm.

UIL’s approach to ESG

ICM is committed to a strong ESG framework and is taking steps to strengthen its policy and public profile. The company is a signatory of the United Nations-supported Principles for Responsible Investment (PRI). The PRI is an international organisation that works to promote the incorporation of ESG factors into investment decision-making. UIL’s board believes it is in shareholders’ best interests to consider ESG factors when selecting and retaining investments. In conjunction with assessing the financial, macroeconomic and political drivers when making and monitoring an investment, the manager embeds ESG opportunities and risks into the firm’s investment process. Companies are scanned using a rigorous in-depth framework. However, the decision on whether to make an investment is not made on ESG grounds alone. Factors are incorporated into the process in three main ways:

Understanding – in-depth analysis of the important business issues faced by potential and current holdings as well as a deep understanding of the industries in which they operate.

Integration – incorporation of the understanding into full company analysis to ensure there is a clear and complete picture of the investment opportunity.

Engagement – regular communication with investee companies, both virtually and on location, where possible, to discuss and identify any gaps in their ESG policies and to further develop and improve their ESG disclosure and implementation.

The board believes that an analysis of ESG factors helps to enhance the understanding of a company, as these factors affect their business models and their long-term ability to generate sustainable returns. It also enables UIL’s investment team to fully question a company’s investment potential from a variety of perspectives.

Gearing: ZDP shares and bank debt

UIL follows a levered strategy using ZDP shares and bank debt. It has a £50m senior secured multicurrency revolving facility with Bank of Nova Scotia, London branch. The loan expires on 19 September 2023 and must be reduced by £12.5m by 30 March 2023. UIL’s board stated its commitment to reduce the company’s debt and gearing in the FY14 annual report and it has fallen from more than 150% at 30 June 2013 to 73.4% at 31 December 2022. At the end of February 2023, net gearing was 77.2%, which is well below the board’s 100% maximum target.

UIL has an exemplary track record of redeeming its 2012, 2014, 2016, 2018, 2020 and 2022 ZDP shares. The 35.6m 2022 ZDP shares were redeemed on 31 October 2022 at 146.99p per share for a total cost of £52.3m, funded by the sale of a third of UIL’s Utilico Emerging Markets Trust holding (£20.8m) and repayments of loans due to UIL from Somers and Zeta Resources (£35.8m). UIL’s capital structure provides holders with attractive yields and a range of maturity dates, which enables it to realise a smaller number of investments in advance of each redemption date, so is therefore less disruptive to the portfolio. Exhibit 13 shows the company’s current three tranches of ZDP shares spread over five years; they are issued by UIL Finance, a wholly owned subsidiary of UIL.

Over time, UIL’s capital growth is driving higher ZDP cover and its financing costs have declined meaningfully in recent years from an average rate of 6.3% at the end of June 2013 to 4.8% at the end of December 2022 (a modest increase from 4.7% at the end of June 2022).

Exhibit 13: ZDP shares (at 28 February 2023)

2024

2026

2028

Accrued capital entitlement (p)

128.04

126.67

110.93

Share price (p)

123.50

114.00

98.00

Premium/(discount) to NAV (%)

(3.5)

(10.0)

(11.7)

ZDP cover* (x)

3.51

2.53

1.97

Yield to redemption* (%)

7.0

8.1

8.1

ZDP redemption value (p)

138.35

151.50

152.29

Shares in issue (m)

30.0

25.0

25.0

Ticker

UTLG

UTLH

UTLI

Source: UIL, Edison Investment Research. Note: *Based on final redemption values.

Fees and charges

ICM receives an annual management fee of 0.5% pa of UIL’s total assets less current liabilities (excluding borrowings and excluding the value of all holdings in companies managed or advised by ICM or its subsidiaries from which it receives a management fee), along with 45% of ICM’s costs of providing company secretarial services. ICM is entitled to a 15% performance fee on NAV returns over benchmark at the higher of 5.0% or the UK gilt five- to 10-year index post-tax yield plus RPIX (RPI excluding mortgage payments) inflation. The NAV must exceed the high-water mark NAV from when the performance fee was last paid (adjusted for capital events and dividends paid) and the fee is capped at 2.5% of financial year-end NAV (adjusted for capital events and dividends paid). It is also reduced to take into account any performance fees paid to ICM by companies where UIL is an investor.

In H123, UIL’s annualised ongoing charges were 2.9%, which was 90bp higher than 2.0% in H122; no performance fees were payable. The company’s ongoing charges including performance fees in H122 were 4.2%. UEM’s ongoing charges appear high compared with other investment companies as the expense calculation is based on a percentage of average net assets (after the deduction of the ZDP shares).

Capital structure

UIL has 83.8m ordinary shares outstanding, the majority are of which are held by companies associated with ICM manager Duncan Saville or UIL’s directors; hence, the free float is 20%. Over the last 12 months, the company had an average daily trading volume of c 11k shares.

Exhibit 14: Major shareholders

Exhibit 15: Average daily volume

Source: UIL. Note: At 31 January 2023.

Source: Refinitiv. Note: 12 months to 7 March 2023.

Exhibit 14: Major shareholders

Source: UIL. Note: At 31 January 2023.

Exhibit 15: Average daily volume

Source: Refinitiv. Note: 12 months to 7 March 2023.

The board

Collectively, UIL’s board has experience in a wide range of financial services and the law. David Shillson is considered to be a non-independent director as he is a senior partner of a law firm that has acted for associates of UIL and ICM from time to time. In FY22, the remuneration was £47,600 for the chairman; £45,500 for the chairman of the audit and risk committee; and £35,200 for the other three directors.

Christopher Samuel will stand down on 31 May 2023. The board will continue with four members unless there is a need to appoint another director for a period to provide a future orderly succession.

Exhibit 16: UIL’s board of directors

Board member

Date of appointment

Remuneration in FY22

Shareholding at end-Jan 23

Peter Burrows (chair since November 2015)

September 2011

£47,600

909,617

Alison Hill

November 2015

£35,200

109,404

Christopher Samuel

November 2015

£35,200

225,019

David Shillson

November 2015

£35,200

151,962

Stuart Bridges (chair of the audit & risk committee)

October 2019

£45,500

172,835

Source: UIL

General disclaimer and copyright

This report has been commissioned by UIL and prepared and issued by Edison, in consideration of a fee payable by UIL. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers’ exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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General disclaimer and copyright

This report has been commissioned by UIL and prepared and issued by Edison, in consideration of a fee payable by UIL. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison’s policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers’ exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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