Gama Aviation, Redhall and Real Good Food are some of the best value opportunities on the alternative investment market (AIM), according to Downing fund manager Judith MacKenzie.
MacKenzie runs both the open-ended MI Downing UK Micro-Cap Growth fund and the closed-ended Downing Strategic Micro-Cap Investment Trust.
The manager has a good track record in stockpicking, beating her average peer since taking over the Micro-Cap Growth fund in 2011 despite the value style being largely out of favour over this period.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
The fund was soft-closed in 2017 as it reached its £30m capacity while the investment trust was launched last year.
Below, MacKenzie outlines three of the most interesting AIM-listed companies in the fund and investment trust.
Redhall
First up is Redhall, a specialist engineer that makes a variety of products from glass-proof doors that go into big infrastructure projects such as Crossrail and Hinkley Point right the way through to what’s called ‘glove boxes’ for nuclear waste.
Due to the safety requirements of the products, countries in Europe and the UK are unlikely to buy them from China or other Asian countries, because they have to be high-integrity.
As such, there are only a few manufacturers in the world. “Basically it is a good old boring UK manufacturer,” MacKenzie said.
She added that four or five years ago Redhall was “a complete basket case” that had acquired seven or eight engineering companies and debt was “coming through its ears”.
The share price reacted accordingly and does not make for pretty reading over the last decade, with shares down 96.35 per cent.
Performance of company share price over 10yrs
Source: FE Analytics
However, MacKenzie said that when looking at the underlying subsidiaries some of them were excellent businesses with the potential to make high integrity margins of 15-25 per cent.
“So when we looked at the sum of the parts we thought if they got rid of some, there were parts that were really nice,” she said.
Since then, a new management team has come in and has sold off a low margin business, helping to pay off some of the debt.
“We met the management team over the course of a couple of years and they would apologetically hand over the presentation and say ‘we have met our numbers’,” Mackenzie said.
“We got to know them and saw the gearing had gone down and we first made a 10 per cent investment in the company two and a half years ago, taking that up to 24 per cent quite recently.” Currently the stock is a 5.71 per cent position in the portfolio.
When she first invested, the order book was around £13m but at the time of the further investment last year this had risen to £38m.
Despite this, the stock has a market cap of £26m and is on a price-to-earnings (P/E) multiples of less than 5x, yet is set to make £4m in cash next year.
“It is just a cracking little business that any mainstream small fund manager will say ‘oh no not Redhall that was a really bad business’ but it has been through that full turnaround and no one is really caring about it.”
GAMA Aviation
Next up is GAMA Aviation, the fifth largest holding in the portfolio with a 4.92 per cent weighting.
Despite having ‘aviation’ in the name, it is more of a services company than a travel company, providing services to both private and public service aircrafts.
“If you happen to own a private jet you have to house it somewhere – perhaps in a hanger – but also every three months or after X number of hours in flight you have to have it maintained,” MacKenzie said.
As well as this, an individual would need to hire a crew and pilot as they are unlikely to have their own on staff.
“GAMA Aviation therefore provides all the ancillaries around such flights, charging for the crew plus around 8 per cent on contracts that are typically for three-to-five-years without taking on the fuel risks,” the manager said.
As the firm does not own the planes and is not in charge of the flights, it is more like a quasi-support services business despite sitting in the aviation sector.
“We bought our first stock around 10 months ago but we said to them that to operate in more countries they need to do it through joint ventures,” she said.
“We knew it would happen at some stage but we were a bit surprised about how quickly it did happen.”
Indeed, last year the company announced a large deal with Hutchison China to expand its services into China and the wider Asia market, announcing a £48m rights issue in February this year.
“That is symptomatic of a growth and value company. These little companies break out and it is now going to be twice the market cap of it was when we bought in but it is still on 6x P/E,” Mackenzie said.
“It is a great business that has grown to the next stage, is not well known but is a tuck away job for us.”
Real Good Food
“Do you want some sex and violence for the last one?” MacKenzie asked, before highlighting the portfolio’s largest holding at 9.08 per cent – Real Good Food.
The company has had a tumultuous time over the last decade and has fallen more than 75 per cent since its peak in 2013, but the manager believes it is just at the start of a turnaround.
Performance of company share price over 10yrs
Source: FE Analytics
“We had monitored it for a number of years having had quite a good experience with Finsbury Food, which had been a great turnaround story, and there were some similar nuances here,” she said.
“We thought it was probably going to be one of our more strategic investments, so we put the bulk of our money in as loan notes – about £8m – bought 10 per cent of the equity and I went on the board.
“We wouldn’t normally do that. I haven’t gone on the board of anything in a long time. In other words we knew that there was going to be a tidy up required.”
However, shortly after joining the board discovered related party transactions that hadn’t been disclosed on the accounts and launched an investigation to make sure it had all been accounted for correctly - which it now has.
Pieter Totté, the former executive chairman, has been replaced by interim chairman Patrick Ridgwell.
“We helped bring in various key members to start that tidy up process. It is a proper strategic tidy up exercise for us. We are right in the heart of and working alongside the management team,” she said.
“This is what Redhall was three years ago and is maybe not one to buy today but is symptomatic of how hands-on we get when we think we can make really good returns.”