Menhaden Re Plc Regulatory News (MHN)

Menhaden Resource Efficiency PLC

Half Year Report

for the six months ended 30 June 2023

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Financial Highlights

Menhaden Resource Efciency PLC (the “Company”) is an investment trust. Its shares are listed on the premium segment of the Ofcial List and traded on the main market of the London Stock Exchange.

The Company’s investment objective is to generate long-term shareholder returns, predominantly in the form of capital growth, by investing in businesses and opportunities that are demonstrably delivering or beneting signicantly from the efcient use of energy and resources irrespective of their size, location or stage of development.

^ Alternative Performance Measure. Please refer to the Glossary on page 21 for denitions of these terms and the basis of their calculation.

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Strategic Context

Over the rst six months of 2023 the level of investment in both the global quoted and private capital markets was subdued. The main reasons include post pandemic concerns, the dislocating impact of the Ukraine war on global energy and other resource supply chains, inationary pressures and rising central bank interest rates, and incidence of extreme weather events in North America, Europe, and Asia.

At the same time the global demand for energy and resources continues to rise. The World Meteorological Association has stated that 2023 is set to be the hottest year ever recorded and the International Monetary Fund reported that nancial markets are under-pricing climate related risks. The need for businesses to progressively reduce their use of fossil fuels and greenhouse gas emissions has never been so critical.

Consequently, our investment thesis to invest in high quality businesses that both enjoy strong market positions and are demonstrably delivering or signicantly benetting from the efcient use of energy and resources is now even more relevant and so should be benecial for long-term shareholders.

Financial Performance

The performance of our investment portfolio has been encouraging. Between 31 December 2022 and 30 June 2023 the Company’s total net assets increased from £103.8 million to £119.7 million. The NAV per share increased from 129.8p at 31 December 2022 to 151.4p at 30 June 2023, giving an NAV per share total return of 16.9%. The Company’s share price over the same period rose from 89.0p per share to 96.5p, giving a share price total return of 8.8%.

These metrics compare with a return over the six months of our primary performance comparator, RPI+3% per annum, of 5.9%. At the end of June the share price stood at a 36.3% discount to the NAV per share. Such share price discounts are currently reected across much of the investment trust sector and does not reect our NAV per share CAGR performance of 12.5%, 10.5% and 10.3 % over 1, 3 and 5 years.

Notable contributors to our performance included private equity clean energy developer X-ELIO, which is expected to realise 2.2 times invested capital following its proposed acquisition by Brookeld Renewable, expected to conclude by the end of 2023. Taken together, our three largest digitalisation (decarbonisation) themed public equities (Microsoft, Alphabet and Amazon) contributed 9.2% to NAV. The two largest detractors were two sustainable infrastructure and transport companies, Union Pacic and Canadian National Railway, which reduced our NAV by 0.3%.

The most signicant changes to the portfolio in the period included investment prots being taken from reducing, by around half, the holding in Alphabet and re-investment in Airbus (because of its focus on manufacturing more efcient engines powered by sustainable aviation fuel). We also made a new large US$25 million private equity commitment into TCI Real Estate Partners Fund IV (because of its focus on developing best in class energy efcient buildings).

Environmental Performance

Our Portfolio Manager actively monitors the energy and resource efciency of our investments in line with the carbon disclosure project and the Science Based Targets initiative.

The focus of engagement with all quoted investee companies has been on their alignment with the Paris Agreement to reduce global warming, deforestation and biodiversity loss. The aim of this engagement is to encourage them to adopt and use best practice environmental solutions and dene pathways to reduce their GHG emissions and preserve tropical rain forests, together with associated biodiversity. Some positive responses were received, which were welcomed. Where a weak or no response was received further follow-up engagement is planned.

Our Portfolio Manager supported AGM resolutions seeking greater disclosures by KLA of their Net Zero targets and the Canadian National Railway climate action plan.

Share Price Discount

We had not previously favoured share buy backs for mitigation of the share price discount and remain of the view that share buybacks are not usually in the best interest of shareholders as they reduce the size of the Company and increase the ongoing charges ratio. However, after a step-down in the share price in January 2023 the Board decided it would trial a very modest programme of share buybacks. We considered that this might reduce the volatility of the share price, take advantage of the accretion to NAV that buying back shares at a discount achieves and provide a signal to the market of our condence in the value of the Company’s portfolio. Some 975,000 shares were bought back between February and April 2023 at an average price of 94.35 pence per share. The exercise did provide some additional liquidity in the volatile market conditions, was accretive to our shareholders and the cost of execution was modest.

We will continue to monitor closely the discount to NAV at which the Company’s shares trade. Any future action will be dependent on market conditions, the Company’s available liquid resources and the potential conict between accretive share buybacks and the availability of attractive portfolio investment opportunities. Buybacks will remain at the discretion of the Board.

As the Company can only issue new shares when the share price is at a premium to NAV it remains the Board’s goal to improve the share price through enhanced investment performance and by having effective marketing strategies and informative communications to potential new investors.

Dividend

In line with previous practice the Board has not declared an interim dividend in respect of this half year. As shareholders will be aware a dividend of 0.4p per share was recommended in respect of the year to 31 December 2022 and, following shareholder approval in June 2023, was paid in July 2023.

Income generation is not part of the Company’s investment objective and shareholders are reminded that the Company’s dividend policy is that the Company will only pay dividends sufcient to maintain investment trust status. If that threshold is crossed once again for the current nancial year, to 31 December 2023, the Directors will recommend to shareholders, for approval at the next AGM, a dividend sufcient to achieve compliance with the investment trust status requirements.

Outlook

Whilst nancial markets have generally been resilient overall so far in 2023, and the Board hopes for an upturn for both quoted equities and private investment opportunities, we cannot ignore background macro factors, including: the continuing war in Ukraine; tension between the USA and China over trade; inationary pressures and high interest rates, which may persist for some time; nor the potential for further energy and resource price volatility; and climate change impacts.

However, the Board considers the Company’s portfolio to be well placed for further capital growth because of its quality and the defensive and ination resistant properties of many of the holdings. Moreover, the Board continues to remain convinced of the validity of the premise that the world and all businesses need to be more energy and resource efcient and the Company’s investment thesis should accordingly provide long-term benets for our investors.

Further Information

Our Portfolio Manager’s report, starting on page 8 provides further details about our investments and their contribution to the Company’s performance during the period. The Company’s most recent 2022 annual environmental impact report and monthly factsheets can be found on our website www.menhaden.com. Our 2023 annual report and environmental impact report will be published in mid 2024.

Howard PearceChairman14 September 2023

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Investment Themes

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Portfolio as at 30 June 2023

1 Investment made through Helios Co-Invest LP

2 Investment made through KKR Aqueduct Co-Invest LP

* Unquoted

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Portfolio Manager’s Review

Performance

During the rst half of 2023, the Company’s NAV per share increased from 129.8p to 151.4p. This represents a total return of 16.9% and compares to the benchmark return of 5.9%. The Company’s share price traded at a 36.3% discount to NAV as at 30 June 2023. The contributions to the NAV per share total return over the period are summarised below:

The easing of ination and hope for a soft landing in the higher interest rate environment have buoyed equity markets this year. The consumer remains resilient so far and dislocations in the United States regional banking sector seem to have been successfully contained. We continue to actively look for attractive private opportunities with better risk-reward proles than those in our quoted portfolio. There is some evidence of increasing deal ow and a more sensible approach to pricing which will satisfy our requirements. The global move towards Net Zero by 2050 continues to gain momentum. More and more companies from all sectors of the economy are establishing frameworks to reduce their greenhouse gas (GHG) emissions. We believe our thesis of investing in businesses benetting from the efcient use of energy and resources remains more relevant than ever.

In the current environment, the portfolio continues to prioritise quoted equities, which represented 77.8% of the NAV at the period end. Our quoted equities span a number of energy and resource efciency themes, namely: clean energy; digitalisation; industrial emissions reduction; sustainable infrastructure and transport; water and waste management. These all offer secular growth and their industry structures provide the incumbents with formidable competitive positions. Commitments to deliver the more efcient use of energy and resources are now widely recognised as adding to the shareholder value of those companies.

Investment performance was led by our biggest digitalisation holdings (Microsoft, Alphabet and Amazon), in a reversal of their poor performance in 2022. Within the private portfolio, KKR agreed a deal to sell its 50% stake in Spanish solar developer, X-ELIO, to joint venture partner, Brookeld Renewable. We expect the transaction to complete in the second half of this year and deliver a compounded rate of return of 13% over 8 years in US dollars. This will be our fourth successful exit from a private investment, which, in aggregate, will have realised gains of approximately £21 million.

Investment performance was negatively affected by the appreciation of sterling, although this was partly offset by our forward currency contract hedges. We realised net cash proceeds of £5.2 million from our currency hedging over the period.

Key investment decisions during the period included the reduction of our Alphabet position by one half and the partial redeployment of the proceeds into a new position in Airbus in February. We continued to increase the size of the position over the subsequent months. We regularly monitor valuation and adjust positions accordingly where appropriate. We opted to take some prots on our Microsoft holding in June, following very strong performance. We then added the proceeds, and some excess cash, to our Airbus, Canadian National Railway and VINCI holdings.

Our private investment activity was limited, with no new transactions in the period. However, we were pleased to make a new commitment to the fourth vintage of the TCI Real Estate Partners strategy in March. This fund will follow the same strategy, and offer similar environmental benets, as the TCI Real Estate Partners Fund III into which we made a US$15 million commitment in 2018. The fund helps to nance developments which are best in class in terms of energy efciency and environmental standards.

The Company’s share price has continued to trade at a signicant discount to its net asset value. Following a widening of the discount in January, the Board of Directors authorised the deployment of up to £1 million for a share buyback program. 975,000 shares (1.2% of the total issued) costing a total of £929,000 were purchased between mid-February to early April.

We maintain a proactive stance on stewardship. We carefully assess shareholder resolutions and engage with portfolio companies on environmental issues, while remaining mindful of our size. We seek to promote energy transition plans to progress towards net zero targets and greater disclosure of greenhouse gas emission reduction and mitigation strategies. During the period we voted against the recommendation of Amazon’s management to support a resolution requesting disclosure on how the company is protecting the retirement plan’s beneciaries from climate risk.

Public Equities

Quoted public equities represented 77.8% of total NAV at 30 June 2023, and delivered a total return of 16.9% over the period, adding 13.0% to the NAV per share.

Note: Percentage increase/(decrease) for individual holdings is calculated on their local currency and based over the holding period if bought or sold during the year.

Microsoft remains the key technology partner for all enterprises and its software products are ubiquitous. Customers can depend on Microsoft to ensure their technology infrastructure is fully sustainable, with the company aiming to operate on carbon-free energy everywhere, at all times, by 2030. Microsoft is also set to be one of the prime beneciaries of Articial Intelligence. The new Copilot products will enable customers to harness the power of Generative AI. The rate of adoption may be gradual, but we believe that the productivity gains from it will support signicant future revenue growth. The core prot drivers, Ofce 365 Commercial and the Azure Cloud business are performing well. Ofce 365 now has more than 380 million users and continues to grow. Azure is still gaining market share. Percentage revenue growth has remained in the high 20s on a year-over-year basis, even as customers have focused on optimising workloads to reduce costs. Positively, the weaker PC market should cease to be a headwind going forwards. With the shares up more than 40% year-to-date in US dollars, we opted to take some prots in June and reduced our position by 2.0% of NAV.

Alphabet continues to step up its response to the competitive threat posed by Open AI/Microsoft and ChatGPT. Management is focused on using Generative AI to enhance Google’s products and services for both users and advertisers. The launch of a new beta search experience in the US (as part of “Search Labs”) provides an AI powered snapshot of key information to consider, then suggested next steps and has chat capabilities. The tempo of iterative product development appears to be increasing. We welcome the new sense of urgency. The company continues to push forward on its sustainability agenda with aims to achieve net-zero emissions, run on 24/7 carbon-free energy and to replenish more water than it consumes. Progress is also being made on costs, with headcount now falling and operating margins improving. The company should be able to accelerate revenue growth once the economy improves.

We opted to reduce our position materially in February due to concerns stemming from heightened competition in Search, following Microsoft’s launch of its new Bing search engine. Whilst we thought that Alphabet was well positioned to fend off this new challenge, we realised that the level of risk and range of outcomes had widened. We sold approximately one half of our position, leaving it equal to the prot we made on our original holding. We have been happy to maintain the position since then but do continue to monitor the various anti-trust actions against the company.

The turnaround at Amazon is gaining momentum. Protability and free cash ow generation have inected. The Retail business’ operating margins have beneted from lower fuel prices, falling freight rates and the switch to a regional fullment model in the US. The latter translates into shorter delivery distances and faster delivery speeds. Amazon Web Services’ growth rate is also picking up following a softer Cloud environment focused on workload optimisations. CEO Jassy has always been adamant on the future for AWS, outlining how 90% of IT spend is still on-premises. We were disappointed to see that Amazon recently failed to meet the Science Based Targets initiative’s (SBTi) deadline to submit their emissions reduction targets for validation. We intend to raise this matter during our engagement with the company.

French aircraft engine manufacturer, Safran, has continued to prot from the commercial aviation industry’s resurgence. The reopening of China in January removed the last major obstacle to a full recovery. We believe air travel remains a secular growth story, with most people still never having travelled on a plane.

Flight cycles are the key driver of the company’s nancial performance, with most of its prots coming from aftermarket sales of spare parts. Safran continues to lead the way towards the decarbonisation of the aviation sector. We were pleased to see that its emission reduction targets were independently approved by the SBTi. These include targets to reduce Scope 1 and 2 emissions by 50% by 2030 and reduce Scope 3 emissions by 42.5% by 2035 (versus 2018).

Holding company, Ocean Wilsons, owns a controlling interest in publicly listed Brazilian port operator, Wilson Sons, alongside a diversied investment portfolio. Wilson Sons’ asset base enjoys high barriers to entry and substantial operating leverage for growth in Brazil’s international trade shipping sector. Shipping has the lowest climate impact of any freight method, on a per unit basis, producing between 10-40 grams of CO2 per metric ton of freight per kilometre of transportation, which is around half that even of rail freight. Ocean Wilsons recently conrmed that it is undertaking a strategic review of its investment in Wilson Sons. We believe that the company could unlock signicant value, with the shares trading at more than a 50% discount to NAV at the period end.

French infrastructure group, VINCI, beneted from the recovery of its Airports business and the good performance of its Energies and Cobra contracting businesses. Trafc at the former is now above 90% of 2019 levels. The management team continues to make progress on its targets to reduce Scope 1 and 2 emissions by 40% and Scope 3 emissions by 20% by 2030. This includes the company’s construction business increasing the use of low carbon concrete for 90% of its needs. The recent completion of the Belmonte solar farm in Brazil marks VINCI’s rst foray into renewable power generation. The company is currently waiting for the publication of the French government’s opinion on the possibility of changing taxes levied on motorway concessions in the country.

Our North American railroad holdings, Canadian National Railway, Canadian Pacic Kansas City and Union Pacic, are currently facing a slowing economy. We view the headwinds as only cyclical in nature. Rail retains a signicant cost advantage over trucks on longer haul routes and no one is building railroads today. Rail remains the most environmentally friendly way of transporting freight over land, with current locomotives four times more fuel efcient than trucking on a per unit basis.

We opted to add incrementally to our position in Canadian National Railway in June. We believed the shares offered good value compared to the company’s midterm organic growth prole. Canadian Pacic nally completed its merger with Kansas City Southern in April. Canadian Pacic Kansas City has multiple opportunities to grow volumes, including by converting truck trafc to rail. We consider the published earnings per share guidance to be overly conservative. We believe new Union Pacic CEO, Jim Vena, should be able to help the company full its potential and deliver meaningful improvements in operations and prots.

Signs are emerging that the semiconductor industry is nding a bottom to its current cycle. A return to growth should translate into higher capital spending. This should benet our semiconductor capital equipment companies, ASML, Lam Research and KLA. Each company dominates its respective niche in the value chain and plays a critical role in helping the wider industry both maximise semiconductor production from nite resources and develop and produce more advanced and energy efcient chips. We believe the fundamental drivers of semiconductor demand remain as clear as ever: cloud computing, articial intelligence, 5G, the Internet of Things (IoT) and the digitalisation of the automotive industry. Semiconductor manufacturers’ capital intensity also continues to increase. We expect all these companies to have very bright futures.

Solid waste pricing is moderating as ination eases, but Waste Management continues to drive forwards on its sustainability agenda. Growth investments in new automated recycling facilities and renewable natural gas plants at landll sites should help to drive double digit earnings growth going forward. The company provides essential services and benets from a high proportion of annuity-like revenue streams, with the cost of its services representing a very small portion (circa 0.5%) of customers’ total expenses.

We opened a new position in aircraft manufacturer, Airbus, in February and increased its size over the subsequent months to 12.4% of NAV at the period end. We previously held the company’s shares but exited in April 2021, believing that the post Covid recovery would take signicantly longer than implied by the price. Now commercial aviation’s recovery from the global reaction to the Covid pandemic is nearly complete and the secular growth of air travel appears set to resume. Fleet renewal requirements and the need for the global aviation sector to accelerate their decarbonisation are key drivers. By upgrading to Airbus’ latest generation aircraft, customers can reduce carbon emissions by 20-30%. Airbus’ aircraft are also certied to operate on 50% sustainable aviation fuel (SAF), with a target to reach 100% by the end of the decade.

Airbus’ A320 program is the most successful aircraft family ever. Production is sold out until 2029. Deliveries should increase from a target of 720 this year to more than 1,000 in the coming years and underpin signicant earnings growth. We were also pleased to see the company receive approval from the SBTi for its greenhouse gas emissions near-term reduction targets. These include plans to reduce scope 1 and 2 emissions by 63% by 2030 and reduce scope 3 emissions by 46% by 2035.

Private Investments

Our portfolio of private investments represented 16.4% of the total NAV as at 30 June 2023, and delivered a total return of 16.6% during the period, adding 2.7% to the NAV per share.

Note: Percentage increase/(decrease) for individual holdings is calculated on their local currency and based over the holding period if bought or sold during the year.

KKR agreed a deal to sell its 50% stake in Spanish solar energy developer, X-ELIO, to joint venture partner, Brookeld Renewable in March. We marked up our valuation to align with the sale price. We expect the transaction to complete in the second half of this year and deliver a return of ~2.2 times invested capital in US dollars, equivalent to an IRR of ~13% over 8 years.

TCI Real Estate Partners Fund III currently comprises three loans to separate real estate developments in the United States. They are rst mortgages and have low loan-to-value ratios (less than 60%). These developments are best in class in terms of energy efciency and environmental standards. Buildings contribute more than 30% of GHG emissions in the United States and raising their efciency levels is vital to reducing emissions. Whilst the Fund did not manage to commit the level of capital we originally hoped, investment returns have remained in line with expectations. The Fund has continued to draw down from its remaining commitment (circa US$3.2 million) in line with the schedules of its existing loans. We expect the last loan to be repaid in 2026.

John Laing is an active manager of public-private partnerships and similar concession-based assets. The company makes both green and browneld investments. Environmental impacts are managed on an asset by asset basis and the rm is seeking to achieve a net zero transition for its direct operations by 2050 or before. We marked down our valuation to align with the manager’s latest valuation, with the downgrade being primarily driven by losses on currency translation. KKR’s overhaul of the company’s operations continues, with the appointment of Andrew Truscott as CEO in March. Recent investments include the acquisition of a majority stake in National Road RV555, Norway’s largest PPP, and the purchase of three Irish infrastructure assets from AMP Capital. The latter consisting of Valley Healthcare, a portfolio of primary care centres, the Convention Centre Dublin and Towercom, a mobile tower operator.

We were pleased to nalise a new US$25 million commitment to the TCI Real Estate Partners Fund IV. This fund will follow the same strategy, and offer similar environmental benets, as the TCI Real Estate Partners Fund III. The coronavirus epidemic provided a stress test for Fund III. We were very pleased that while certain developments were affected by construction delays, return expectations on the loans remained unchanged. Each loan has several elements of downside protection such as credit seniority, loan-to-value ratios of up to 65% and completion and carry guarantees. The strategy has only ever recorded one loss out of 37 loans. The manager believes that stress is starting to permeate real estate credit markets and that the emerging conditions should underpin strong demand for its differentiated nancing. Furthermore, the rise in interest rates has increased the relative attractiveness of their traditionally premium rates. The manager is targeting gross returns of 11-14%. We believe this level of return represents an exceptional balance between risk and reward. We expect the fund to start drawing down this year. We expect our net invested amount, on a cost basis, to peak at approximately 70% of the total commitment in mid-2026.

FX Hedges

The aim of our currency hedging policy, to date, has been to address volatility inherent in the portfolio's exposure to both the US dollar and the euro. While in this period we realised proceeds of £5.2 million, we continue to keep the policy under review.

Outlook

We continue to focus on what we can control. Our preference remains for investments which require us to make as few predictions as possible. We believe our criteria of investing in energy and resource efciency businesses offering quality and value should leave the portfolio well placed to generate superior risk adjusted returns over time in most market conditions.

Private investment opportunities are becoming more interesting, with higher expected returns. We believe that the balance between risk and reward on proposed transactions is improving but we will take a considered approach to committing capital. We continue to evaluate new transactions with a critical lens. We will only make private investments when they offer a more attractive balance between risk and reward compared to public markets. We believe the next vintage of TCI Real Estate Partners’ strategy met this criteria and were very happy to make a substantial commitment (US$25 million) in March. We expect to earn comparable returns to equity markets, whilst incurring substantially less risk due to our more senior position in the capital structure.

Following the strong year to date returns, the Company’s net asset value per share has now compounded at over 10%, after fees, for the ve years ended 30 June 2023. Share price performance continues to trail net asset value returns. We believe the two should converge in time. We remain optimistic on both our energy and resource efciency investment thesis and our current portfolio’s prospects.

Note: Figures are adjusted for cumulative dividend reinvestments

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Regulatory Disclosures

Principal Risks and Uncertainties

The principal risks and uncertainties faced by the Company are explained in detail in the Company’s Annual Report for the year ended 31 December 2022 (the “Annual Report”). The Board believes that the Company’s principal risks and uncertainties have not changed materially since the date of the Annual Report and are not expected to change materially for the remaining six months of the Company’s nancial year.

Related Parties Transactions

During the rst six months of the current nancial year, no transactions with related parties have taken place which have materially affected the nancial position or the performance of the Company.

Going Concern

The Directors believe, having considered the Company’s investment objective, risk management policies, capital management policies and procedures, the nature of the portfolio and the expenditure projections, that the Company has adequate resources, an appropriate nancial structure and suitable management arrangements in place to continue in operational existence for the foreseeable future and, more specically, that there are no material uncertainties pertaining to the Company that would prevent its ability to continue in such operational existence for at least twelve months from the date of the approval of this half year report. For these reasons, the Directors consider it is appropriate to continue to adopt the going concern basis in preparing the nancial statements.

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Directors’ Responsibilities Statement

The Board conrms that, to the best of the Directors’ knowledge:

(i) the condensed set of nancial statements contained within the half year report has been prepared in accordance with FRS 104 ‘Interim Financial Reporting’ and gives a true and fair view of the assets, liabilities, nancial position and return of the Company; and

(ii)  the interim management report includes a fair review of the information required by sections 4.2.7R and 4.2.8R of the UK Listing Authority Disclosure Guidance and Transparency Rules.

In order to provide these conrmations, and in preparing these nancial statements, the Directors are required to:

•  select suitable accounting policies and then apply them consistently;

•  make judgements and accounting estimates that are reasonable and prudent;

•  state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the nancial statements; and

•  prepare the nancial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business;

and the Directors conrm that they have done so.

This half year report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the date of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

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Condensed Income Statement

The total column of this statement is the profit and loss account of the Company. The supplementary revenue and capital columns are prepared under guidance issued by the Association of Investment Companies’ Statement of Recommended Practice.

All revenue and capital items in the above statement derive from continuing operations.

There are no recognised gains or losses other than those shown above and therefore no Statement of Total Comprehensive Income has been presented.

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Condensed Statement of Changes in Equity