YB new stock pitches (Tue, May 12)

HgCapital Trust (HGT.L) is a software-focused investment trust trading at £3.55 per share, representing a 33% discount to its £5.28 NAV per share (£1.62 billion market cap versus £2.4 billion net assets as of March 31, 2026), offering an attractive EV/EBITDA multiple of 5.1x compared to peers trading at 14-46x (Microsoft 19.5x, ActiveOps 46x, Sage 14.6x, Intuit 14.6x, ADP 14.3x). The trust's portfolio of 49 vertical software and service companies demonstrates elite performance with a 'Rule of 50' score (16% revenue growth plus 34% EBITDA margin), driven by 19% EBITDA growth that outpaces revenue growth, indicating operational efficiency improvements despite AI disruption fears. Each £1 of HGT shares generates nearly 30p of trading EBITDA annually, with the portfolio earning approximately 20p of trading earnings per £1 of NAV, reflecting record-level trading profits that contradict concerns about AI replacing software. Notably, 16 of 19 portfolio exits since 2020 achieved multiples higher than the current 24x valuation, with an average exit multiple suggesting the portfolio is undervalued by approximately £800 million, implying NAV should be £3.2 billion rather than £2.4 billion and shares should trade at £4.80 versus £3.55. The trust experienced a £289 million adverse valuation adjustment in Q1 2026 due to multiple compression from 25.2x to 24x, despite weak 20-40% correlation between public market movements and HGT valuations, and the portfolio demonstrated AI integration success with 95%+ and 60%+ valuation uplifts on recent disposals following AI transformation. Management has initiated a £19 million share buyback program in response to the share price being down 22.9% year-to-date and at five-year lows despite strong operating performance, with outstanding commitments to follow-on funding from 2026-2031 representing 88% of NAV, though these are not obligations as parent fund manager Hg invests approximately 10x more annually than HGT's funds alone, accessing client money for additional investments.

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STMicroelectronics (STM) is at a cyclical trough with revenues down 40%, capex halved, and 15 percentage points of gross margin lost following the EV bust, but the company is closing old factories to boost margins, with inventories now cleaner and lead times stabilized. As an integrated device manufacturer (IDM), STM will benefit from natural pricing power as utilization recovers, with 50%+ of the business in Auto/Industrials expected to continue recovering, supported by a stable STM32 ecosystem with 1.5 million developers. The company derives 17.7% of revenues from Apple within its 25% Personal Electronics segment, which is expected to massively outperform other consumer hardware despite segment challenges. STM is ramping its Crolles PIC100 photonics foundry with GFS, built with €2 billion from Europe's Chips Act funding and capable of 1.6T to supply large hyperscale customer needs directly. The company's 15% power semiconductor business (SiC/GaN) targets 800V architectures with compact, performant packages, is a named NVDA ecosystem partner, and guides for $230 million SAM per GW of compute with $1 billion total AI exposure by 2027. Trading at 17x 2027 earnings versus Bloomberg's 39% gross margin estimate for 2028 (which the company will likely reach faster), the stock offers significant upside from photonics and power ramps, though risks include the sustainability of the auto/industrial recovery, with prolonged higher gas prices potentially boosting EV sentiment and near-term delivery numbers.

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China Merchants China Direct Investments Limited (0133.HK) holds a 0.066% stake in Moonshot AI (developer of China's leading agentic AI model Kimi) that is marked at $16.76 million based on a stale $2.5 billion valuation from December 31, 2025, despite Moonshot closing a $2 billion Series D at a $20 billion valuation in May 2026 led by Meituan's venture arm. Kimi has achieved $200 million in annualized recurring revenue as of April 2026 (doubling from $100 million the prior month), surpassed 1 trillion tokens in weekly call volume on OpenRouter (ranking second globally), and serves as the base model for Cursor AI's 'Composer 2' (with Cursor reportedly receiving a $60 billion acquisition option from SpaceX). At the $20 billion valuation, CMCDI's Moonshot stake would represent over 10% of NAV versus the current 2% book value, but CMCDI trades at 0.6x NAV, implying the market values the Moonshot stake at only $1.5 billion (a 93% discount to the $20 billion mark). Following activist engagement, CMCDI's external management agreement expired and a new transitional arrangement implemented in January 2026 explicitly ties manager economics to exit outcomes, aligning incentives with shareholders, while the company recently declared a $0.25 per share dividend (approximately 8% yield) payable in July 2026. As a comparable, SK Telecom's $3-4 billion Anthropic stake added over $6 billion to its market capitalization year-to-date as markets priced in the AI exposure. Under various scenarios accounting for dilution and taxes, CMCDI's Moonshot stake could represent over 30% of NAV in an upside 'Moonshot' case, with significant upside potential if Moonshot is re-rated or exits.

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