DSM: Final Results
09/05/2023 07:00
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Downing Strategic Micro-Cap Investment Trust plc
LEI Code: 213800QMYPUW4POFFX69
9 May 2023
Final Results
The Directors of Downing Strategic Micro-Cap Investment Trust plc announce the
company's results for the year ended 28 February 2023.
Key points
* 8.7% decrease in NAV per share and 9.7% decrease in the share price,
compared to a 17.4% decrease in the FTSE AIM All-Share TR index over the 12
months to 28 February 2023, driven by increasing negative sentiment towards UK
smaller companies given the macro-economic headwinds.
* Focused portfolio of actively managed investments with exciting catalysts in
play, which should prove reliable in volatile markets.
* Most of the investments have progressed through the ‘J curve’ and are
now in either late-stage turnaround or value realisation phase.
* The majority of investee companies are well-financed, and resilient in the
face of the macro headwinds.
* c.£1.5 million of cash to deploy as at 28 February 2023 and a strong list
of potential new investments which will be executed during the right
conditions and at attractive valuations.
* Optionality of a liquidity event in May 2024.
* Improving market conditions favour the Company’s active, value style.
Judith MacKenzie, the lead manager, said
“Despite what we think will be volatile markets over the coming 12 months,
we believe the catalysts put in place
by management within this portfolio should provide non-index correlated
returns, with value creation playing out
in a maturing portfolio. More generally, we think the focus of the market is
likely to play to DSM’s favour. Higher
inflation isn’t great for larger monolithic companies but favours smaller
companies that can grow faster than
inflation. As the cost of capital increases, there will be investor focus on
real assets and real earnings (cash) –
which is a feature of the DSM portfolio where the majority of positions hold
cash on the balance sheet. Capital
allocation, buybacks and self-help are features of the DSM portfolio, as is
the focus on organic growth versus
M&A. We believe the market headwinds could in fact be DSM tailwinds once
combined with the strategic
catalysts playing out in the portfolio.”
Financial highlights
28 February 28 February Change
Assets 202 3 202 2 %
Net assets (£’000) 38,355 43,059 (10.92%)
Net asset value (‘NAV’) per Ordinary Share 77.99 p 85.43p (8.71%)
Mid-market price per Ordinary Share 65.70 p 72.75p (9.69%)
Discount 15.76 % 14.84%
Year ended Year ended
28 February 28 February
Revenue 202 3 202 2
Revenue return per Ordinary Share (1.32 p ) 0.42p
Capital return per Ordinary Share (6.22 p ) 4.29p
Total return per Ordinary Share (7.54 p ) 4.71p
Chairman’s Statement
Overview
Looking back over 2022, it was a difficult year for almost all markets and
portfolios, marked by steep declines for small-cap and micro-cap investing
entities. Nevertheless, even though ending 8.7% down over the year, DSM
outperformed the AIM index comfortably and has eventually beaten the FTSE
Small Cap. That follows last year’s performance when the company’s NAV was
up 5.3% compared to the FTSE AIM All-Share’s decline of 21%. 2023 is proving
almost impossible to assess as central banks tussle to bring down inflation,
the IMF sees no growth at all for the UK and inflation continues to dictate
interest rates. Markets have been largely inactive and depressed. The worst
was through the summer and autumn of last year and companies had to be
resilient and determinedly managed, not highly indebted, to cope with that
economic environment.
Your company’s portfolio demonstrated that resilience and during 2023 to
date DSM has been a good performer amongst micro-cap investment trusts with a
10% increase in NAV.
Portfolio performance
Although NAV per share declined in the financial year, from 85.43p to 77.99p,
that better than most investment company comparators. More to the point, the
constituents of the portfolio remained largely strong and adequately financed.
Its constituent companies have generally sorted themselves. There has already
been successful M&A activity within the portfolio since the year end. The
Manager’s Report will take you through the prospect of further advantageous
realisations.
Something like half of DSM’s portfolio is ripe to be acquired or otherwise
realised. DSM has consistently pointed out that its portfolio is at carried
values that are something like 40% to 50% below market analysts’ consensus
values. In the first quarter of this year, one investment has been bought by
Macquarie at a premium of over 70% to its carrying value. We will just have to
see what interest develops in the rest.
Dividend
In the past, we have usually paid a small dividend in line with the
Investment Trust regulations (0.3p per share in 2022) when we have generated a
revenue surplus for the year. This year we have taken a cautious view on
loan stock interest, deferring recognition until it is paid. As a result,
there is no revenue surplus showing on the Income Statement and consequently
there will be no small year-end dividend.
Shareholders’ interests
Your board is well aware of the share price discount and consistently tries to
ameliorate unnecessary volatility in the share price. We have been constrained
in efforts from time to time: once, at the back end of last year, when inside
information stopped any discount management, and once at the beginning of this
year when an unusual technical issue did the same. So, the discount has rather
wandered between 20% and 15%. We have been modestly buying back of late
whenever markets are stable. At the time of writing, the discount is 15.9%.
On 9 January 2023 we re-iterated our cash redemption offer in a regulatory
announcement. Before issuing that announcement, we talked to all our largest
shareholders. Our published intentions met their interests. That January
announcement discusses the board’s steps ahead including its policy on
discount management, the cash redemption offer and the varied outcomes that
might follow from a strategic review if the cash offer is widely taken up.
Those assertions make for an attractive potential return in these worrisome
times.
Even so, communicating with the wider body of shareholders and potential
investors is not easy. Commentators and analysts do not have the time. Reports
and accounts are too long (ours is 100-odd pages). Thousands of shareholdings
are held in nominee names via platforms. To try to overcome some of those
problems, we embarked on an extensive exercise using s793 of the Companies Act
to penetrate the holdings in nominees. We received a response of about 10% and
we were told that was good! Our managers ran several webinars and to the
latest we received a couple of dozen responses, all of which were supportive
and positive. I continue to contact the larger shareholders two or three times
a year, which is apparently unusual for chairmen.
Provision of information to shareholders
The board and a team at Downing have been developing a new DSM website from
which shareholders and potential investors can navigate across sources of
information set out for them including investor letters, analysts’ reports,
DSM’s performance and its portfolio. The link to the new website is:
www.downingstrategic.co.uk
We press on to try to obtain more interested parties to register their
interest so we can keep you up to date with our communications.
Governance
Our own governance
As in all years, the board undertakes an extensive appraisal of itself and the
managers (and they of us, as a matter of interest) which is a process of
continuous improvement that works well.
More widely
High quality corporate governance and clarity of objectives support
shareholder value through constructively critical executive oversight. Boards
of directors are not there simply to feel comfortable. Directors are the
critically important stewards of their companies. The buck does stop with
them, whether that is the board of a large bank or the vitally important board
steering and monitoring a small AIM business. The failings of boards are all
too tiresome as well as economically damaging. A DSM principle is to be
constructively determined in aiming for effective boards.
Forward view
Across a range of indicators, financial conditions are now very tight. That
suggests more economic difficulties for the US and Europe and continuing
concern amongst investors about their cash holdings and investments. If in
addition UK inflation becomes entrenched, the cost to the economy and society
of dealing with that will be tough. Unwinding will expose the consequences of
past lack of investment and just how many things are now going to be more
difficult if money is no longer cheap.
Your board can take a view on whether businesses have clear objectives whilst
the managers assess management, direction, and balance sheets. Most of DSM’s
portfolio has proved to be resilient and comparatively cheap. Much of its
management has been assessed and improved. As to the UK, slowly, all too
slowly, its leadership is, maybe, learning; learning politically, in its
establishment and its governance that poor management leads to poor returns
and comparative decline whilst, sadly, its leaders tackle stagnation and
inflation through a playbook of responses. In the meantime, your portfolio
should do much better than that, as it has done in recent years. It is a
portfolio for the future of the more determined UK.
As to DSM’s managers – the team are one of the few who have real
determination to change, improve and inject catalytic transformation into
their investments. DSM’s portfolio is a portfolio for change and for a
hopefully recovering country.
Thanks go to the board and managers through a difficult year for markets but
another year of progress for DSM.
AGM
The AGM will be at 12:00 pm on 6 July 2023 at Downing’s office at St Magnus
House, 3 Lower Thames Street, London EC3M 6HD. We ask shareholders intending
to attend to register by email to dsmagm@downing.co.uk so that the Registrars
have your details. The notice of the AGM is set out within the Annual Report
with notes in respect of special business to be proposed at the meeting. We
encourage shareholders to submit their proxy votes in advance of the deadline
of 4 July 2023.
In addition to the AGM, the Company is also planning to issue a circular
shortly to complete the resolution of the technical matter regarding the
company’s share capital which was addressed earlier in the year.
Hugh Aldous
Chairman
5 May 2023
Investment Manager’s Report
Hunting Value, Enabling Transformation
As we have written about many times before - strategic investing takes time,
requires catalysts to be exercised, and outcomes tend not to be correlated to
wider markets. Negative sentiment has not been the friend of smaller UK
companies over the last two years. This has made it even more important for
the DSM philosophy and style to be adhered to. We believe that the coming
months and years could lend themselves to our style of stock-picking, value
orientated investing, as the absence of ‘free money’ and the importance of
cash flows returns to investors’ minds.
DSM builds and helps realise value in UK small companies. DSM is focused, long
term, and the managers unlock value by executing on specific catalysts driven
by company management. We are able to do this by concentrating on a focused
portfolio (12-18 positions) and taking between 3-25% of the underlying equity,
awarding us a seat at the table.
We focus on companies under £150m market capitalisations as they tend to be
overlooked by investors, therefore providing pricing anomalies. We are engaged
investors. We like investing in companies which, whilst solid, might be
underperforming their potential and are overlooked by the market. We invest
where we see the opportunity for constructive corporate engagement to unlock
improved sustainable returns for all stakeholders.
This style is likely to lead to periods of NAV per share performance that is
quite different to the wider market. Out of the 70 months of DSM’s life for
instance, the performance has been 1st or 2nd quartile for over 30 months,
whilst 4th quartile for 21. We realise there is still significant ground to
make up from the early years of the Company. However, we think that recent
performance should allow the current and potential investor to understand the
journey of our underlying portfolio, and how it is reaching maturity with some
significant catalysts playing out within it. We highlight these later in the
report.
Since inception, we have undertaken a multitude of constructive engagements,
these include board improvements, engaging on operational improvements, M&A,
disposals, and helping to guide strategic direction. More specifically, in the
last 12 months we have engaged with management teams in the following
capacities (this list is a sample and just an example of some of what goes on
behind the scenes):
* AdEPT Technology Group, invested in 2020 when revenues were £34m and EBITDA
£7.8m. Based on the last full year accounts, revenues were £68m and EBITDA
£11.9m. We worked with management and other shareholders to deliver a trade
exit during 2022/23. In Feb 2023 the company achieved a successful exit to
WaveNet (a Macquarie backed company) at a 75% premium to our holding value
pre- announcement.
* New Chairman at Synectics. Succession and appropriate handover period. DSM
managers were involved in interview process and selection.
* Attended DigitalBox board meetings in a monitoring capacity.
* Engaged with a number of investees on next steps and strategic realisations
and approaches both for exit and M&A.
* Engaged with new position Journeo and its shareholders regarding the
appointment of a new NED.
* Catalysed new FD appointment at Norman Broadbent.
* Continued active engagement in a non-executive capacity at Real Good Food.
We know that constructive corporate engagement can unlock value because we can
see the results in our portfolio, (see tables below for an illustration of the
catalysts in play to date, and where we believe value will be found in our Top
10 positions).
Good ESG practice has always been core to the DSM investment ethos. We
probably didn’t realise how well we were doing it. We have now become more
diligent in ensuring accurate reporting of ESG credentials within the
portfolio, and we include some key metrics below.
Over the period, we have conducted 24 engagements with 13 companies on various
ESG issues such as board independence, climate change and ESG disclosures.
Four of the engagements are resolved, while the rest are ongoing. All of this
stewardship activity is logged in an Engagement Tracker to monitor the
companies’ progress and performance, as well as manage escalations. We voted
on 160 shareholder resolutions, whereby 9% of votes were against management
recommendations. All of the votes against management were due to changes in
capital structure.
A summary of our voting at General Meetings for the year is below (unless
otherwise stated all meetings are Annual General Meetings):
Meeting date Number of resolutions Management Our votes Rationale for decision
recommendation
Synectics plc 20/04/2022 10 For all For all
Centaur Media plc 11/05/2022 17 For all For all (excl. 14 & 15) Against pre-emption rights waiver
Equals Group plc 17/05/2022 4 For all For all (excl. 4) Against pre-emption rights waiver
Digitalbox plc 16/05/2022 11 For all For all
National World plc 11/07/2022 13 For all For all
Flowtech Fluidpower plc 01/06/2022 13 For all For all (excl. 12)
Venture Life Group plc 20/06/2022 7 For all For all (excl. 5 & 6)
Fireangel Safety Technology plc 21/06/2022 9 For all For all
Norman Broadbent plc 23/06/2022 9 For all For all
Volex plc 19/08/2022 12 For all For all (excl. 11 & 12)
Adept Technology Group plc 20/09/2022 9 For all For all (excl. 7) Against pre-emption rights waiver
Hargreaves Services plc 27/10/2022 10 For all For all (excl. 10 & 11)
Real Good Food plc 27/10/2022 7 For all For all
Theworks.co.uk plc 27/10/2022 14 For all
Ramsdens Holdings plc 27/02/2023 12 For all For all
We decided not to ‘outsource’ ESG, as this is an important part of our
diligence and monitoring process. We as managers need to be accountable.
Therefore, we have created our own ‘scorecard’ for companies, which
considers that one-size-does not fit all. We are pragmatic but lack patience
where we see behaviours that are not acceptable socially, corporately, or
environmentally. Often, we are engaging with our investees on how to improve
their reporting and disclosures.
The added benefit of our integrated approach is that an investee that reports
well on all matters ESG should pique the attention of new shareholders, drive
more efficient returns on equity, and over time achieve a better rating.
Performance and portfolio activity
The year ending February 2023 represented a depressing and volatile period for
equity investors, particularly those investing in small UK businesses. The
macro issues are well known and don’t need reiteration here. We believe that
the time where cheap money was available has gone, inflation hasn’t
stabilised and hence the ‘tool’ of interest rates to balance the economy
hasn’t played out yet. Hence, this is a good time for a value orientated
stock-picker in an overlooked market. The UK market now looks cheaper on
relative terms than it has done for most of our careers.
Below we include a slide from our recent investor presentation which
summarises the outlook and reporting from the top 10 positions in the
portfolio over the reporting year, and our expectations for 2023.
Company % of NAV FY22 reporting Outlook for FY23
Real Good Food plc 10.5% Resilient trading through Covid. Headwinds of cost inflation hit in 2022 Costs being passed through. FY March 24 forecast of £2-4m EBITDA
Centaur Media plc 9.1% Impressive 2022 earnings, EBITDA £8.5m +33%. Two special dividends Commitment to £45m revenue and 23% EBITDA margin in '23 on track
Flowtech Fluidpower plc 8.5% Covid recovery has played through as expected Distributors generally do okay in an inflationary environment. Inventory turns and cash generation can improve
Hargreaves Services plc 8.5% Record year aided by associate contribution Land resilient. Services growth. Potential capital return from associate
Ramsdens Holdings plc 6.6% A year of recovery, and restructure of online business Continued recovery in FX. Good Loan Book progression
Synectics plc 6.3% Restructure bedded in. Recovery in infrastructure markets Recovery in gaming driving earnings. Better quality of recurring revenue deserving higher multiples
National World plc 5.3% Strong year in a challenging market. Growing cash balance Upgraded EPS expectations. Flexible operating model expected to provide benefits versus peers
Fireangel Safety Technology plc 5.0% Headwinds on supply chain disappointed earnings outcome Cost pass through driving operational gearing with tail wind of strong demand
Inspecs Group plc 4.6% Annus horribilis provided a buying opportunity Earnings recovery from 2022 trough driven by reduced Norville losses and Eschenbach cost initiatives
Digitalbox plc 4.5% Very strong full year but with H2 headwinds Headwinds continue but cash balance provides optionality
The Top 3 Contributors:
Centaur Media saw its share price rise by 23.9% in the period and contributed
2.3% to performance. Centaur is certainly coming of age – having weathered
Covid well, we had been concerned about potential negative macro influences
that could affect this media orientated business. However, given the levers it
had to pull from an operational perspective, we have been reassured to see the
continued resilience in the business. This was in part due to the unique
aspects of its brands and offerings – The Lawyer being the predominant title
for the legal profession, and the growth of the ‘Mini MBA’ continuing to
buck the trend of a relatively stagnant wider marketing industry. Upgrades and
a special dividend have buoyed the share price, but we still believe there is
significant latent value here and as the company delivers on its MAP-23 margin
plan, it will have a double-digit free cash flow yield and a single digit PE.
Ramsdens saw its share price up by 21.8% in the period and contributed 1.4% to
performance. This was a reflection of trading improving to close to pre-Covid
levels, the articulation of a refreshed new store opening program, and the
results of a revitalised online jewellery offering. In the thick of Covid,
Ramsdens was one of DSM’s worst hit investments – store closures put the
business strategy on ice. However, we believe that this management team is one
of the strongest and most manoeuvrable in the portfolio, and they used their
time well. After only modest spend on the online jewellery site and a revamp
of FX, the opening up of Covid restrictions evidenced an improvement in
jewellery sales. The group recently reported in a trading update that
jewellery retail gross profit increased by over 20% on the prior year,
reflecting further growth both in store and online. Meanwhile FX has returned
to c.70% of pre-Covid and the loan book has improved to £9.7m.
Synectics saw its share price up by 18.2% in the period and contributed 1.5%
to performance. This was a recognition of good order intake and new contract
wins which included the most recent Saudi pipeline surveillance contract for
£3.5m. The analyst forecasts are underpinned by this contract’s strength
and therefore look to an EBITDA of £4.3m in 2023, implying an EV/EBITDA
multiple of sub 5x. Next year (2024) this drops to sub 4x, delivering a 10%
free cash flow yield. Clearly the market is cynical on delivery of this,
however, confidence from management and the arrival of a new chair has begun
to attract attention to a company that has been overlooked by the market.
Top 3 Detractors:
FireAngel saw its share price down by 26.9% in the period and detracted 3.3%
from performance. We often describe this company as the one in the portfolio
that is notorious for finding the banana skin to slip on. Although our
confidence in management’s ability to execute was heightened through the
last 18 months as the gross margin delivery plan was delivered, this has been
further hampered recently by macro headwinds. Although demand is strong and
the barriers to entry are significant, we are ensuring management focus on the
execution of getting product out the door. The recent Techem contract news
illustrates the strength of the IP and the market leading advantage of
FireAngel. This has yet to translate to shareholder value. Ultimately, we
believe that FireAngel should be part of a much larger entity, who could
benefit from the IP, the dominant market position and regulatory growth in the
market.
DigitalBox saw its share price down by 42.3% in the period and detracted 4.0%
from performance. After a stellar first half of the year, trading deteriorated
in the second half as a result of wider ad spend headwinds. Regardless, the
group still delivered a strong performance, owed to the lean operating model
centred around the Graphene Ad-Stack and core titles Entertainment Daily, The
Daily Mash, The Tab, and now, The Poke. While strategic progress has been
relatively slow due to the valuations of media businesses through 2021 and the
first half 2022, expectations of the vendors of private businesses are now
reducing and there is greater opportunity for Digitalbox management to deploy
capital. Buying sub-scale assets is a proven strategy in public markets but
requires patience. Management is also proving their track record here with The
Tab paying itself back in less than a year. The Poke, acquired at the end of
2022, will add to the group’s depth in satirical content which generates
strong yields, and we believe this can generate similar payback to The Tab.
Overall, we remain positive on the group’s prospects. While they can be
subject to algorithm changes on the social media platforms, they have proven
adept at navigating these in the past and a healthy net cash balance sheet
provides comfort and opportunity in a market currently facing headwinds.
Tactus, a private holding, saw the value of its C shares written down by 34.9%
in the period, detracting 1.8% from performance. While near term trading is
difficult, Tactus retains a strong market position in the PC gaming space
which is one of the fastest growing forms of digital entertainment globally.
It also has an established market position through supply of its own and
third-party branded PCs to the consumer, enterprise, and education sectors.
Tactus experienced difficulties through 2022, mostly driven by a weaker
consumer environment and significant de-stocking of all retail channels
following buoyant Covid trading. There were also fewer new product releases
through the year which often provide a catalyst for upgrade and replacement
cycles. While earnings were significantly lower, operating cash generation was
very strong as the company was able to prioritise inventory sell through and
to reduce overall levels of working capital. Consumer appetite should return
as attitudes adjust to a higher cost of living through 2023, and Tactus has
significant untapped opportunity in the B2B space where they have added
headcount and are significantly under penetrated versus peers. While the write
down is disappointing, this should be taken in the context of the total
investment and returns to date. Of a total investment of £1.9m across equity
and loan notes, DSM has realised a total of £1.4m. The loan notes were fully
redeemed less than four months after our investment, returning 13% in total,
including the redemption premium and arrangement fee. The equity element
disposed of at the same time returned over 3.6x our cost. Overall, DSM has
recouped 75% of its total cost of investment to date yet retains over 84% of
its equity stake.
Activity in the period
Four new investments were made in the period: Norman Broadbent, TheWorks,
Inspecs, and OnTheMarket, and we topped up modestly in another three
positions. This incurred a spend of £6.3m. Meanwhile, an outright disposal
was made in one company, Venture Life, where we had lost confidence in
management’s capabilities re capital deployment and controls.
Alongside this transaction we took profits in four others, realising £5.2m in
total, at a realised gain of £852,000. Net cash at the period end was 3.9% of
net assets, before the proceeds of AdEPT Technology which, received post
period end, will add c£2.48m to cash.
Outlook
In terms of our outlook, we focus on where we are on the value creation
journey with our portfolio. The table below highlights where we believe value
creation is likely to be derived within our top 10 holdings over the course of
the next 12-24 months.
As you can see, there is a clear pathway to value realisation, or an
identification of where the market has undervalued companies, across the
portfolio.
Company % of NAV Comment
Real Good Food plc 10.5% Value sits in Loan Stock, with double digit accrued interest and redemption premium. Capital is £3.28m, with interest accrued of £3.1m, of which c£2m is not reflected in the DSM NAV
Centaur Media plc 9.1% Delivery of commitment to £45m revenue and 23% EBITDA margin in '23 will drive a 12% free cash flow yield. Rerating from EV/EBITDA of 7x towards sector multiple of 12.5x. Consensus at 78p which is below our SOTP assumption
Flowtech Fluidpower plc 8.5% Pathway to double digit margins is established, now needs strategic execution. Online can facilitate cross sell and wallet share growth. Re-rating to 10x+ and de-gearing opportunity over short-medium term
Hargreaves Services plc 8.5% Associate and renewables realisations could be £50+ million. Cleaner group without pension is easier to understand and value
Ramsdens Holdings plc 6.6% Return to pre-Covid earnings is on track, with improved efficiencies with online offering improving margin. Expansion into SE should provide enhanced ROI
Synectics plc 6.3% Return to pre-Covid trading in Asia. Earnings forecasts underpinned by better margin on services and infrastructure contracts. FY'23 EBITDA of £4.3m, Net Cash of £4.3m and a double-digit free cash flow yield deserves a re-rating from 4.6x EV/EBITDA to c. 9/10x
National World plc 5.3% Digital progress offsetting print declines can transform the earnings profile and rating. Cash deployed on earnings accretive deals can prove the strategy. Rating recovery will be market/ sentiment dependent
Fireangel Safety Technology plc 5.0% Delay in earnings progression due to headwinds of supply chain in 2022 are lifting. 2023 key year for the Techem contract –not included in forecasts. Currently 3xEV/EBITDA due to cynicism on delivery of earnings – as news flow improves this should change. Delivery is key
Inspecs Group plc 4.6% Earnings recovery to c$24m EBITDA in 2023 largely underwritten by cost savings and self-help, accompanied by a re-rating. Medium- and longer-term growth opportunities and delivery against strategy can regain a premium multiple
Digitalbox plc 4.5% M&A opportunities and organic growth can build a £2m EBITDA business. Requires media recovery for a fair rating
Despite what we think will be volatile markets over the coming 12 months, we
believe the catalysts put in place by management within this portfolio should
provide non-index correlated returns, with value creation playing out in a
maturing portfolio. More generally, we think the focus of the market is likely
to play to DSM’s favour. Higher inflation isn’t great for larger
monolithic companies but favours smaller companies that can grow faster than
inflation. As the cost of capital increases, there will be investor focus on
real assets and real earnings (cash) – which is a feature of the DSM
portfolio where the majority of positions hold cash on the balance sheet.
Capital allocation, buybacks and self-help are features of the DSM portfolio,
as is the focus on organic growth versus M&A. We believe the market headwinds
could in fact be DSM tailwinds once combined with the strategic catalysts
playing out in the portfolio.
Judith MacKenzie
Head of Downing Fund Managers and partner of Downing LLP
5 May 2023
Investments as at 28 February 2023
As at 28 February 202 3 As at 2 8 February 202 2
Market Value (£’000) % of Total A ssets % of Total Assets
Centaur Media plc 3,484 9.08 6.54
Flowtech Fluidpower plc 3,273 8.53 7.92
Hargreaves Services plc 3,269 8.52 10.09
Real Good Food 10% Loan Notes* 2,528 6.59 6.19
Ramsdens Holdings plc 2,520 6.57 7.80
Synectics plc 2,402 6.26 4.91
Adept Technology Group plc 2,394 6.24 5.16
National World plc 2,040 5.32 4.97
Fireangel Safety Technology plc 1,904 4.96 6.28
Inspecs Group plc 1,769 4.61 -
Digitalbox plc 1,724 4.50 7.39
Volex plc 1,568 4.09 9.98
Equals Group plc 1,494 3.90 -
Onthemarket plc 1,445 3.77 -
Real Good Food 12% Loan Notes (*) 1,420 3.70 4.08
Journeo plc 1,419 3.70 -
Theworks.co.uk plc 868 2.26 -
Tactus Holdings Limited** 760 1.98 3.79
Norman Broadbent plc 334 0.87 1.23
Norman Broadbent 10% Loan Notes* 215 0.56 -
Real Good Food plc 97 0.25 0.40
Venture Life Group plc - - 1.98
Other - - 2.88
Total investments 36,927 96.26 91.59
Cash 1,505 3.93 8.82
Other net current assets (77) (0.19) (0.41)
Total assets 38,355 100.00 100.00
*Unquoted. Stated inclusive of the fair value of unpaid interest income **Unquoted
All investments are in Ordinary Shares and traded on AIM unless indicated. The
total number of holdings as at 28 February 2023 was 18 (28 February 2022: 15).
As at 28 February 2023, loan note principal represented 9.64% (28 February
2022: 7.29%) of total assets and the total of loan note principal and interest
represented 10.85% (28 February 2022: 10.27%).
Background to the investments
(unless otherwise stated all information provided as at 28 February 2023)
AdEPT Technology Group PLC (AdEPT) (6.24% of net assets)
Cost: £3.83m Value as at 28 February 2023: £2.39m
Background
AdEPT is one of the UK's leading independent providers of managed services for
IT, unified communications, connectivity, and voice solutions. AdEPT's
tailored services are used by thousands of customers across the UK and are
brought together through the strategic relationships with tier-1 suppliers
such as Openreach, Vodafone, Virgin Media, Avaya, Microsoft, Dell, and Apple.
AdEPT functions as an aggregator of telecoms services providing a smoother,
integrated service to corporate and government organisations. We were
attracted by the high operational gearing and recurring revenue streams at
attractive margins. Communications and technology have converged over recent
years and that is only set to accelerate into the future, and AdEPT is well
placed to benefit from this trend.
Update to the investment case
* Trade exit to Wavenet, a subsidiary of the private equity backed Macquarie
Group Limited, at a 75% premium to the holding value in DSM at the time of the
announcement.
Progress against investment case
Wavenet Group, a subsidiary of Macquarie Group, a global financial services
group, based in Australia, announced an all-cash offer for AdEPT. We believed
that AdEPT had over-geared, and that it would take considerable time for the
market to realise the quality of the earnings and market position that the
business had achieved. Therefore, we were keen to drive an exit as we believed
the derisory multiple that the company has been trading at since before Covid
was likely to continue in public markets. With the managers of DSM urging an
exit, management embarked on a process to sell the business which resulted in
Wavenet offering a significant premium of 74.8% to the closing price of 115
pence per AdEPT share on 7 February 2023 (the last business day before the
date of the commencement of the offer period); and 77.4% to the
volume-weighted average price of 113 pence per share for the three-month
period ended 7 February 2023. The acquisition by Wavenet Group completed in
April.
Centaur Media PLC (Centaur) (9.08% of net assets)
Cost: £3.58m Value as at 28 February 2023: £3.48m
Background
Centaur Media is an international provider of business information, training
and consultancy, creating value through premium content, analytics and market
insight within the Marketing and Legal segments. Centaur operates under
several flagship brands, namely The Lawyer, MW Mini MBA, Influencer
Intelligence and Econsultancy, with the latter three brands forming part of
their marketing arm, XEIM.
Update to the investment case
* Strong progress on strategy to drive profitable revenue growth despite macro
headwinds.
* Net cash balance grew to £16m which equates to a double-digit free cash
flow yield.
* Another special dividend of 2p announced, which results in a pay-out per
share of 6.1p in the year (previous year 1p).
* Significant director share-buying.
Progress against investment case
Centaur is a multi-faceted media and IP business where we believe the sum of
the parts is significantly greater than our entry price. There is value in the
Flagship 4 brands which management consider to be the key drivers of organic
growth: ‘Econsultancy’, Influencer Intelligence’, ‘MW Mini MBA’ and
‘The Lawyer’. The first stage in that value realisation is the group’s
Margin Acceleration Plan (MAP23) which aims to raise adjusted EBITDA margin
growth to 23% and increase revenue to more than £45m by 2023.
The group reported strong trading for the year to December 2022. This resulted
in revenue of £41.6m, EBITDA margins of 20% and EBITDA of £8.5m. This puts
the MAP23 firmly on track. While management highlighted that the macro
conditions resulted in slowing growth in H2, the fact that it grew at all is
testament to the defensive revenue model largely in subscriptions. The strong
operating performance continues to translate well into cash, and net cash
balances grew to £16m, allowing a 6.1p cash return in the year through normal
and special dividends. This puts Centaur at an interesting juncture, with a
strong net cash balance sheet and a highly cash generative business model. The
special return might indicate that the board now deem excess cash as
distributable, and since the business is generating a free cash flow yield of
around 10%, if it doesn’t re-rate and earnings don’t decline, then
double-digit returns are all but guaranteed from here (the usual caveats
apply). We also believe in our investment thesis that the sum-of-the-parts is
significantly greater than the market capitalisation, providing optionality
for value realisation which is not just earnings driven.
Digitalbox PLC (Digitalbox) (4.50% of net assets)
Cost: £1.13m Value as at 28 February 2023: £1.72m
Background
Digitalbox is a 'pure play' digital media business with the aim of profitable
publishing at scale on mobile platforms. The business generates revenue from
the sale of advertising in and around the content it publishes. Its
optimisation for mobile enables it to achieve revenues per session
significantly ahead of market norms for publishers on mobile.
Update to the investment case
* Increased advertiser demand for high-quality audiences on mobile.
* FY2022 delivered a strong revenue and profit year despite H2 headwinds.
* Strategy delivering acquisitions as expected and in a more favourable
pricing environment.
* 2023 likely to be tougher in the face of ad-spend headwinds.
Progress against investment case
The company acquired The Poke, a satirical website, in December 2022. The
acquisition provides a great opportunity for Digitalbox to strengthen its
position within the satire/comedy space. The Poke has over three million
monthly sessions, which when combined with The Daily Mash's three million
monthly sessions, will establish Digitalbox as a leading destination for
online humour.
Equals PLC (Equals) (3.90% of net assets)
Cost: £1.19m Value as at 28 February 2023: £1.49m
Background
Equals Group is a technology-led international payments group augmented by
highly personalised service for the payment needs of SME's, whether these be
FX, card payments or via Faster Payments. Founded in 2007, the group listed on
AIM in 2014 and currently employs around 265 staff across sites in London and
Chester.
Update to the investment case
* Continued significant revenue growth.
* Gross profits and adjusted EBITDA upgrades on the back of the Full Year 2022
results.
* Tight control of cost base in the face of high inflation and labour market
tightness.
* Strong balance sheet.
Progress against investment case
Equals continued to outperform expectations with revenues up 58% to £69.7m.
Most significantly, the KPI that we monitor – the revenue per day – was up
to £342k in Q1 2023, an increase of 52% over £225k per day in Q1 2022. Ian
Strafford‐Taylor, the CEO, is very focused and motivated to grow Equals into
one of the predominant payments/FX solutions, rivalling the big banks for
service and cost. Our investment thesis here is predicated by the operational
gearing achievable from the quality of revenue growth and careful management
of the core cost base. We acknowledge that software driven solutions
businesses require constant investment and evolution in development, which can
often hamper the earnings of a small company. But here we believe that Equals
has got to a scale that supports that spend, complemented by a steely eye on
return on investment for development spend.
FireAngel Safety Technology Group PLC (FireAngel) (4.96% of net assets)
Cost: £5.73m Value as at 28 February 2023: £1.90m
Background
FireAngel designs, sells and markets smoke detectors, carbon monoxide
detectors and home safety products under the FireAngel, FireAngel Pro,
FireAngel Connect, AngelEye and SONA brands.
We were attracted to FireAngel because of its dominant share of the UK fire
safety market, with products that are endorsed throughout Europe. We also saw
an opportunity from changing legislation that we believe FireAngel will
benefit from. Legislative guidance is for the purchase of smoke alarms with a
7–10-year lifespan, and we are already beginning to see a replacement cycle
on the installed base in more mature markets.
Update to the investment case
* Strong revenue performance.
* New contract wins.
* Increasing legislation driving sales.
* Supply chain challenges remain.
* Forward currency hedge.
Progress against investment case
FireAngel announced a trading update for the year ended 31 December 2022 and
reported that the group delivered a resilient performance in 2022, resulting
in its strongest revenue performance since 2017. Business Unit performance was
strong across most territories with demand outweighing supply, driven by the
tailwind of increasing legislation. Sales were up 32% to £57.5m, adjusted
loss before tax reduced by 30% to £2.1m, and adjusted EBITDA was £1.6m from
£0.3m the year prior.
FireAngel had some ‘self-help’ measures to implement which has allowed it
to broadly maintain gross margins despite the headwinds. These were achieved
despite low availability of higher margin products and strong input price
pressures. Planned mitigations against inflation and volatile input prices
began to improve performance from mid-Q2 2022 and the company delivered gross
margin of c.26% in the six months to the 30 June 2022, leaving it well
positioned for the historically stronger second half of the year. While impact
of the global supply chain challenges improved across H2 2022, the group and
its suppliers are still having to commit to purchases 12 to 15 months ahead,
as opposed to a historic norm of 3 to 6 months. Changes in product and
sourcing mix along with extended shipping times from Asia have impacted the
level of stock held. As a result, stock at 31 December 2022 stood at
approximately £8.0m, compared to an abnormally low comparable position as at
31 December 2021 of £3.7m. The board had anticipated a year end stock number
closer to £7.0m.
At the end of December 2022, the group had £1.4m of cash, £4.8m of debt, and
an Inventory Discount Finance (IDF) facility draw down of £3.4m. The majority
of the group’s goods and services are currently purchased in USD. FireAngel
chose to establish a level of certainty by hedging a large proportion of the
USD purchases for the remainder of the year and into 2023 at an average rate
of 1.14 USD/GBP. This established a level of certainty as regards cash
performance in the rest of the year and into 2023. At 31 December 2022, there
was a mark-to-market loss on the forward currency contracts taken out from
September 2022 of £1.6m against a gain of £0.3m in 2021.
There was further pain in the form of exceptionally high Purchase Price
Variance costs for securing scarce components of £1.4m which were incurred in
the year compared to £0.8m in 2021. Management does not expect these costs to
be a material cost going forward. FireAngel has made significant progress with
its project to develop a new generation smoke alarm alongside its German
partner, Techem. This is a paid-for project that will yield some exciting
international opportunities in the coming year. In a highly challenging macro
environment, the group has performed well and while the reported result will
not be what the group had set out to achieve, the underlying numbers
demonstrate the strong progress made in line with its growth ambitions.
Flowtech Fluidpower PLC (Flowtech) (8.53% of net assets)
Cost: £2.60m Value as at 28 February 2023: £3.27m
Background
Flowtech is a value‐added distributor of hydraulic and pneumatic consumables
into a wide array of sectors predominantly in the UK and Ireland. The group is
a leading UK player in this space, with pre‐Covid revenues of over £110m,
and it sits between much larger global manufacturers and a highly fragmented
and localised cohort of smaller distributors. The company’s high service
levels, broad stock offering and exposure to maintenance, repair and overhaul
markets were key attractions, and these attributes facilitate Flowtech’s
relatively high gross margins of over 35%.
Update to the investment case
* Trading performance in line with market expectations.
* Re-structuring providing a more scalable operating cost base.
* Post-Covid revenue recovery has played out as expected.
* Impairment of goodwill in relation to legacy acquisitions.
* Higher inventory investment affected cash generation and net debt.
Progress against investment case
Full year results were in line with expectations, with revenue up 5.2% and a
strong recovery in underlying earnings with a healthy positive return from the
Services segment. The business continues to streamline with further cost base
improvements. Net debt was higher, owed to higher working capital investment,
but we expect this to reduce in due course. A detractor was the impairment of
several legacy acquisitions, driven by the current interest rate environment
demanding a higher cost of capital. Given these are non-cash and were made
under a prior management regime and different growth strategy, this should not
be too concerning.
Flowtech has been a post-Covid recovery play, and this has now come through in
revenue terms. The business is now investing in its e-commerce platform which
will allow it to better target existing customers and open up new revenue
opportunities. From a margin perspective, we think that there are gross margin
tailwinds, and the effects of the ongoing re-structuring should provide a more
scalable operating cost base which can deliver improved drop through on
revenue growth.
Progress against our original thesis has been slower than expected, however,
there remains a significant potential upside if management can demonstrate
reasonable top line growth combined with improving margins and payback from
e-commerce investment. Working capital efficiencies should be well within
their grasp to execute once trading conditions normalise. We remain confident
and view the equity as significantly mispriced
Hargreaves Services PLC (Hargreaves) (8.52% of net assets)
Cost: £2.56m Value as at 28 February 2023: £3.27m
Background
Hargreaves is a diversified group delivering key projects and services to the
industrial and property sectors. The Distribution and Services division aims
to generate sustainable profitability through operations across the energy and
infrastructure sectors in the UK, Europe and Asia. The Property and Land
division aims to generate value through the development and/or disposal of the
company’s significant land bank which includes planning for residential,
logistics and industrial space.
Update to the investment case
* Strong trading with profitable growth across business sectors.
* Pre-tax profits up 80%.
* Strong balance sheet.
* Potential reduction in trading opportunities in the German commodity
business.
* Numerous strategic catalysts available to unlock value.
Progress against investment case
Hargreaves reported interim results for the six months to 30 November 2022,
and highlighted strong revenue growth in Services, leading to an overall
increase of 53% year on year, primarily due to HS2. Pre-tax profit was up 80%.
The group increased the dividend by 7.1% to 3.0p and the balance sheet remains
robust, with £18.1m in cash, up from £8.5m in November 2021.
Hargreaves has developed a strong platform from which to create value for
shareholders. The core Land and Services businesses are well positioned to
generate slow and dependable growth and there are numerous strategic catalysts
to unlock value, including from the renewable asset portfolio and the German
associate which we expect could play out sooner rather than later.
Inspecs Group PLC (Inspecs) (4.61% of net assets)
Cost: £1.54m Value as at 28 February 2023: £1.77m
Background
A new investment in the reporting period was made in Inspecs, a company we
have been following as a potential recovery trade since around the summer of
2022. Inspecs is a vertically integrated designer, manufacturer and
distributor of eyewear and lenses. It owns its own brands, some of which are
market leading, and it also licenses brands and provides white label options
for others.
Update to the investment case
* FY trading performance expected to be in line with revised market
expectations.
* Norville losses narrowed in Q4 and further progress continues to be made.
* Operational efficiencies expected to deliver further benefits in 2023.
* Operating costs need to be well-managed.
* Net debt (excluding leases) increased by $1.4m during the year to $34.1m.
Progress against investment case
As Inspecs is a new position, there is little to report against our thesis at
this stage. However, we broadly expect that 2023 will be a recovery year as
cost savings and improved demand play through such that the current guidance
is achievable, and the risk of a covenant breach is reduced. This should drive
a re-rating as the business is priced on its growth and quality potential.
Longer term, there remains significant upside opportunity in smart eyewear and
other growth initiatives. The business has historically been valued between
15-20x EV/EBITDA, which is also in the range of its publicly quoted peers,
thus we would expect a return to around this rating in a normal market.
Journeo PLC (Journeo) (3.70% of net assets)
Cost: £1.13m Value as at 28 February 2023: £1.42m
Background
Another new addition to the portfolio is Journeo. Journeo provides solutions
into the transport sector, including displays and passenger management. This
is a sector that we are particularly enthusiastic about. The underinvestment
in UK infrastructure, particularly transport, is well known and we as managers
have capitalised on this in other investments over the last decade. The sector
tends to be serviced by a number of niche/small companies, and therefore a
smart buy-and-build strategy can yield attractive returns if executed by a
management team focused on return on investment.
Update to the investment case
* Set to benefit from long‐term government spending trends in the transport
sector.
* Strong and increasing levels of earnings visibility.
* Strong sales opportunity pipeline.
* Net margins expected to improve.
Progress against investment case
We have followed Journeo for many years, not least because the ex‐CEO of
another portfolio position (Synectics) had become CEO at Journeo. Russ
Singleton overcame some contractual and structural issues at the company and
created a profitable business, ready to make acquisitions. We took a 6.6%
equity stake in Journeo on the acquisition of Infotec and the subsequent £7m
fundraising in late December 2022.
The business is set to benefit from long‐term government spending trends in
the transport sector to help reduce emissions by improving the quality and
quantity of public transport journeys. There are a number of
multi‐billion‐ pound government projects which Journeo is able to tap into
to expedite the growth of the business, such as the c.£2.4bn Transforming
Cities Fund, the c.£3bn Bus Back Better strategy, and the Williams‐Shapps
Plan for Rail. Post reporting period end, the group announced that Journeo has
won a SaaS contract with Transport for Wales to supply a new displays Content
Management System for the Welsh Bus Data Content Management System. The
initial contract value is £1m and has a five-year term, with two additional
one-year extensions available through to 2030. Infotec, has received a £0.7m
purchase order from Network Rail for the supply of customer information
displays for stations operated by Southeastern throughout the Kent region.
Journeo’s products and services may be familiar – these include displays
at bus stops throughout the UK (where bus due times are shown). There are also
displays in railway stations – notably the new displays at both Euston and
Paddington stations. Journeo has strong and increasing levels of earnings
visibility with a scalable SaaS business model which has been in existence for
over two years. Investments made over recent years in the group’s technology
have been focussed on the delivery of a cloud‐based, modular,
hardware‐agnostic SaaS platform. The number of connections on the platform
has now reached 10,000. The sales opportunity pipeline currently sits at over
£50m post‐acquisition. Beyond the near‐term acquisition target, the
company will continue to look for opportunities to strengthen and deepen the
product portfolio, extend the range of services offered, and potentially add
growth into adjacent market opportunities. In terms of valuation, we believe
the acquisition of Infotec was undertaken at a good price (c.2.5x EV/EBITDA)
and is an excellent fit – even being in the same town as the main activities
of Journeo. However, we have not baked in any synergies on cost, or indeed on
cross selling. Therefore, just putting the businesses together for FY 23 (E)
should yield a turnover of £33m, and EBITDA of £4.2m. Net margins should
improve by 2% to 9%. At our entry price, post‐acquisition Journeo therefore
trades on a FY 23 (E) EV/Sales multiple of 0.3x, an EV/EBITDA of 2.4x and a
P/E of 5.7x. Compare this to wider peers, like Tracsis Plc which trades on a
P/E of 25x, and discounting this by 30% for size and liquidity – would
reflect a peer P/E of 17.5x – or 311p per share valuation, a 127% uplift to
the current price of 137p
National World PLC (National World) (5.32% of net assets)
Cost: £2.62m Value as at 28 February 2023: £2.04m
Background
National World is a reverse into the regional publishing assets of the old
Johnston Press, the third largest newspaper publisher in the UK. The business
is highly cash generative and unencumbered by legacy assets typical of other
large publishers. This leads to improved cash generation and that cash flow
can be re-invested into content and a digital transition which will offer more
opportunities for growth and higher margins.
Update to the investment case
* Strong trading for FY22.
* Digital revenues up 25%.
* Acquisitions increase online audience by 10%.
* Restructuring generating significant cost savings.
* Difficult consumer environment reducing advertising demand.
Progress against investment case
National World issued a strong trading update in January 2023 which was
especially welcome given the company seemed to have been completely forgotten
by investors. Many had evidently assumed that the woes of other publishers
were being replicated here, however, the lean operating model shone through,
and the business generated a strong result. EBITDA of £9.4m and cash less
loans and deferred consideration of £23.5m provides a strong balance sheet.
The business made some strategic progress in the year, with several
acquisitions and investments. A $1.25m investment into The News Movement which
should provide access to new audiences through serving content via more
engaging short format stories. ScoopDragon and NewsChain bring football and
video‐first content, respectively, into the group. Video received a lot of
focus through 2022 and grew strongly, as well as providing higher yields, so
it makes sense that management continue to focus on this area for growth.
Norman Broadbent PLC (Norman Broadbent) (equity, loan notes and interest,
1.43% of net assets)
Cost: £0.62m Value as at 28 February 2023 (including loan note interest):
£0.55m
Background
Norman Broadbent (NBB) is less than 2% of DSM but Downing client funds now
hold an influential stake of almost 20% of the equity. NBB offers a bespoke
mix of high‐quality Search, Interim Management, Research & Insight,
Assessment & Development solutions. A recognised but historically uninspiring
brand, NBB has market presence but had struggled to gain scale. However, it is
profitable, modestly cash generative, and provides a platform for growth.
After executing a turnaround in 2017 and a return to stability, Downing and
other strategic shareholders recently refreshed the Chair and CEO positions,
having identified a strong ‘buy‐in’ team to take NBB to the next level
of organic and inorganic growth.
Update to the investment case
* Strong revenue growth and Net Fee Income (NFI).
* Highly experience management team with proven track record.
* Highest expected annual NFI and EBITDA figures since FY. 2019.
* Average fee per engagement increased by 50%.
* Economic headwinds.
Progress against investment case
Norman Broadbent issued a trading update for the three months ended 31
December 2022 and the year ended 31 December 2022 in January 2023. Over Q4,
the group reported that group NFI was up 29% to £2.34m, which was up 40%
compared to the average for the previous three quarters of £1.67m. The group
is progressing with its plans to expand its position in Scotland and opened an
office in Edinburgh ahead of plan. It has sub-let the overcapacity in its
London office with income entirely offsetting cost in 2023 of the newly opened
Aberdeen and Edinburgh offices.
Over the full-year, NFI was up 27% to £7.34m and EBITDA is expected to be
approximately £100k, up c.£400k on FY 2021's LBITDA of £303k. The business
is now on a much firmer footing and very much back to pre-pandemic levels,
with the highest expected annual NFI and EBITDA figures since FY 2019.
In addition to the positive annual EBITDA, the group has been growing
headcount significantly, thus building the platform for continued profitable
growth in future years. This includes a number of fee generating hires made in
Q4 2022 who will begin delivering revenue in Q1 2023. The quality and
seniority of mandates consistently rose over 2022, with the average fee per
engagement increasing by 50% over that period.
Management is aiming to deliver annual EBITDA of £1.25m in 2025 through
organic growth whilst continuing to seek acquisition opportunities. The
economic headwinds remain challenging; however, we have confidence that the
necessary foundations are in place to enable NBB to achieve this target.
OnTheMarket PLC (OnTheMarket) (3.77% of net assets)
Cost: £1.70m Value as at 28 February 2023: £1.44m
Background
OnTheMarket is a majority agent-owned and backed property portal with around
60% share of UK agents. The new strategy will recycle the profits and cash
generation from the undervalued portal into ancillary tech services to provide
more value for agents and facilitate further wallet share.
Update to the investment case
* FY23 pre-close indicated that results would be in-line.
* Cash balance of £10.4m provides operating flexibility and potential for
capital returns.
* Small agents sell down of shares indicates good support for the business.
Progress against investment case
OnTheMarket is a new holding and therefore there is not much to report against
the investment case at this stage. However, we view the FY23 pre-close as
positive, signalling per agent revenue growth which is key to our thesis.
Within this we expect that new home revenue will be particularly strong as
housebuilders try to sell through stock more quickly. While the economic
conditions are less supportive, we view OTMPs value offering compared to the
two larger portals as having particular merit since agents are more likely to
reassess their business costs and return from that investment. There was a
sell-down of shares as agent backers exited their lock-up period and this was
lower than we expected, signalling good support for the business from its
backers and customers.
Ramsdens Holdings PLC (Ramsdens) (6.57% of net assets)
Cost: £1.90m Value as at 28 February 2023: £2.52m
Background
Ramsdens is a growing, diversified, financial services provider and retailer,
operating in the four core business segments of foreign currency exchange,
pawnbroking loans, precious metals buying and selling and retailing of second
hand and new jewellery. Ramsdens does not offer unsecured high-cost short term
credit. Headquartered in Middlesbrough, the group operates from over 150
stores within the UK (including 2 franchised stores) and has a growing online
presence.
Update to the investment case
* Strong performance as trading conditions normalised.
* Revenue and gross profit significantly improved.
* Quality management team.
* Strong balance sheet conservatively managed.
* Store estate expanded to 158 stores.
Progress against investment case
Ramsdens issued FY22 results that were significantly ahead of FY21 as the
group recovers from the impact of Covid-19. Revenues were up 62% on the year
prior, and profits up 71%. FY22 profit has been driven primarily by the strong
recovery in foreign currency gross profit to £12.6m as international travel
returned to a reasonable level. Revenue generated by the jewellery retail
segment increased by almost 50% to £27.1m, supported by strategic investments
in stock, merchandising and the website. Demand for the group's pawnbroking
loans grew during the year as a result of customer spending habits returning
to normal and fewer alternative options for small sum short term credit being
available. As at 30 September 2022, the loan book had increased by over 40% to
£8.6m.
In an update on Q1 FY23 trading, the group reported further positive progress:
jewellery retail gross profit increased by over 15% primarily as a result of
strong premium watch sales both instore and online; volumes of foreign
currency exchange remained at approximately 70% of pre pandemic levels; the
pawnbroking loan book has grown further from the year-end balance of £8.6m to
£9.1m; new stores have been opened in Bootle, Basildon, Croydon and a second
store in Bradford, taking the store estate to 158 stores (including two
franchised stores).
While Ramsdens is a consumer facing business, its diversified model has proven
resilient, and we expect that a tighter consumer environment will continue to
drive strong business growth for the pawnbroking segment. This is also likely
to be replicated in precious metals purchasing, which is growing from a
relatively low base, where consumers are likely to dispose of unwanted items
to boost cash flows. Jewellery retail and FX may find the operating
environment tougher, but we think that there is still some recovery trade to
play through here, and scope to benefit from consumers trading down.
Margins should be stable, and we think that there is upside as the business
continues to benefit from operating leverage and investment into cross-selling
and a more scalable e-commerce platform. We don’t expect any shocks in terms
of cash flow – this is a cash generative business and investments are small
and incremental. Similarly, outside of lease liabilities, the business is
conservatively managed with little bank debt – of a £10 million revolving
credit facility, only £1.5 million was drawn as at March, and this facility
extends through to 2024, so no near-term refinance risks. Overall, we think
Ramsdens is a relatively lowly priced company given the quality of management
and defensiveness of the business model. We expect that it will continue to
prove a solid store of value through economic uncertainty.
Real Good Food PLC (RGD) (equity, loan notes and interest, 10.54% of net
assets)
Cost: £5.17m Value as at 28 February 2023 (including loan note interest):
£4.04m
Background
Real Good Food is a food manufacturing business specialising in cake
decoration (Renshaw and Rainbow Dust Colours) in the UK, USA and Europe.
Update to the investment case
* Business has gone through material turnaround.
* Macro-headwinds continue to impact the business.
* Challenging conditions for consumer facing business.
* Efficiency measures to take out costs.
Progress against investment case
Real Good Food’s latest interims reported revenue decreased by 20.1% to
£15.9m and there was an EBITDA loss of £2.0m. Reduced volumes and the lag
effect of passing cost increases through to customers reduced gross margins to
34%, and the ongoing availability of key ingredients has also negatively
impacted performance, albeit this has begun to ease. Real Good Food is,
optically, in a tough position, operating a consumer facing business, with a
discretionary product. It has a structurally low margin, high commodity, and
significant (unionised) labour input, and has a high level of debt. Firstly,
the debt is predominantly shareholder debt – hence, we are not dictated to
on an attitude to gearing from a third party. Secondly, as the company
announced for its first half, a good percentage of cost increases have been
passed through the chain. Thirdly, management has been working hard to take
cost out of the business.
Real Good Food recently announced a trading update, noting that market
conditions remain very challenging due to the perfect storm of rising costs
and lower revenues. However, the Group’s radical reform programme is
progressing well with significant price resets and cost savings having been
achieved. Further work is being done on improving manufacturing efficiency and
balancing capacity to levels of demand. However, Q4 revenue was below
expectations, as consumer demand and confidence were knocked by speculation in
the media of a recession in the early months of 2023. As previously stated,
the Board expects to report a loss for the year ended 31 March 2023, following
losses in the first half and further losses in the second half. The full year
benefit of the price resets and cost savings are expected to lead to a
significant performance improvement in the new financial year commencing 1
April 2023. The Group has recently announced that its EBITDA is anticipated to
be in the range of £2 million to £4 million, and the Group to be cash
generative.
Overall, we remain positive on the company’s prospects, despite what is
obviously going to be a tough demand and cost environment in the immediate
future. Our economic interest lies predominately in the loan notes, and we are
focused on ensuring that this value is not permanently impaired and that the
business is positioned to repay these plus premiums at a later date.
Synectics PLC (Synectics) (6.26% of net assets)
Cost: £3.98m Value as at 28 February 2023: £2.40m
Background
Synectics is a leader in the design, integration and support of advanced
security and surveillance systems. The group has deep industry experience
across gaming, energy, urban transport, public space and critical
infrastructure projects. Its expert engineering teams work in partnership with
customers to create integrated product and technology platforms, proven in the
most complex and demanding operating environments.
Update to the investment case
* Covid recovery reorganisation yielding positive results.
* Latest financial results demonstrate significant turnaround in performance.
* Strong order book.
* New contract wins.
Progress against investment case
Synectics announced its results for the year ended 30 November 2022 and
highlighted revenue was up 6.8% to £39.1m from £36.6m the previous year. The
balance sheet is strong with net cash at 30 November 2022 of £4.3m, with no
bank debt and undrawn bank facilities of £3.0m.
Significant cost savings have been taken out of the business, leaving a
leaner, more efficient structure that is highly operationally geared. FY22 saw
a substantial profit turnaround, booking profit before tax of £1.2 million
versus £0.5 million in the previous year. This was accompanied by a healthy
order book (at the end of November 2022) of £24.4 million. We like how
Synectics measures its order book – these are real signed orders; not
pipeline orders.
New contract wins over the course of the last six months include those in the
oil and gas and infrastructure markets. These are all solution-based contracts
at good margins. We are confident that the business can grow from here. While
a recovery in the Asian gaming market may take longer, the US is returning
strongly, as is investment in oil and gas which we had written off in our
original thesis. This is a business which used to generate over £80 million
of revenues when the oil price was strong.
We mentioned previously the share incentive plan. Its metrics are worth
noting. Management need to reach a base EPS of 17.2p before any pay-out and
would receive a full incentive at 24.36p EPS (starting hurdle of 11.87p).
Reading this through, we believe that a fair and modest price-earnings ratio
is 12-15x for this type of company – therefore implying 292p/365p per share
(before valuing cash). The current share price of around 120p is therefore
significantly undervaluing the future value of the business in the eyes of the
board.
Tactus Holdings Limited (Tactus) (1.98% of net assets)
Cost: £1.00m Value as at 28 February 2023: £0.76m
Background
Tactus is an unquoted UK business which supplies own and third-party computer
hardware, including laptops and notebooks and customised gaming PCs.
Update to the investment case
* Revenue behind budget due to consumer slow down.
* Margins and earnings affected by destocking and sell through initiatives in
H2.
* Write down of carrying value given weaker trading.
* Strong cash generation driven by inventory reductions.
Progress against investment case
Tactus is strategically well-positioned to take share in the PC gaming market
which is one of the fastest growing forms of entertainment globally. While the
year saw consumer spending and margin headwinds which have impacted earnings,
we expect that the normalisation of supply chains, reduced de-stocking
activity and internal restructuring efforts should provide upside to earnings
over the next 12 months. There is also untapped opportunity in the B2B market
which has been underserved by the current model and which presents a good
growth opportunity going forward.
TheWorks.co.uk PLC (TheWorks) (2.26% of net assets)
Cost: £1.41m. Value as at 28 February 2023: £0.87m
Background
TheWorks is one of the UK's leading multi-channel value retailers of arts and
crafts, stationery, toys, and books, offering customers a differentiated
proposition as a value alternative to full price specialist retailers. The
group operates a network of over 500 stores in the UK & Ireland and an online
store.
Update to the investment case
* Performance in line with management expectations.
* Total revenue increased.
* Balance sheet strengthened.
* Positive pattern of trading.
Progress against investment case
TheWorks recently issued a trading update which highlighted that despite the
cost headwinds, the business delivered a resilient performance in H1 FY23
which was in line with management expectations.
The group made solid progress against its strategic objectives, with careful
management of supply chain and increased consumer demand post Covid-19. Total
revenue at £118.9m was up 2.4% compared with H1 FY22, and store like-for-like
sales were up by 3.5%. Disappointingly, online sales declined 16.9%, although
still 50% above pre-Covid levels, resulting in overall like-for-like growth of
0.6%. Net cash balance at the period end of £7.0m reflected a return to the
normal pattern for the group, which typically generates cash in H2 but not in
H1. The board's expectations for the overall FY23 result are unchanged,
despite the recent increase in like-for-like sales, due to heightened levels
of uncertainty regarding consumer spending over the remainder of the financial
year.
Progress has been supported by the ongoing evolution of TheWorks proposition,
including a strong performance of its improved 'Back to School' range. We have
also seen significant growth in the books category, driven by an increased
representation of front-list authors including Julia Donaldson and Richard
Osman. The group has continued to optimise the store estate by opening seven
new stores and relocating two, all of which are trading ahead of expectations.
It has also launched an updated brand and relaunched its loyalty scheme,
signing up 0.3m new members in the first half, a 100% increase on H1 FY22.
Volex PLC (Volex) (4.09% of net assets)
Cost: £0.74m Value as at 28 February 2023: £1.57m
Background
Volex manufactures complex cable assemblies and power cords through a global
manufacturing base for a wide variety of industries. Following a turnaround
and portfolio repositioning, the business has shifted away from lower margin
commodity products and has been growing sales in high structural growth
sectors such as electric vehicles and data centres.
Update to the investment case
* Half year results were positive and showed good revenue growth.
* Margins expected to improve as supply chains normalise.
* Cash flow should also improve as inventory turns improve.
Progress against investment case
Volex’s year end trading update was well received by the market as it seemed
to alleviate two key concerns. The first was an improving margin profile after
several periods of deterioration. The second, was a recovery in free cash flow
as more normalised supply chains required less working capital investment. The
statement also indicated a beat against market guidance and suggested a
positive outlook for the current financial year.
We remain positive on Volex’s prospects through the short, medium and long
term. The new five-year strategy to effectively double the size of the
business will create an economically significant manufacturing business, with
a global footprint and exposure to several structural growth sectors.
Statement of Directors’ responsibilities in respect of the Annual Report and
Financial Statements
The directors are responsible for preparing the Annual Report and Financial
Statements in accordance with applicable law and regulation.
Company law requires the directors to prepare Financial Statements for each
financial year. Under that law the directors have prepared the company’s
Financial Statements in accordance with the UK adopted international
accounting standards and in conformity with the requirements of the Companies
Act 2006. Under company law the directors must not approve the Financial
Statements unless they are satisfied that they give a true and fair view of
the state of affairs of the company and of the profit or loss for that
period.
In preparing these Financial Statements the directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable and prudent;
* state whether the UK adopted international accounting standards have been
followed, subject to any material departures disclosed and explained in the
Financial Statements; and
* prepare the Financial Statements on a going concern basis unless it is
inappropriate to presume that the company will continue in business.
The directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the company’s transactions and disclose with
reasonable accuracy at any time the financial position of the company, and to
enable them to ensure that the Financial Statements comply with the Companies
Act 2006. They are also responsible for safeguarding the assets of the company
and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The directors are also responsible for preparing the Strategic Report,
Directors’ Report, Directors’ Remuneration Report, the Corporate
Governance Statement and the Report of the Audit Committee in accordance with
the Companies Act 2006 and applicable regulations, including the requirements
of the Listing Rules and the Disclosure and Transparency Rules.
The directors consider that the Annual Report, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
shareholders to assess the company’s position and performance, business
model and strategy.
Each of the directors confirms that, to the best of his or her knowledge:
* the Financial Statements, which have been prepared in accordance with the UK
adopted international accounting standards and on a going concern basis, give
a true and fair view of the assets, liabilities, financial position and
profits of the company; and
* the Strategic Report includes a fair review of the development and
performance of the business and the position of the company, together with a
description of the principal risks and uncertainties that it faces.
For and on behalf of the board
Hugh Aldous
Chairman
5 May 2023
Statement of Profit or Loss and Other Comprehensive Income for the year ended
28 February 2023
Year ended 28 February 202 3 Year ended 28 February 202 2
Revenue Capital Total Revenue Capital Total
£’000 £’000 £’000 £’000 £’000 £’000
(Losses)/gains on investments at fair value through profit or loss - (2,774) (2,774) - 2,454 2,454
Investment income 1,088 - 1,088 700 61 761
1,088 (2,774) ( 1,686 ) 700 2,515 3,215
Investment management fee ( 62 ) ( 247 ) ( 309 ) (77) (308) (385)
Impairment expense (1,196) - (1,196) - - -
Other expenses ( 483 ) (61) ( 544 ) (410) - (410)
( 1, 741 ) ( 308 ) ( 2,049 ) (487) (308) (795)
Return before taxation (653) (3,082) (3,735) 213 2,207 2,420
Taxation - - - - - -
Return for the year after taxation (653) (3,082) (3,735) 213 2,207 2,420
Revenue Capital Total Revenue Capital Total
(p) (p) (p) (p) (p) (p)
Basic and diluted return per Ordinary Share (1.32) (6.22) (7.54) 0.42 4.29 4.71
The total column of this statement represents the Statement of Profit or Loss
and Comprehensive Income of the company prepared in accordance with the UK
adopted international accounting standards and in conformity with the
requirements of the Companies Act 2006.
The supplementary revenue and capital return columns are prepared under
guidance published by the Association of Investment Companies (‘AIC’).
The return for the year disclosed above represents the company’s total
comprehensive income. The company does not have any other comprehensive
income.
All items in the above statement are those of a single entity and derive from
continuing operations. No operations were acquired or discontinued during the
period.
Statement of Changes in Equity for the year ended 28 February 2023
Share capital Capital redemption reserve Special reserve Capital reserve Revenue reserve Total
£’000 £’000 £’000 £’000 £’000 £’000
At 28 February 2021 56 – 54,474 (12,863) 857 42,524
Return for the year – – – 2,207 213 2,420
Buyback of Ordinary Shares into treasury – – – (1,460) – (1,460)
Transfers between reserves – – - - – -
Expenses for share buybacks – – – (10) – (10)
Dividends paid – – – – (415) (415)
As at 28 February 2022 56 – 54,474 (12,126) 655 43,059
At 28 February 2022 56 – 54,474 (12,126) 655 43,059
Return for the year – – – (3,082) (653) (3,735)
Buyback of Ordinary Shares into treasury – – – (812) – (812)
Transfers between reserves – – – – – –
Cancellation of treasury shares (4) 4 – – – –
Expenses for share buybacks – – – (8) – (8)
Dividends paid – – – - (149) (149)
As at 28 February 2023 52 4 54,474 (16,028) (147) 38,355
Statement of Financial Position as at 28 February 2023
28 February 2023 28 February 2022
£’000 £’000
Non-current assets
Investments held at fair value through profit or loss 36,927 39,441
36,927 39,441
Current assets
Trade and other receivables 88 60
Cash and cash equivalents 1,505 3,798
1,593 3,858
Total assets 38,520 43,299
Current liabilities
Trade and other payables (165) (240)
(165) (240)
Total assets less current liabilities 38,355 43,059
Net Assets 38,355 43,059
Represented by:
Share capital 52 56
Capital redemption reserve 4 -
Special reserve 54,474 54,474
Capital reserve (16,028) (12,126)
Revenue reserve (147) 655
Equity shareholders’ funds 38,355 43,059
Net asset value per Ordinary Share 77.99p 85.43p
Statement of Cash Flows for the year ended 28 February 2023
Year ended 28 February 2023 Year ended 28 February 2022
£’000 £’000
Operating activities
Return before taxation (3,735) 2,420
(Losses)/gains on investments at fair value through profit or loss 2,774 (2,454)
UK fixed interest income (380) (351)
Receipt of UK fixed interest income - 1,162
Impairment expense 1,196 -
(Increase)/decrease in other receivables (28) (21)
(Decrease)/increase in other payables (75) 79
Purchases of investments (6,321) (14,493)
Sales of investments 5,244 15,913
Net cash inflow/(outflow) from operating activities (1,325) 2,255
Financing activities
Buyback of Ordinary shares into treasury (812) (1,460)
Expenses for share buybacks (7) (10)
Dividends paid (149) (415)
Net cash outflow from financing activities (968) (1,885)
Change in cash and cash equivalents (2,293) 370
Cash and cash equivalents at start of period 3,798 3,428
Cash and cash equivalents at end of period 1,505 3,798
Comprised of:
Cash and cash equivalents 1,505 3,798
Notes to the Financial Statements for the year ended 28 February 2023
1. General information
Downing Strategic Micro-Cap Investment Trust PLC (‘the company’) was
incorporated in England and Wales on 17 February 2017 with registered number
10626295, as a closed-end investment company limited by shares.
The company commenced its operations on 9 May 2017. The company intends to
carry on business as an investment trust company within the meaning of Chapter
4 of Part 24 of the Corporation Tax Act 2010.
2. Accounting policies
Basis of accounting
The annual Financial Statements of the company have been prepared in
accordance with the UK adopted international accounting standards and in
conformity with the requirements of the Companies Act 2006.
These Financial Statements are presented in Sterling (£) rounded to the
nearest thousand. Where presentational guidance set out in the statement of
recommended practice ‘Financial Statements of Investment Trust Companies and
Venture Capital Trusts’ (‘SORP’), issued by the Association of
Investment Companies (‘AIC’) issued in July 2022 is consistent with the
requirements of the UK adopted international accounting standards, the
directors have sought to prepare the Financial Statements on a consistent
basis compliant with the recommendations of the SORP.
Going concern
The Financial Statements have been prepared on a going concern basis and on
the basis that approval as an investment trust company will continue to be
met.
The directors have made an assessment of the company’s ability to continue
as a going concern and are satisfied that the company has the resources to
continue in business for the foreseeable future, being a period of 12 months
from the date these Financial Statements were approved. Furthermore, the
directors are not aware of any material uncertainties that may cast
significant doubt upon the company’s ability to continue as a going
concern, having taken into account the liquidity of the company’s investment
portfolio and the company’s financial position in respect of its cash
flows and investment commitments. Therefore, the Financial Statements have
been prepared on the going concern basis.
Presentation of Statement of Profit or Loss and Other Comprehensive Income
In order to better reflect the activities of an investment trust and in
accordance with guidance issued by the AIC, supplementary information which
analyses the income statement between items of revenue and capital nature has
been presented alongside the income statement. The revenue profit for the
year is the measure the directors believe is appropriate in assessing the
company’s compliance with certain requirements set out in the Investment
Trust (Approved Company) (Tax) Regulations 2011.
Segmental reporting
The directors are of the opinion that the company is engaged in a single
segment of business, being investment business. The company only invests in
companies quoted in the UK.
Accounting developments: new standards, interpretations and amendments adopted
from 1 January 2022
Management have assessed all new standards and amendments to standards and
interpretations that are effective for annual periods after 1 January 2022 and
considered none to have a significant effect on these Financial Statements.
Accounting developments: new standards, interpretations, and amendments not
yet effective
* IAS 1 (Amendments to the Classification of Liabilities as Current or
Non-Current) – effective 1 January 2023
* IAS 1 (Amendments to the Disclosure of Accounting Policies) – effective 1
January 2023
* IAS 8 (Amendments to the Definition of Accounting Estimates) – effective 1
January 2023
Critical accounting estimates and judgements
The preparation of financial statements in conformity with the UK adopted
international accounting standards requires management to make judgements,
estimates and assumptions that affect the application of policies and the
amounts reported in the Statement of Profit or Loss and Other Comprehensive
Income and the Statement of Financial Position. The estimates and associated
assumptions are based on historical experience and various other factors that
are believed to be reasonable under the circumstances, the results of which
form the basis of making judgements about carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates. The estimates and underlying assumptions are
reviewed on an ongoing basis.
The Directors have made the following judgements and estimates that have had
the most significant impact on the carrying values of assets and liabilities
stated in these financial statements:
* Valuation and classification of unquoted loan notes: unquoted loan note
investments, comprising loan note principal, interest, and any amounts of
redemption premium, are held at fair value through profit or loss and are
valued using a discounted cash flow methodology. Key contractual inputs, as
well as assumptions regarding the nature, timing and amount of future cash
flows are assessed as part of the discounted cash flow approach. The directors
use judgement in selecting and applying the assumptions used, although such
assumptions are based upon all available information which the directors deem
to be reliable and are stress tested under a range of scenarios. The directors
consider all loan note investments to be non-current assets, as such
investments are entered into in conjunction with a strategic equity holding in
the same portfolio company.
* Valuation of unquoted equity: a key estimate in the financial statements is
the determination of the fair value of the unquoted equity by the Directors,
as it impacts the valuation of the unquoted investments at the balance sheet
date. Of the company’s assets measured at fair value, it is possible to
determine their fair values within a reasonable range of estimates. The fair
value upon acquisition is deemed to be cost. Thereafter, unquoted equity is
measured at fair value in accordance with International Private Equity and
Venture Capital Valuation (‘IPEV’) Guidelines.
There were no other significant accounting estimates or significant
judgements applied in the current period.
Investments held at fair value
All investments held by the company (quoted and unquoted equity investments,
redemption premium, unquoted loan notes and unpaid loan note interest) are
classified at ‘fair value through profit or loss’ as the investments are
managed and their performance evaluated on a fair value basis in accordance
with the investment strategy and this is also the basis on which information
about the investments is reported to the board. Investments are initially
recognised at book cost, being the fair value of the consideration given,
including any transaction fees. After initial recognition, investments are
measured at fair value, with unrealised gains and losses on investments
recognised in the statement of comprehensive income and allocated to capital.
Realised gains and losses on investments sold are calculated as the difference
between sales proceeds and the book cost.
For investments actively traded in organised financial markets, fair value is
generally determined on a daily basis, with reference to quoted market bid
prices at the close of business on the balance sheet date, without adjustment
for transaction costs necessary to realise the asset. When a purchase or sale
is made under a contract, the terms of which are required to be delivered
within the time frame of the relevant market, the investments concerned are
recognised or derecognised on the trade date.
Unquoted investments are valued by the directors at the balance sheet date
based on recognised valuation methodologies, in accordance with International
Private Equity and Venture Capital Valuation (‘IPEV’) Guidelines, such as
dealing prices or third-party valuations where available, net asset values and
other information as appropriate.
UK fixed interest income represents loan note interest receivable from
unquoted investments and is measured on a daily basis. Such amounts form part
of the overall fair value of the loan note instruments and are therefore
included within investments held at fair value through profit or loss on the
Statement of Financial Position.
All investments for which fair value is measured or disclosed in the Financial
Statements will be categorised within the fair value hierarchy in the notes of
the Financial Statements, described as follows, based on the lowest
significant applicable input:
* Level 1 reflects financial instruments quoted in an active market;
* Level 2 reflects financial instruments whose fair value is evidenced by
comparison with other observable current market transactions in the same
instrument or based on a valuation technique whose variables include only data
from observable markets; and
* Level 3 reflects financial instruments whose fair value is determined in
whole or in part using a valuation technique based on assumptions that are not
supported by prices from observable market transactions in the same instrument
and not based on available observable market data. For investments that are
recognised in the Financial Statements on a recurring basis, the company
determines whether transfers have occurred between levels in the hierarchy by
re-assessing the categorisation (based on the lowest significant applicable
input) at the date of the event that caused the transfer.
Income
Dividends receivable on quoted equity shares are taken into account on the
ex-dividend date. Where no ex- dividend date is quoted, they are brought into
account when the company’s right to receive payment is established. Special
dividends will be taken to revenue or capital account depending on their
nature. In deciding whether a dividend should be regarded as a capital or
revenue receipt, the company will review all relevant information as to the
reasons for and sources of the dividend on a case-by-case basis.
UK fixed interest income is recorded on a daily basis and in the revenue
column of the Statement of Profit or Loss and Other Comprehensive Income.
Where the terms of loan note investments require interest or a redemption
premium to be paid on redemption, the fair values of any previously unpaid
amounts are assessed as part of the total fair values of the loan note
instruments, under the company’s discounted cash flow methodology.
Dividend’s receivable are initially recognised at the fair value of the
consideration receivable by the company. This is subsequently measured at
amortised cost using the effective interest method less any provision for
impairment. The company recognises an annual loss allowance for expected
credit losses (‘ECL allowances’), in accordance with IFRS 9. ECL
allowances are calculated on a specific basis and are deducted from the gross
carrying values of the dividend receivables carried at amortised cost. ECL
allowances are recognised in the Statement of Profit or Loss and Other
Comprehensive Income, designated as revenue or capital in accordance with the
categorisation of the income to which the allowance relates.
Expenses
All expenses are accounted for on an accruals basis and gross of Value Added
Tax (‘VAT’) where charged to the company. All expenses are charged to
revenue within the statement of comprehensive income, with the exception of
the following:
* expenses which are incidental to the acquisition or disposal of an
investment as an element of the purchase of sales consideration respectively,
and therefore charged to capital. Details of transaction costs are given in
note 9. All other expenses are allocated to revenue, with the exception of 80%
of the investment manager’s fee which is allocated to capital. This is in
line with the board’s expected long-term split of returns from the
investment portfolio in the form of income and capital gains respectively.
Taxation
The charge for taxation is based on revenue profit for the year. Deferred
taxation is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date. Investment Trusts which
have approval under Section 1158 of the Corporation Tax Act 2010 are not
liable for taxation on capital gains. Any tax relief obtained in respect of
investment management fees and other capital expenses charged or allocated to
the capital column of the Statement of Profit or Loss and Other Comprehensive
Income is reflected in the capital reserve and a corresponding amount is
charged against the revenue column of the Statement of Profit or Loss and
Other Comprehensive Income. The tax relief is the amount by which corporation
tax payable is reduced as a result of these capital expenses.
Cash and cash equivalents
Cash and cash equivalents are defined as cash in hand, demand deposits and
short-term, highly liquid investments readily convertible to known amounts of
cash and subject to insignificant risk of changes in value.
Operating cash flows
As the principal activity of the company is to invest in accordance with the
Investment Policy, the directors consider all cash flows relating to the
portfolio, including purchases and sales of investments, to be operating cash
flows. Operating cash flows also includes cash movements relating to
investment income and the settling of investment management fees and other
expenses.
Share issue costs
Share issue costs relating to Ordinary Shares issued by the company are
charged to the share premium account.
Repurchase of Ordinary Shares for cancellation or to be held in Treasury
The cost of repurchasing shares including the related stamp duty and
transaction costs is charged to capital reserves and dealt with in the
Statement of Changes in Equity. Share repurchase transactions are accounted
for on a trade date basis. Where shares are cancelled or held in Treasury and
subsequently cancelled, the nominal value of those shares is transferred out
of called up share capital and into Capital Redemption Reserve. Should shares
held in Treasury be reissued, the sales proceeds up to the purchase price of
the shares will be transferred to capital reserves. The excess of the sales
proceeds over the purchase price will be transferred to share premium.
Capital reserve
Capital reserve is a distributable reserve which includes:
* gains and losses on the disposal of investments;
* exchange difference of a capital nature;
* expenses, together with the related taxation effect, allocated to this
reserve in accordance with the above policies; and
* increase and decrease in the valuation of investments held at period end.
Revenue reserve
This reserve includes profit for the year recognised in the revenue column of
the Statement of Profit or Loss and Other Comprehensive Income. This reserve
is distributable.
Special reserve
The company cancelled its share premium account following a court order issued
on 12 July 2017. As a result, a distributable special reserve was created.
This reserve is distributable.
Capital redemption reserve
This reserve represents the repurchase and subsequent cancellation of the
Ordinary Shares of the company. This reserve is not distributable.
Dividends payable to shareholders
Dividends to shareholders are recognised as a liability in the period in which
they are paid. Dividends declared and approved by the company after the
balance sheet date have not been recognised as a liability of the company at
the balance sheet date.
3. Basic and diluted return per Ordinary Share
Returns per Ordinary Share are based on the weighted average number of shares
in issue during the year. As there are no dilutive elements on share capital,
basic and diluted returns per share are the same.
Year ended 28 February 202 3 Year ended 28 February 2022
Net return Per share Net return Per share
£’000 Pence £’000 Pence
Revenue return (653) (1.32) 213 0.42
Capital return (3,082) (6.22) 2,207 4.29
Total return (3,735) (7.54) 2,420 4.71
Weighted average number of Ordinary Shares (*) 49,519,100 51,409,463
*Excluding treasury shares
4. Net Asset Value per Ordinary Share
NAV per Ordinary Share is based on net assets at the period end and 49,176,599
(28 February 2022: 50,402,145) Ordinary Shares, being the number of Ordinary
Shares in issue excluding treasury shares at the period end.
28 February 202 3 28 February 2022
NAV per share NAV attributable NAV per share NAV attributable
Pence £’000 Pence £’000
Ordinary Shares:
Basic and diluted 77.99 38,355 8 5.43 43,059
5. Principal risks
The company is exposed to a variety of risks and uncertainties. The Directors
have carried out a robust assessment of the principal risks facing the
company, as well as a review of emerging risks which may have arisen during
the year, including those which could threaten its business model, future
performance, solvency or liquidity.
Listed below is a summary of the principal and emerging risks identified by
the board and the action taken to
mitigate those risks.
Risk Mitigation
Investment performance
The investment objective of the company may not be achieved as returns are reliant on the performance of the portfolio. The company is reliant on the investment manager’s investment process. The board has set investment restrictions and guidelines which the investment manager monitors and regularly reports on. The board monitors the implementation and results of the
investment process with the investment manager. The investment manager attends all board meetings and provides the board with information including performance data, an explanation of stock selection decisions, portfolio exposure and the rationale for the
portfolio composition.
The company will invest primarily in the smallest UK quoted or traded companies, by market capitalisation. Smaller companies can be expected, in comparison to larger companies, to have less mature businesses, a more restricted depth of management and a higher risk profile. The investment manager has significant experience in small-cap investing and deploys an approach that is designed to maximise the potential for the investment objective to be achieved over the longer-term.
Investment performance
The lasting economic consequences of the coronavirus pandemic remain unclear, however lagging performance of the UK economy has the potential to impact market conditions and depress market prices. The company has a small, focused portfolio which allows the investment manager to work closely with each portfolio company and provide active support where it can.
The price of the company’s shares trade at either a discount or premium relative to the underlying NAV of its shares. Shareholders could become dissatisfied with a continuing discount to NAV. The board actively monitors the company’s share price discount or premium to the published NAV and continually engages with the company’s corporate broker regarding share trading volumes, comparative data from the company’s peer group and significant
buyers and sellers. The board look to manage the value through a programme of share buybacks, subject to liquidity and other considerations, whilst seeking to broaden the interest in the company’s shares through a series of marketing activities.
Operational
The company relies on external service providers. In the event that these parties are unable or unwilling to perform in accordance with the terms of their appointment, this could have a detrimental impact on the company’s performance. Disruption to the accounting, payment systems or custody records could lead to inaccurate reporting and monitoring of the company’s financial position. The security of the company’s assets, dealing procedures, accounting records and adherence to regulatory and legal requirements are reliant on the effective operation of the control systems of the service providers. Due diligence is undertaken before contracts are executed with potential service providers. The board monitors the performance of service providers together with the associated costs. The board also reviews reports on the effective operation of the
internal controls of service providers. The company’s assets are subject to a strict liability regime and in the event of a loss of financial assets held in custody, assets of an identical type or the corresponding amount must be returned unless the loss
was beyond the reasonable control of the custodian. The board also considers the business continuity arrangements of the company’s key service providers. The board may terminate all key contracts on normal market terms.
Financial
The company’s investment activities expose it to a variety of financial risks that include market risk, liquidity risk, and credit and counterparty risk. Further details of these risks are disclosed in the Financial Statements, together with a summary of the policies for managing these risks.
Legal and compliance
Non-compliance with investment trust eligibility conditions. The company has been accepted by HM Revenue & Customs as an investment trust, subject to continuing to meet the relevant conditions. The investment manager monitors investment movements and the amount of proposed dividends, if any, to ensure that the relevant provisions of the Corporation Tax Act 2010 are not breached. A report is provided to the Board at each meeting.
Non-compliance with Companies Act 2006, the Alternative Investment Fund Manager’s Directive (‘AIFMD’), the UK Listing Rules and Disclosure & Transparency Rules and the Market Abuse Regulations, the UK adopted international accounting standards and the AIC SORP. The company secretary and administrator, along and the company’s professional advisers, provide reports to the board in respect of compliance with all applicable rules and regulations and ensure that the board is made aware of any changes to such rules and
regulations. Compliance with applicable accounting standards and best practice reporting for investment trusts are also reviewed on an ongoing basis, with recommendations made to the board by the administrator.
Emerging risks
Geopolitical risks
The continuing conflict in Ukraine and the impact of sanctions placed on Russian businesses and individuals may have some impact on the returns of the Company. The investment manager’s approach of having a strategic involvement with the investee companies ensures that the manager is well placed to assess the exposure of the business to the Ukraine conflict and associated developments. Exposure is considered to be
low and any direct impact on the company’s performance not expected to be significant. The manager will continue to review the evolving situation as part of its ongoing activities.
Interest rate rises and Inflation
The company’s investments could be impacted negatively as a result of increasing interest rates and continued high inflation, particularly on wages and other costs. The investment manager’s close relationship with the investee companies allows it to ensure that the businesses properly assess the potential impact of increasing costs, particularly wages, and the extent to which these may or may not be able to be passed
on to the end customer. The manager currently considers the net impact to be at a manageable level and continues to monitor developments closely with all investee companies.
SVB and Signature Bank collapse
The recent failure of Silicon Valley Bank and Signature Bank could negatively impact investments who have exposure to either bank, particularly accounts held with them. The investment manager’s close relationship with the investee companies allows it to assess its exposure to SVB and Signature Bank. From a review of the portfolio, the manager has confirmed that none of the portfolio companies have accounts with either
bank.
Climate change
The effects of climate change or those of changing legislation as the world looks to transition towards net zero emissions may impact the returns generated by the portfolio companies. Whilst the company itself, as an investment entity, has negligible exposure to climate change risk, the investment manager works closely with investee companies to ensure that climate change risk and transition risk is appropriately addressed. The manager
believes that the risks within the current portfolio to be manageable and gives consideration to this in reviewing new investment decisions and will continue to assess developments in legislation and their potential impact on portfolio companies.
Developments in accounting and disclosure regulations impacting the company are monitored by the investment and administration manager to ensure full compliance.
6. Related parties and Investment Manager
Investment Manager
Downing LLP is the investment manager to the company. The relationship is
governed by an agreement dated 23 March 2017.
The total investment management fee charged by Downing LLP for the period
ended 28 February 2023 was
£309,000 (2022: £385,000). The amount outstanding as at 28 February 2023 was
£26,000 (2022: £123,000).
During the year under review, Judith MacKenzie was a non-executive director of
Real Good Food plc, in which the company has an investment. An annual fee of
£25,000 is paid to Downing LLP for Judith’s services as a director of Real
Good Food plc.
Administrator and Company Secretary
On 1 April 2020, Downing LLP was appointed as administrator to the company and
Grant Whitehouse, a Downing LLP partner, was appointed as Company Secretary.
During the period from 1 April 2022 to 28 February 2023, total fees of
£79,000 (2022; £79,000) (inclusive of VAT where applicable) were charged by
Downing LLP in connection with the provision of the Administration, AIFM
Support and company secretarial services set out in the Downing LLP
Administration Agreement. As at 28 February 2023, the amount outstanding was
£6,000.
Directors
Disclosure of the directors’ interests in the Ordinary Shares of the company
and fees and expenses payable to the directors are set out in the Directors’
Remuneration Report. At 28 February 2023, there were no outstanding
directors’ fees (2022: none).
7. Non-adjusting events after reporting date
In the period between 28 February 2023 and midday on the date of this report
(5 May 2023), the following non-adjusting events took place:
* The company purchased 703,397 of its own Ordinary Shares, at an average
price of 64.55 pence per share, all of which are now held in treasury.
Announcement based on audited accounts
The financial information set out in this announcement does not constitute the
Company's statutory financial statements in accordance with section 434
Companies Act 2006 for the year ended 28 February 2023 but has been extracted
from the statutory financial statements for the year ended 28 February 2023
which were approved by the Board of Directors on 5 May 2022 and will be
delivered to the Registrar of Companies. The Independent Auditor's Report on
those financial statements was unqualified and did not contain any emphasis of
matter nor statements under s 498(2) and (3) of the Companies Act 2006.
The statutory accounts for the year ended 29 February 2022 have been delivered
to the Registrar of Companies and received an Independent Auditors report
which was unqualified and did not contain any emphasis of matter nor
statements under s 498(2) and (3) of the Companies Act 2006.
A copy of the full annual report and financial statements for the year ended
28 February 2023 will be printed and posted to shareholders shortly. Copies
will also be available to the public at the registered office of the Company
at St. Magnus House, London, EC3R 6HD and will be available for download from
www.downingstrategic.co.uk .
Notes for Editors:
The investment objective of the company is to generate capital growth for
shareholders over the long term, from a focused portfolio of UK micro-cap
companies (those whose market capitalisations are under £150 million at the
time of investment) targeting a compound return of 15% per annum over the long
term.
Enquiries:
Hugh Aldous Chairman 07785 294 789
William Marle FinnCap Group 020 7220 0557
Jean Birrell Downing PR 07799 555 353