RCS - Down MicroCap InvTst - Results analysis from Kepler Trust Intelligence

Downing Strategic Micro-Cap Investment TrustAnnouncement

17/11/2023 07:00

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RNS Number : 7220T  Downing Strategic Micro-Cap IT PLC  16 November 2023

Downing Strategic MicroCap (DSM)

16/11/2023

Results analysis from Kepler Trust Intelligence

Downing Strategic MicroCap (DSM) has released its half-year financial report
for the period ending 31/08/2023. Over the six-month period, the trust saw its
NAV decrease by 8.2% on a total return basis, which compares to a 12.8%
decrease in the FTSE AIM All-Share Index in the same period.

M&A has continued to feature in the period, with two portfolio companies
being taken out in the past six months which has contributed to returns. There
is now over 20% of net portfolio assets with agreed bids or under strategic
review which should contribute to capital returns.

After a number of years of unrealised potential, and low investor appetite for
micro cap stocks, the board has announced a planned wind down. The board have
decided a journey towards a full redemption will be the best way of unlocking
value in the trust. The first return to shareholders of at least 20% of the
portfolio is expected to come in early 2024.

Chairman Hugh Aldous said, "Most of DSM's portfolio is performing well and
more is ripe for M&A or rerating", but despite this ongoing uncertainty
means he "has concluded that it would advantage all shareholders equally and
fairly to commence a managed wind down of the company's investment portfolio
in an orderly manner".

Kepler View

Managers Judith Mackenzie and Nick Hawthorn have released, in our opinion, a
bittersweet half-yearly annual report for Downing Strategic MicroCap (DSM). On
the one hand, they have delivered another period of outperformance from their
concentrated portfolio of companies at the smallest end of the market cap
spectrum. However, they also acknowledge the ongoing headwinds towards the
sector mean that the prospects for their holdings are unlikely to be fulfilled
in the foreseeable future. As such, they believe shareholders will be best
served by a winding up of the trust and a returning of capital to
shareholders.

Judith and Nick highlight that two holdings received bids in the period and
another has announced a strategic review. We understand these will likely make
up the first capital repayment of c. 20%. Before the announcement, the shares
traded at a 17.8% discount to NAV. We believe this approach of selling the
'low-hanging fruit' should offer investors a near-term boost of a well-defined
capital return in the interim, at a price that is likely to be much closer to
NAV than the shares currently trade at, with the potential for future returns
as the wind down process continues.

The managers also highlight positive performance from a number of holdings
including one the managers had recently added to and another DSM helped
appoint a new director. We believe this demonstrates the potential in the
portfolio which could contribute to further returns going forward, though this
will be primarily led by exit values achieved.

Going forward, we believe this means the discount could be seen as attractive.
While it will take some time to wind up the portfolio, and markets could move
in the interim, there is the scope for periodic distributions at or near NAV.
Furthermore, there is still potential for the managers to deliver value
through their active approach. It may take some time to fully realise the
value, as the UK remains out of favour, but this wind down approach could
deliver strong returns if the managers achieve exits close to the current
value in the NAV.

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