REG - Down MicroCap InvTst - Final Results
06/06/2024 07:00
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RNS Number : 3258R Downing Strategic Micro-Cap IT PLC 06 June 2024
Downing Strategic Micro-Cap Investment Trust plc
LEI Code: 213800QMYPUW4POFFX69
5 June 2024
Final Results
The Directors of Downing Strategic Micro-Cap Investment Trust plc announce
the company's results for the year ended 29 February 2024.
Highlights
► Results of shareholder approved managed wind-down exceeded the board's
expectations with distribution of 74% of the reported year end NAV, either
announced or in train.
► Post period-end a payment of 30p per share was made to shareholders by
way of a Special Interim Dividend on 26 April 2024. A second Special Interim
Dividend of 12p per share will be paid on 21 June 2024. In addition, the board
announced on 30 May 2024 the intention to pay a Third Special Interim Dividend
of at least 7 p per share by mid/late July 2024.
► 30% of remaining assets are held in companies where there is a bid
situation.
► Portfolio is held in profitable companies with strategic catalysts for
value creation.
► Investments have progressed through classic hockey stick formation and
are now in either late-stage turnaround or value realisation phase.
► Wind up approved by majority of shareholders following 15.75% decrease
in NAV and 5.6% decrease in the share price, compared to a 12.6% decrease in
the FTSE AIM All-Share TR index over the 12 months to 29 February 2024, driven
by continued negative sentiment towards UK smaller companies and a realised
loss on unquoted assets
Judith MacKenzie, lead manager, said
"Given the inherent value of the portfolio, we feel very confident that
further meaningful distributions can be achieved in the coming months beyond
what is already being delivered, whilst enabling the trust to maintain the
optimum outcome for value return to shareholders in a timely manner."
Hugh Aldous, chairman of Downing Strategic Micro-Cap Investment Trust, said:
"Since the shareholders voted for a managed wind-down of the trust, the
managers have executed the strategy of exiting the investments exceedingly
efficiently, extracting the maximum return for investors. I am confident that
they will continue to perform to their mandate. "
Financial highlights
29 February 28 February Change
Assets 2024 2023 %
Net assets (£'000) 30,627 38,355 (20.15)
Net asset value ('NAV') per Ordinary Share(1) 65.71p 77.99p (15.75)
Mid-market price per Ordinary Share 62.00p 65.70p (5.63)
Discount(1) 5.65% 15.76%
1 Alternative Performance Measure
Year ended Year ended
29 February 28 February
Revenue 2024 2023
Revenue return per Ordinary Share (1.52p) (1.32p)
Capital return per Ordinary Share (11.45p) (6.22p)
Total return per Ordinary Share (12.97p) (7.54p)
Chairman's Statement
To date, the results of the shareholder approved managed wind-down of your
company's portfolio have exceeded the board's expectations. We have already
paid a dividend of 30p per share, declared a further 12p per share and
indicated another 7p per share following Government approval of a bid for one
of our investments. Together those distributions would result in your
company distributing some 74% of the reported year end NAV, with further
distributions indicated. Having distributed 30p per share, the remaining NAV
was 40.02p per share as at 31 May 2024 giving a view for continuing
shareholders of over 70p per share of worth, comfortably ahead of the year
end. Of that remaining 40p, 19p is already slated for distribution in June
and July with an indication of more dividends in August and thereafter.
In November 2023 we said, the board had been considering what would be the
best and fairest way to meet its commitment of returning capital to
shareholders, realising best value for them equitably, and 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'. At a
general meeting of the company held on 28 February 2024, shareholders approved
the managed wind-down of the company and, since that date, our manager has
sought to realise all of the company's remaining assets in a prudent manner,
consistent with the principles of good investment management, and with a view
to an orderly return of cash to shareholders.
Having already distributed £13.98 million, 46.0% of the company's NAV at 29
February 2024 (the date the company commenced its managed wind down) the
company is ready to distribute a further 12p per share which it declared as a
dividend on 28 May 2024 for payment on 21 June 2024 and which amounts to
another 18% of that NAV. Given the takeover of FireAngel we have already
announced our intention to distribute a further 7p per share in July and
together those distributions would amount to approximately 74% of the
company's net assets as at 29 February 2024, which is more than we estimated
in our announcements made in December 2023 and February 2024. At current
market valuations there would still remain something over 20p per share after
those three distributions. Realisations have been achieved within the spread
of market prices; there have been no sales at any undervalue to the market.
Value uplifts, anticipated in my report in November 2023, have been captured
as have the uplifts from subsequent events in the portfolio. In current
markets we hope for further uplift.
In its financial year, despite one investment going into administration, on
which I comment briefly later, DSM's mid-market price per share held up
well. It was 62.0p at the year-end compared with 60.25p at the half year and
65.7p at the last year end. As I have said, currently, with the 30p per
share distribution already made plus today's NAV for the remaining portfolio
at 40.02p per share the potential for continuing shareholders looks to be over
70p per share, less relatively modest costs; and there is further value still
to be realised (see manager's report). In its managed wind down your company
is realising value, limiting costs and distributing realisations as cash.
As to the remaining portfolio, the manager's report reviews the stocks, about
which their view remains positive, and sets out where further potential value
may be realised. To date, the board is satisfied that the manager has struck
the appropriate balance in maximising returns to shareholders whilst also
ensuring that such returns are made in a timely manner.
That means that regardless of the events, which I set out below, we are
currently on course to return cash well in excess of the company's NAV as at
29 February 2024, meeting the timelines set out in the circular to
shareholders dated 2 February 2024, and still able to benefit from indications
of further bid interest in our portfolio. From time to time, if the
discount has gone much wider than 15%, we have authorised modest buybacks.
Events following the announcement of a proposed wind down
Following the announcement of the proposed managed wind-down in November 2023,
the company received alternative proposals from four counterparties, one of
which was Milkwood Capital Limited ("Milkwood"). Each of the four
proposals had a different purpose. Only one, from an investment company with
similar objectives, offered any significant return of capital. Milkwood
made it clear that its particular purpose was to secure for itself the
contract for the future management of the company's portfolio. Your company
therefore undertook market soundings in January 2024 with its then four
largest shareholders to gauge those shareholders' appetite for each of the
alternative proposals that had been put to us. The feedback indicated a clear
preference that the company should proceed with its managed wind-down as
originally proposed and return cash to shareholders.
That view was then supported by the broader shareholder response to the wind
down proposal put to the February general meeting at which voting shareholders
overwhelmingly voted in favour of a change to the company's articles so as to
realise all remaining assets and return cash to shareholders. The votes were
approximately 86.6% in favour, with the only significant vote against being
lodged by Milkwood. A further general meeting was needed to approve the
implementation of a B share scheme, which would ensure a tax efficient capital
return, and such a meeting was called for 3 April 2024. In the meantime,
Milkwood built up a shareholding of approximately 28 per cent in the company
by, among other things, acquiring stakes held by two of the company's
institutional shareholders both of which had indicated strong support for the
company's managed wind-down and concomitant return of cash to shareholders. At
the general meeting held on 3 April 2024, Milkwood used those acquired stakes
to vote against the resolution to implement the B share scheme designed to
ensure that distributions would be treated as capital receipts for all
shareholders. Notwithstanding that the resolution still received the support
of more than 50% of the shareholders who cast votes (which amounted to
approximately 56.7% of the company's issued share capital) the resolution had
to be a special resolution, requiring 75% of the votes cast in order to pass,
and hence it was not carried. However over 99.7% of the other voting
shareholders (i.e. non-Milkwood) still voted for that resolution to achieve
full realisation and tax efficient distribution. That indicated a continuing
and overwhelming vote of support for the managed wind-down of the company and
for the distribution of cash proceeds.
Your board, committed to doing the right thing for all shareholders, was,
therefore, blocked, by a new shareholder with its own agenda, from
distributing cash in a particularly tax efficient way.
Mindful of the other shareholders' vote for a return of cash proceeds, the
board therefore proceeded to declare special dividends to shareholders which,
while not our preferred route, has the merit of fulfilling the mandate we were
given to wind down the company and return cash. With the remainder of the
portfolio looking, as the manager puts it, readily realisable at carrying
value, full realisation is anticipated with, in current markets, some further
uplift.
We have met Milkwood several times. They are a small team with whom we have
had reasoned discussions. We and our advisers know little of their
investment credentials and we have asked, more than once, for verification
material on which to do some diligence. At the time of writing, this
information has not been received. It is not for self-interest that we
cannot see for what reason we would recommend them; we are, after all, on
track to wind up DSM. If shareholders wish to invest in Milkwood, or
otherwise, then through the timely return of realisation proceeds they are
free to do so.
The board will continue to attend to its mandate of returning cash to
shareholders until such time as the managed wind-down is complete or
shareholders, as a collective, direct otherwise.
Portfolio performance
Most of the portfolio has held its value and companies have generally had a
positive reporting season during Q1 2024. The knock-back last year was Real
Good Food, for which we already had a provision, but which issued in October
2023 a comparatively upbeat RNS on future performance. It was then (one
might note after the pre-Christmas sales) put into administration by its
bankers and sold via a pre-pack administration to Backels Bakery. The
write-off for us has been £3.8 million.
The stocks that remain valued in the portfolio are all listed and traded. By
and large those amounts not yet realised are there because the manager notes
some interesting catalysts (private equity interest in Equals, approaches to
Centaur, new and historically effective chairman in Synectics, Flowtech
re-rated as examples). The manager is therefore balancing realisation
against value enhancement. A matrix of price against prospects is set out in
the manager's report.
Expenses
There is one large legal charge. A while ago we reported wrongdoing at Real
Good Food to the AIM team, who at least fined them. Recently we reported
another investment where the balance sheet was repeatedly misstated. Sadly,
no action. As I said last November, 'We are resolutely intolerant of
misstatements or misleading statements by investee boards and their
companies'. Had we not decided to wind up DSM, we would have pursued that
latter case in which our King's Counsel was confident that he was reading up
on fraud.
Dividends
The dividend of 30p per share paid on 26 April seems to have been well
received. A further 12p declared on 28 May 2024 with a Third Special Interim
Dividend of 7p proposed for July (see above) and indications of another in
August will hopefully be welcome, with more to be anticipated as the manager's
work continues.
Governance
We review ourselves rigorously. That comes from a free and open speaking
board. As the company is well on its way to being wound up, which is
proceeding well with all the board actively involved, we have not repeated the
immensely thorough board appraisal on which we reported last year, but we
observe its findings. Progress to wind-down is such that the AIC tenure
recommendation is not relevant. I am the only director standing for
re-election under our established policy.
Will Dawkins
The board has reduced its directorships to three. Will Dawkins volunteered
to step down and as a result we have lost a first-class director with a
distinguished, international record as Foreign Editor of the FT and a
subsequent career at Odgers and then Spencer Stuart where he was head of UK
board appointments. He has been a valuable contributor to this board,
helping focus and clarity. We are very sorry to lose him.
Forward View
As for the UK economy, the country continues to lack direction. I noted the
following in the company's last half-yearly report, and believe it needs
repeating:
The UK desperately needs growth and the creation of economic and social values
to fund ever increasing liabilities. That will have to come from the
foundation of entrepreneurial business, managerial determination (just go
visit the US, never mind its politics, to see real determination at work)
re-thinking of productivity, depth of technology, process, skill levels,
training and education. All that will take far longer than an electoral span
to achieve and hence barely features in UK politics and establishment
drive. Meantime short-term muddle and often ineffectual initiatives
continue. Corporate UK needs more drive, determined entrepreneurs,
investment in the future and, wherever possible, constructively challenging
governance. As an optimistic perspective, I said…. small companies are the
seedbed of growth for the UK. Our institutions and our future well-being
needs that growth. Desperately. The UK can punch way above its weight in a
range of knowledge intensive, highly skilled industry and research. That is
underrated in the application of national and institutional resources. It
appears only in political humbug. Centrally the country has become so bound by
departmental statements that cold feet respond to opportunity and a confused
'establishment' fails to foster the personal and local determination that
drives growth. Success demands determination (vide, again, the USA) not a
country that is stuck in something akin to administration (for those familiar
with the Insolvency Acts) with decisions taken, effectively, by the bank
manager - HM Treasury. I would suggest that over the last 75 years that
Treasury fixation has run its course. The 'private' governance of public
money has not been very clever.
The country's needs and liabilities will not wait for introverted economics
and a blinkered Treasury. I make no comment on politics of any colour.
Thanks
This has been a very time-consuming and not at all an easy year. My thanks
go to all the fellow board members who have given far more time than is usual
for investment companies, to our advisers, to our manager team who have risen
to the challenge of wind-down and whose matrices of progress, which we
monitor, have proved reliable. Thank you for continued focus and working
with the board.
AGM
The AGM will be held at 12:00 pm on 21 August 2024 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 on page 91 of
the annual report. We encourage shareholders to submit their proxy votes in
advance of the deadline of 19 August 2024.
Hugh Aldous
Chairman
5 June 2024
Investment Manager's Report
In the year to 29 February 2024 the NAV of the company fell 15.75% against the
wider FTSE AIM Index Total Return which fell by 12.6%. This reflected the
underperformance of a larger position in the company (Real Good Food Plc) and
the wider volatility in smaller company markets.
In November 2023 the board and manager announced the managed wind-down of the
company and the intention to return at least 20% of NAV to shareholders in
early 2024. Since then, authority to change the mandate of the company and
proceed with wind down has been approved by shareholders, and the payment of a
30p dividend (42% of the NAV as at the time of the November announcement of
intention to return capital), has been repaid to shareholders by way of
special dividend. The remaining portfolio is valued at a NAV of 40.02p per
share (as at 31 May 24).
In the period, there were realisations of £11.6 million across the portfolio
realising net gains on cost of £2.0 million. Write downs of unlisted assets
resulted in a realised loss of £3.8 million in the period.
The main contributors and detractors in the year included;
Journeo Plc which had realised and unrealised gains of £1.5 million in the
period of which £1.3 million were realised.
Synectics Plc also made a positive contribution to performance with unrealised
gains of £0.96 million in the period. As did Equals Plc which booked
realised and unrealised gains of £0.54 million in the period of which £0.17
million were realised.
A full realisation was made in OntheMarket Plc which was subject to a trade
sale from an international buyer, which returned a gain in the period of £1.1
million.
The main detractors included:
Real Good Food Plc, which fell into administration which led to a near 100%
write off and realised loss in the period of £3.8 million. The current
holding value is £0.275 million although there is a prospect of a further
modest return of capital from the administration process given the prior
ranking status of the loan note instrument held. However, the outcome of
this and quantum is too uncertain to recognise within the valuation.
FlowTech Fluid Power Plc also saw a significant unrealised loss in the period
of £1 million as it underwent management changes and restructuring. We have
confidence in the longer-term prospects of this business which is now proving
resilient against challenging industrial market headwinds.
Centaur Media Plc also subjected the portfolio to a £1 million unrealised
loss in the period, mainly due to market sentiment. We believe that this
company is undervalued in relation to the quality of earnings and its ability
to generate free cash flow. This was evidenced by a speculative private
equity bid that was announced during April, which has subsequently fallen
away.
Outlook and Post Balance Sheet events
As at 31 May 2024, the net assets were £18.3 million or 40.02 per share post
the payment of the special interim dividend of 30p per share on 30 April 2024.
The remaining portfolio amounts to £12.7 million, and cash was £5.6
million.
Since the year end, as at 31 May 2024, FireAngel (12.8% of NAV) is now under a
mandatory offer subject to shareholder support, which should it be approved,
alongside other realisations would return a minimum of 8p per share to
shareholders in DSM later in the summer of 2024.
As highlighted below the remaining portfolio, is held in companies that are
profitable, cash generative, reporting positive operational trading momentum
and where we believe that they sit at a material discount to intrinsic value
with clear catalysts in place.
A summary of the remaining positions at 31 May 2024 and our belief of their
intrinsic value is highlighted in the table below. The share price target is
the market analyst expectations of fair value over the course of the next 12
months.
Company Current share price Analyst Target Catalyst Upside % of NAV
Centaur Media 39.0p 78p Earnings 100% 9.5%
DigitalBox 3.0p 7.6p Earnings 111% 4.5%
Equals 118.0p 160p Corporate activity/earnings 36% 5.6%
FireAngel 6.5p 7.4p Corporate activity 14% 12.8%
Flowtech 113.5p 150p Earnings 32% 7.8%
National World 14.5p 40p Earnings 175% 8.6%
Norman Broadbent 8.5p 12-18p** Earnings 41%-111% 0.4%
Synectics 180.0p 277p Earnings 54% 18.7%
Volex 350.0p 441p Earnings 26% 7.5%
** based on Downing internal estimates predicated on the achievement of the
incentive scheme.
Given the inherent value with the portfolio, the manager feels very confident
that further meaningful distributions can be achieved post the Summer, whilst
maintaining the optimum outcome for value return to shareholders in a timely
manner.
Judith MacKenzie
Head of Downing Fund Managers and partner of Downing LLP
5 June 2024
Investments
As at 29 February 2024
As at As at
29 February 2024 28 February 2023
Market % of Market % of
Value Total Value Total
(£'000) Assets (£'000) Assets
Synectics plc 3,362 10.98 2,402 6.26
Volex plc 2,541 8.30 1,568 4.09
Centaur Media plc 2,479 8.09 3,484 9.08
Flowtech Fluidpower plc 2,046 6.68 3,273 8.53
Fireangel Safety Technology plc 1,986 6.48 1,904 4.96
Equals Group plc 1,705 5.57 1,494 3.90
National World plc 1,401 4.57 2,040 5.32
Ramsdens Holdings plc 1,011 3.30 2,520 6.57
Journeo plc 832 2.71 1,419 3.70
Digitalbox plc 805 2.63 1,724 4.50
Theworks.co.uk plc 694 2.27 868 2.26
Norman Broadbent plc 609 1.99 334 0.87
Hargreaves Services plc 317 1.04 3,269 8.52
Inspecs Group plc 291 0.95 1,769 4.61
Real Good Food 12% Loan Notes(1 *) 275 0.90 1,420 3.70
Real Good Food 10% Loan Notes(1 *) - - 2,528 6.59
Adept Technology Group plc - - 2,394 6.24
Onthemarket plc - - 1,445 3.77
Tactus Holdings Limited(1 *) - - 760 1.98
Norman Broadbent 10% Loan Notes(1*) - - 215 0.56
Real Good Food plc - - 97 0.25
Total investments 20,354 66.46 36,927 96.26
Cash 10,463 34.16 1,505 3.93
Other net current liabilities (190) (0.62) (77) (0.19)
Total assets 30,627 100.00 38,355 100.00
1 Unquoted.
* in administration
All investments are in Ordinary Shares and traded on AIM unless indicated. The
total number of holdings as at 29 February 2024 was 15 (28 February 2023: 18).
Details of the equity interests comprising more than 3% of any company's share
capital are set out in note 17 of the annual report. As at 29 February 2024,
loan note principal represented 0.90% (28 February 2023: 9.64%) of total
assets and the total of loan note principal and interest represented 0.90% (28
February 2023: 10.85%).
Unquoted Investments
As at 29 February 2024
As at
29 February As at
2024 28 February
2023
Market % of Market % of
Cost Value Total Cost Value Total
(£'000) (£'000) Assets (£'000) (£'000 Assets
Real Good Food 12% Loan Notes 1,507 275 0.90 1,232 1,420 3.70
Real Good Food 10% Loan Notes 2.051 - - 2,051 2,528 6.59
Tactus Holdings Limited * 1,227 - - 1,002 760 1.98
Norman Broadbent 10% Loan Notes(*) 200 - - 200 215 0.56
Total investments 4,985 275 0.90 4,485 4,923 12.83
Background to the investments - top 10 positions
(unless otherwise stated all information provided as at 29 February 2024)
Centaur Media PLC (Centaur) (8.09% of net assets)
Cost: £3.58 million Value as at 29 February 2024: £2.48 million
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
Comfortably exceeded MAP23 EBITDA margin objective
Strong growth in EBITDA and EBITDA margin
Revenue down slightly on the year prior
Higher quality revenue streams demonstrate resilience
Speculative approach from private equity which has not developed into a bid
Progress against investment case
Centaur issued its preliminary results for the year ended 31 December 2023 and
reported that the group's performance was the culmination of its Margin
Acceleration Plan (MAP) 23 strategy which achieved its three clear
objectives: to implement a simple, efficient and scalable operating model,
develop high-quality, trusted products which are the leaders in their markets,
and build the credibility of Centaur's management team for delivering on its
strategic and financial commitments. Centaur has significantly grown its
profitability and built a business with an impressive proportion of
higher-quality revenue, providing it with a scalable platform for long-term
sustainable future growth.
Centaur generated an adjusted EBITDA margin of 26% (up from 21% in 2022 and
12% in 2020), comfortably exceeding the MAP23 target and resulting in net cash
of £9.5 million at 31 December 2023 after paying ordinary and special
dividends of £8.9 million in the year. Revenue of £37.3 million was slightly
down from £38.4 million in 2022 after a softening in the macroeconomic
environment trading conditions and inflationary pressures. The group recorded
good performance across its higher quality revenue streams in Premium Content
and Training and Advisory, which now collectively represent 80% of the
business, up from 76% in 2022.
The group issued a response to recent media speculation on 10 April 2024 and
confirmed that it has received an expression of interest from Waterland
Private Equity Investments regarding the proposed acquisition of its entire
issued share capital. Waterland subsequently declined to formalise their
intention to make an offer for Centaur.
Digitalbox PLC (Digitalbox) (2.63% of net assets)
Cost: £1.13 million Value as at 29 February 2024: £0.81 million
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
Challenging markets impacted revenues
Significantly reduced profitability
Algorithm changes
Scaled up the portfolio to five operational brands
Acquisition of tvguide.co.uk and onboarding of Graphene platform
Acquired Media Chain assets growing the social follower base to over 20
million
Progress against investment case
Digitalbox published its final results for the year ended 31 December 2023.
While headline financial performance metrics were down on the previous year,
the group traded profitably and generated £193k in operating cash in 2023,
while experiencing some very challenging market conditions. Despite the
difficult backdrop, the group further scaled the Digitalbox portfolio from
four to five operational brands in the period. In addition, it completed the
acquisition of tvguide.co.uk and onboarded to the Graphene platform, acquired
Media Chain assets, growing the group's social follower base to over 20
million. The Daily Mash premium ad-free subscription experience continues to
grow with an uplift of over 180% taking its current base to over 4,000. There
was a significant focus on the diversification of the audience sourcing model,
helping to lessen the impact of algorithmic changes made by the major
platforms.
Performance of the acquired properties - The Daily Mash, The Tab, The Poke and
TV Guide has proved the potential of the Digitalbox operating model and its
Graphene platform as it builds a larger portfolio of successful profitable
digital brands. Trading for the current financial year remains in line with
expectations and the company expects advertising markets to bounce back in
2025.
Equals PLC (Equals) (5.57% of net assets)
Cost: £1.03 million Value as at 29 February 2024: £1.70 million
Background
Equals Group is a technology-led international payments group augmented by
highly personalised service for the payment needs of SMEs, 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
Strong trading performance
Strong growth in the Solutions business
Strategic review underway.
Private equity showing interest in acquiring Equals.
Progress against investment case
Equals issued an update on current trading and an update on the Strategic
Review on 20 March 2024. Trading has continued the strong growth trajectory of
FY 2023, with revenues in the period reaching £22.2 million, an increase of
28% over the same period the year prior. In keeping with recent trends,
trading has been robust across the business with particularly strong growth
from Solutions.
The board announced that it is conducting a review of strategic options that
would deliver greater value to Equals' shareholders than pursuing a standalone
independent strategy. This process is ongoing and is considered to be in the
best interests of shareholders and could lead to the group being acquired.
FireAngel Safety Technology Group PLC (FireAngel) (6.48% of net assets)
Cost: £6.54 million Value as at 29 February 2024: £1.99 million
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
Sales volumes down as group tackles trading challenges
New management concentration on refocusing the business
Improvement of operational and sales processes
Bid received from ISE
Progress against investment case
FireAngel provided an update on trading in the year ended 31 December 2023 and
on its strategic review. The group expects to report sales of approximately
£41.0 million, down 28.8% on the preceding year. As anticipated, the measures
taken by the board to manage the trading challenges and significant
inflationary pressures experienced, have come at the expense of a significant
reduction in sales volume. Whilst the recent restructuring of its sales team
will ensure that FireAngel is well positioned to build momentum in 2024, the
changes have inevitably had some impact in the short term, particularly in UK
Trade performance. International sales also remained comparatively depressed
in H2 2023 as new legislation in Benelux in 2022, which had led to a surge in
customer demand in the region for products during 2022, was not carried into
2023 as customers looked to reduce inventory intake.
Throughout H2 2023, the group remained focused on the ongoing strategic review
to return it to profitability as quickly as possible. This has included
exploring all options available to realise value for shareholders. Further
progress has been made by the new management team on refocusing the business
to recover sales performance and increase cash generation. There has been
significant improvement in both operational and sales processes.
On 27 October 2023, the boards of Intelligent Safety Electronics PTE. LTD
("ISE") and FireAngel announced that they had reached an agreement on a
recommended cash offer for FireAngel. ISE is a company incorporated in
Singapore and is wholly owned by Siterwell, a leading manufacturer of
intelligent security protection. ISE currently holds approximately 17.46% of
FireAngel's issued share capital.
The offer was conditional upon, among other things, the satisfaction of a
condition relating to a material official authorisation or regulatory
clearance, in this instance being the National Security and Investment Act
2021.
On 30 May 2024 it was confirmed that the timetable in respect of the
recommended offer has resumed, following the approval of the conditions
required by the Secretary of State. The date by which all conditions in
respect of the Offer must either be satisfied or waived is now 27 June 2024.
Flowtech Fluidpower PLC (Flowtech) (6.68% of net assets)
Cost: £2.42 million Value as at 29 February 2024: £2.05 million
Flowtech is a value‐added distributor of hydraulic and pneumatic components
into a wide array of sectors predominantly in the UK and Ireland. The group
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
Revenue down 2.4% on the year prior
Simplified operating model to unlock full margin potential
New leadership team in place
Continued focus on working capital management delivering £1.8 million
improvement
Improvement in product distribution stock availability
Progress against investment case
Flowtech issued its results for the full year ended 31 December 2023 and
reported a challenging period for the business. Management believes that it
has addressed the root causes of underperformance in Product Distribution and
is confident that 2024 will see the beginnings of a return to stronger
historic EBITDA margins. Flowtech has achieved significant growth in Ireland
and despite the continued challenging external market, there are reasons for
optimism. The group has a new and energised leadership team, with a
performance improvement plan that is beginning to deliver measurable results
and clarity of strategy which serves to unlock its full potential across six
defined EBITDA growth engines.
Journeo PLC (Journeo) (2.71% of net assets)
Cost: £0.34 million Value as at 29 February 2024: £0.83 million
Background
Journeo provides solutions in 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 trading
New contract wins
Acquisitions performing well
Strong order book and growing sales pipeline
Progress against investment case
Journeo announced strong final results for the year ended 31 December 2023 and
reported revenue up 118%, gross profit up 84%, and adjusted profit before tax
up 325%. It has a strong balance sheet with cash and cash equivalents of £8.1
million. Operationally, the acquisitions of Infotec and MultiQ are expanding
the reach of Journeo's solutions into new markets, both domestic and
international. There has been continued investment into R&D and increasing
capacity at the group's Ashby-based Infotec manufacturing and production
facility. The group has secured several significant new contract wins
throughout the year, including a £1 million award from Transport for Wales
(TfW) for a country-wide content management solution. The Arriva framework to
supply CCTV and associated services for new and retrofit vehicles was also
extended.
National World PLC (National World) (4.57% of net assets)
Cost: £2.92 million Value as at 29 February 2024: £1.40 million
Background
National World was 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 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
Adjusted EBITDA up 6%
Digital revenues up 13%
Strong balance sheet with financial flexibility
Seven acquisitions completed in the period
Restructuring generating significant cost savings.
Progress against investment case
National World announced its results for the year ended 30 December 2023 and
highlighted adjusted EBITDA 6% above expectations at £9.5 million, and
digital revenues up 13%. The group reported strong revenue growth and
annualised cost savings of £6.0 million, with restructuring costs of £3.6
million expensed in the period. NWOL has a strong balance sheet with financial
flexibility and a closing cash balance of £10.7 million. This follows a
£12.9 million cash consideration for seven acquisitions, a £2.5 million
final deferred consideration payment for JPI Media, and the repayment of £1.0
million loan note.
In Q1 2024, the group's EBITDA was slightly higher than management
expectations, with total revenue slightly lower. There is still some
continuing market volatility as audience and programmatic yields are impacted
by algorithm changes by global social media platforms. The board believes that
with the introduction of further consolidation plus cost efficiency and
productivity enhancements, the pace of the operating model change has
accelerated, with initiatives embedded in both the heritage portfolio and
newly acquired assets. The future model is based on original and expert
content in specific sectors and genres to better serve both consumers and
advertisers. Examples are business information, including events and the
transformation of premium brands to populate all platforms reaching a wider,
increasingly global audience.
Ramsdens Holdings PLC (Ramsdens) (3.30% of net assets)
Cost: £0.93 million Value as at 29 February 2024: £1.01 million
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 157
owned stores within the UK and has a growing online presence
Update to the investment case
Trading strong and in line with expectations
Strong balance sheet conservatively managed
Store estate expanded to 167 stores
Progress against investment case
Ramsdens issued a trading update for the financial year to date for the five
months from 1 October 2023 to 29 February 2024. Trading has remained strong
and in line with the board's expectations. Foreign currency gross profit
increased c.3% YoY with encouraging momentum building ahead of the key summer
trading period. The pawnbroking loan book has continued to grow, increasing
by £0.4 million, however, jewellery retail revenue was broadly flat compared
with the prior year. The group's strategic expansion has continued, with two
further stores opened and the total estate now comprises 167 stores (including
two franchised stores).
Synectics PLC (Synectics) (10.98% of net assets)
Cost: £3.98 million Value as at 29 February 2024: £3.36 million
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
Significant turnaround in performance
Strong order book
New contract wins
Solid net cash position
New Chairman announced
Progress against investment case
Synectics announced strong results for the year ended 30 November 2023 and
reported revenue increased 26% to £49.1 million. There was a substantial
increase in underlying operating profit to £3.1 million and underlying
EBITDA increased by 50% to £4.8 million. The group highlighted its strong
order of £29.2million, up 20% on the same period the year prior. Net cash was
£4.6 million with no bank debt. The business performed well over the period,
exceeding market expectations, and this was underpinned by growing demand from
the oil and gas sector. Synectics has a strong order book, reinforced by sound
order intake and significant contract wins across all sectors, with continued
momentum into 2024. Management retains its focus on specialist, core markets -
gaming, oil and gas, public space, transport and critical infrastructure - all
of which offer significant growth opportunities. Post reporting period end,
the group completed its agreement with National Grid, with contracts of £4.0
million signed to upgrade more sites across its estate.
Volex PLC (Volex) (8.30% of net assets)
Cost: £1.46 million Value as at 29 February 2024: £2.54 million
Background
Volex manufactures complex cable assemblies and power cords through a global
manufacturing base for a wide variety of industries. The business has been
growing sales in high structural growth sectors such as electric vehicles and
data centres.
Update to the investment case
Electric Vehicles and Consumer Electricals performance improving but revenues
below FY2023 levels
Strong FY trading, slightly ahead of analyst expectations
Operating profits improved in H2
Strong organic growth
Structural growth drivers in place
Progress against investment case
Volex issued a trading update for the financial year ended 31 March 2024. The
group highlighted that full-year performance is ahead of market expectations,
with revenue now expected to be at least $900 million, representing an
increase of at least 25% over the prior year. This includes seven months'
contribution from the acquisition of Murat Ticaret. Underlying operating
profit1 is also anticipated to be slightly ahead of analyst expectations.
This performance underscores Volex's ability to secure additional customer
commitments and deliver new projects, whilst maintaining robust financial and
operational discipline.
The group's strong organic growth has been driven by attractive positions in
diversified end markets that have structural growth characteristics. The board
is confident that exposure to a number of growth sectors will allow the
business to make strategic progress even in volatile market conditions. The
acquisition of Murat Ticaret also delivered significant incremental revenue,
in a largely new end-market. In response to increasing customer demand, the
group invested in the further expansion of its global manufacturing base,
creating additional capacity to facilitate growth as part of its five-year
growth plans which target revenues of $1.2 billion by the end of FY2027.
1 Underlying operating profit is before adjusting items which are one-off in
nature and significant (such as restructuring costs, impairment charges or
acquisition-related costs), the amortisation and impairment of acquired
intangible assets and share-based payment charges. This trading update is
based upon unaudited management accounts information. Forward-looking
statements have been made by the Directors in good faith using information
available up until the date that they approved this statement. Forward-looking
statements should be regarded with caution because of the inherent
uncertainties in economic trends and business risks.
Statement of Directors' responsibilities in respect of the Annual Report and
Financial Statements
The directors are responsible for preparing the annual report and the
financial statements in accordance with UK adopted international accounting
standards and applicable law and regulations.
Company law requires the directors to prepare financial statements for each
financial year. Under that law the directors are required to prepare the
company financial statements in accordance with UK adopted international
accounting standards. 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 the
company 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 accounting estimates that are reasonable
and prudent;
· state whether they have been prepared in accordance with UK
adopted international accounting standards, subject to any material departures
disclosed and explained in the Financial Statements;
· prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the company will continue in
business. As stated in note 2 below the directors do not consider the company
to be a going concern and have prepared the Financial Statements on a basis
other than that of a going concern;
· prepare a directors' report, a strategic report and directors'
remuneration report which comply with the requirements of the Companies Act
2006.
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
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 responsible for ensuring that the
annual report and accounts, taken as a whole, are fair, balanced, and
understandable and provides the information necessary for shareholders to
assess the company's performance, business model and strategy.
Website publication
The directors are responsible for ensuring the annual report and the Financial
Statements are made available on a website. Financial Statements are
published on the company's website in accordance with legislation in the
United Kingdom governing the preparation and dissemination of Financial
Statements, which may vary from legislation in other jurisdictions. The
maintenance and integrity of the company's website is the responsibility of
the directors. The directors' responsibility also extends to the ongoing
integrity of the Financial Statements contained therein.
Directors' responsibilities pursuant to DTR4
The directors confirm to the best of their knowledge:
· The Financial Statements have been prepared in accordance
with the applicable set of accounting standards, give a true and fair view of
the assets, liabilities, financial position and loss of the company.
· The annual report includes a fair review of the development
and performance of the business and the financial position of the company,
together with a description of the principal risks and uncertainties that they
face.
For and on behalf of the board
Hugh Aldous
Chairman
5 June 2024
Statement of Profit or Loss and Other Comprehensive Income
for the year ended 29 February 2024
Year ended Year ended
29 February 2024
28 February 2023
Revenue Capital Total Revenue Capital Total
£'000 £'000 £'000 £'000 £'000 £'000
Losses on investments at fair value through profit or loss - (5,219) (5,219) - (2,774) (2,774)
Investment income 664 - 664 1,088 - 1,088
664 (5,219) (4,555) 1,088 (2,774) (1,686)
Investment management fee (47) (189) (236) (62) (247) (309)
Loan interest write off (451) - (451) (1,196) - (1,196)
Other expenses (884) - (884) (483) (61) (544)
(1,382) (189) (1,571) (1,741) (308) (2,049)
Return before taxation (718) (5,408) (6,126) (653) (3,082) (3,735)
Taxation - - - - - -
Return for the year after taxation (718) (5,408) (6,126) (653) (3,082) (3,735)
Revenue Capital Total Revenue Capital Total
(p) (p) (p) (p) (p) (p)
Basic and diluted return per Ordinary Share (note 3) (1.52) (11.45) (12.97) (1.32) (6.22) (7.54)
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 29 February 2024
Share Capital redemption Special reserve Capital reserve Revenue reserve
capital
reserve
Total
£'000 £'000 £'000 £'000 £'000 £'000
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)
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
At 28 February 2023 52 4 54,474 (16,028) (147) 38,355
Return for the year - - - (5,408) (718) (6,126)
Buyback of Ordinary Shares - - - (1,582) - (1,582)
Expenses for share buybacks - - - (20) - (20)
As at 29 February 2024 52 4 54,474 (23,038) (865) 30,627
Statement of Financial Position
as at 29 February 2024
29 February 28 February
2024 2023
£'000 £'000
Non-current assets
Investments held at fair value through profit or loss - 36,927
- 36,927
Current assets
Investments held at fair value through profit or loss 20,354 -
Trade and other receivables 63 88
Cash and cash equivalents 10,463 1,505
30,880 1,593
Total assets 30,880 38,520
Current liabilities
Trade and other payables (253) (165)
(253) (165)
Total assets less current liabilities 30,627 38,355
Net Assets 30,627 38,355
Represented by:
Share capital 52 52
Capital redemption reserve 4 4
Special reserve 54,474 54,474
Capital reserve (23,038) (16,028)
Revenue reserve (865) (147)
Equity shareholders' funds 30,627 38,355
Net asset value per Ordinary Share 65.71p 77.99p
Statement of Cash Flows
for the year ended 29 February 2024
Year ended Year ended
29 February
28 February
2024 2023
£'000 £'000
Operating activities
Return before taxation (6,126) (3,735)
Losses on investments at fair value through profit or loss 5,219 2,774
UK fixed interest income (12) (380)
Receipt of UK fixed interest income 27 -
Impairment expense 451 1,196
Decrease/(increase) in other receivables 25 (28)
Increase/(decrease) in other payables 88 (75)
Purchases of investments (2,831) (6,321)
Sales of investments 13,719 5,244
Net cash inflow/(outflow) from operating activities 10,560 (1,325)
Financing activities
Buyback of Ordinary shares into treasury (1,582) (812)
Expenses for share buybacks (20) (7)
Dividends paid - (149)
Net cash outflow from financing activities (1,602) (968)
Change in cash and cash equivalents 8,958 (2,293)
Cash and cash equivalents at start of period 1,505 3,798
Cash and cash equivalents at end of period 10,463 1,505
Comprised of:
Cash and cash equivalents 10,463 1,505
Notes to the Financial Statements
for the year ended 29 February 2024
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. Material 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') 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.
Basis other than going concern
As stated on page 32 of the annual report, at a General Meeting of the company
held on 28 February 2024 shareholders voted to adopt a new investment policy
and the Company will be managed with the intention of realising all remaining
assets in the Company's portfolio in a prudent manner consistent with the
principles of good investment management and with a view to returning cash to
shareholders in an orderly manner. Once this process has been completed the
directors' intention would be to place the company into liquidation. Given
this, the Financial Statements have been drawn up on a basis other than that
of a going concern basis.
In preparing the Financial Statements on a basis other than that of a going
concern the following amendments have been made:
► As the investments are expected to be realised within 12 months from
the reporting date, they have been reclassified from non-current to current
assets. The board has concluded that no adjustments to the value of
investments is required and that the bid price remains appropriate.
► A provision for the costs of liquidation of £25,000 has been made
and is shown in note 11 on page 78 of the annual report.
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 loss 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 2023
Management have assessed all new standards and amendments to standards and
interpretations that are effective for annual periods after 1 January 2023 and
considered none to have a significant effect on these Financial Statements.
Accounting developments: new standards, interpretations, and amendments not yet effective
The Directors do not expect the adoption of the following amended standards or
interpretations to have a significant impact on the Financial Statements of
the company in future periods.
► IAS 7 Disclosures to add disclosure requirements, and 'signposts'
within existing disclosure requirements about supplier finance arrangements -
effective 1 January 2024
► IAS 21 The Effects of Changes in Foreign Exchange Rates - effective
1 January 2025
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
assessment of the valuation of unquoted loan notes by the directors take into
account the dependability of the estimated EBITDA for the upcoming financial
year. The valuation of the unquoted investment is based successful
implementation of management's plan for the business in the next financial
year. If the EBITDA estimate is not met, it would have a significant impact on
the valuation of the unquoted loan notes. At the year-end the directors have
valued all loan notes at nil other than the loan notes on Really Good Food
which is currently in administration and has been valued at £275,000
reflecting the amount expected to be received from the Administrators. The
directors consider all loan note investments to be current assets.
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.
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.
Fixed returns on debt securities are recognised on a time-apportioned basis so
as to reflect the effective yield. and recorded in the revenue column of the
Statement of Profit or Loss and Other Comprehensive Income.
Where, immediately before recognition is due, it is not considered probable
that a return will actually be received the recognition of the return is
deferred until the doubt is removed.
Where, subsequent to the recognition of an amount of income, it becomes clear
that payment will not be received or the collectability becomes doubtful, an
impairment provision to reduce the value of the asset to the recoverable
amount is made. The provision in the year of £451,000 on the Real Good Food
loan notes is recognised as an expense, rather than as an adjustment of the
amount of income originally recognised and is shown separately in the
Statement of Profit or Loss and Other Comprehensive Income on page 67.
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 profit or loss and other 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.
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.
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 made from total distributive reserves and 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 or loss 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 Year ended
29 February 2024
28 February 2023
Net return Per share Net return Per share
£'000 Pence £'000 Pence
Revenue return (718) (1.52) (653) (1.32)
Capital return (5,408) (11.45) (3,082) (6.22)
Total return (6,126) (12.97) (3,735) (7.54)
Weighted average number of Ordinary Shares(1) 47,242,771 49,519,100
(1)Excluding treasury shares
4. Net Asset Value per Ordinary Share
NAV per Ordinary Share is based on net assets at the period end and 46,608,486
(28 February 2023: 49,176,599) Ordinary Shares, being the number of Ordinary
Shares in issue excluding treasury shares at the period end.
29 February 2024 28 February 2023
NAV NAV NAV NAV
per share
attributable
per share
attributable
Pence £'000 Pence £'000
Ordinary Shares:
Basic and diluted 65.71 30,627 77.99 38,355
5. Principal and emerging 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.
The board identifies risks and mitigating actions to reduce the potential
impacts should any of the risks materialise. The Audit Committee and the
board regularly monitor the effective operation of the controls. Risks are
updated on an ongoing basis, with new risks added as they are identified.
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 The company is reliant on the investment manager's investment process. The
reliant on the performance of the portfolio. 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 The investment manager has significant experience in small-cap investing and
companies, by market capitalisation. Smaller companies can be expected, in deploys an approach that is designed to maximise the potential for the
comparison to larger companies, to have less mature businesses, a more investment objective to be achieved over the longer-term.
restricted depth of management and a higher risk profile.
The lasting economic consequences of the coronavirus pandemic remain unclear, The company has a small, focused portfolio which allows the investment manager
however lagging performance of the UK economy has the potential to impact to work closely with each portfolio company and provide active support where
market conditions and depress market prices. it can.
The price of the company's shares trade at either a discount or premium The board actively monitors the company's share price discount to the
relative to the underlying NAV of its shares. 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.
Shareholders could become dissatisfied with a continuing discount to NAV.
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 Due diligence is undertaken before contracts are executed with potential
parties are unable or unwilling to perform in accordance with the terms of service providers. The board monitors the performance of service providers
their appointment, this could have a detrimental impact on the company's together with the associated costs. The board also reviews reports on the
performance. effective operation of the internal controls of service providers.
Disruption to the accounting, payment systems or custody records could lead to The company's assets are subject to a strict liability regime and in the event
inaccurate reporting and monitoring of the company's financial position. 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 security of the company's assets, dealing procedures, accounting records The board also considers the business continuity arrangements of the company's
and adherence to regulatory and legal requirements are reliant on the key service providers.
effective operation of the control systems of the 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 Further details of these risks are disclosed in Note 14 to the Financial
that include market risk, liquidity risk, and credit and counterparty risk. Statements in the annual report, together with a summary of the policies for
managing these risks.
Legal and compliance
Non-compliance with investment trust eligibility conditions. The company has The investment manager monitors investment movements and the amount of
been accepted by HM Revenue & Customs as an investment trust, subject to proposed dividends, if any, to ensure that the relevant provisions of the
continuing to meet the relevant conditions. 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 The company secretary and administrator, along and the company's professional
Manager's Directive ('AIFMD'), the UK Listing Rules and Disclosure & advisers, provide reports to the board in respect of compliance with all
Transparency Rules and the Market Abuse Regulations, the UK adopted applicable rules and regulations and ensure that the board is made aware of
international accounting standards and the AIC SORP. 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 The investment manager's approach of having a strategic involvement with the
Russian businesses and individuals may have some impact on the returns of the investee companies ensures that the manager is well placed to assess the
Company. 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 The investment manager's close relationship with the investee companies allows
increasing interest rates and continued high inflation, particularly on wages it to ensure that the businesses properly assess the potential impact of
and other costs. 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.
Climate change
The effects of climate change or those of changing legislation as the world Whilst the company itself, as an investment entity, has negligible exposure to
looks to transition towards net zero emissions may impact the returns climate change risk, the investment manager works closely with investee
generated by the portfolio companies. 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 manager and administrator 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 29 February 2024 was
£236,000 (2023: £309,000). The amount outstanding as at 29 February 2024 was
£12,000 (2023: £26,000).
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 2023 to 29 February 2024, total fees of
£72,500 (2023; £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 29 February 2024, the amount outstanding was
£3,400.
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 on pages 55 to 58 of the Annual Report. At 29 February
2024, there were no outstanding directors' fees (2023: none).
7. Non-adjusting events after reporting date
In the period between 29 February 2024 and midday on the date of this report,
the following non-adjusting events took place:
► The company has purchased 963,245 of its own Ordinary Shares, at an
average price of 31.57 pence per share, all of which have been cancelled.
► Following the shareholder vote at the General Meeting on 28 February
2024 the directors proposed a return of capital to shareholders through a tax
efficient B share scheme. At a General Meeting held on 3 April 2024 the
special resolution to issue the B Shares s did not secure the required
approval of shareholders. In the light of this result, and in order to give
immediate effect to the plan overwhelmingly supported by shareholders at the
28 February General Meeting to adopt the managed wind-down investment policy
and return cash to shareholders, the board decided to make a distribution to
shareholders by way of the First Special Dividend of 30 pence per share,
equivalent to £13.98 million.
The First Special Dividend was paid on 26 April 2024 to shareholders on the
company's register of members at close of business on 12 April 2024. The
company's shares ex-dividend date was 11 April 2024.
► On 3 April 2024 the board announced the following measures to reduce
administration costs in line with the reduction in the size of the company as
cash proceeds are paid out to shareholders: (i) a reduction of the size of the
board, with one director stepping down; and (ii) a reduction of fees paid to
each remaining director by £5,000 per annum, both with effect from 1 May
2024. The board is committed, in principle, to further reductions in costs as
and when appropriate given the progress of its cash return plan.
► The board has also agreed with the investment manager that the
investment manager's capital return fee will now be set at 0.5 per cent. of
the total value of distributions made during the company's managed wind-down,
instead of its former proposed sliding scale. This change will incentivise the
investment manager to realise value for shareholders over the whole of the
managed wind-down period.
► On 28 May 2024, the board declared a second special interim dividend
of 12 pence per share, equivalent to, in aggregate, £5.5 million (the
"Second Special Interim Dividend").
The Second Special Interim Dividend will be paid on 21 June 2024 to
shareholders on the company's register of members at close of business on 7
June 2024. The company's shares will go ex-dividend on 6 June 2024.
► On 30 May 2024 the board announced that the timetable in respect of
the recommended offer for FireAngel, one of DSM's investee companies, by
Intelligent Safety Electronics Pte. Ltd (the "Offer") had resumed, following
the approval of the conditions required by the Secretary of State. The date
by which all conditions in respect of the Offer must either be satisfied or
waived is now 27 June 2024. The company intends to return the value of its
investment in FireAngel to shareholders as soon as possible and expects to be
able to do so by way of a third special interim dividend of at least 7 pence
per share, equivalent to, in aggregate, £3.2 million (the "Third Special
Interim Dividend"). It is expected that the Third Special Interim Dividend
would be paid to shareholders by mid-late July 2024.
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 29 February 2024 but has been extracted
from the statutory financial statements for the year ended 29 February 2024
which were approved by the Board of Directors on 5 June 2024 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 2023 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
29 February 2024 will be printed and posted to shareholders shortly. Copies
will also be available to the public at the registered office of the company
at The Office Suite, Den House, Den Promenade, Teignmouth TQ14 8SY and will be
available for download from www.downingstrategic.co.uk
Notes for Editors:
► The company will achieve the investment objective by effecting an orderly
realisation of its assets in a manner that seeks to maximise the value
received from those assets within a reasonable timescale, having regard to
both catalytic corporate events and markets generally. This process might
include sales of individual assets or running-off the portfolio in accordance
with the existing terms of the assets, or a combination of both.
Enquiries:
James King Cavendish 0207 397 1913
Jean Birrell Downing PR 020 7630 3319
ISCA Administration Services Limited - Company Secretary 01392 487056
(#_ftnref1)
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